After spending 80 hours over the past three months researching nine portfolio management software products for independent advisors, some leading products and trends have emerged. Integrated Decision Systems, one of the PMS vendors reviewed this month, is one of the leaders. As for trends, let’s say that Web-based PMS is gaining traction. But let’s talk first about the two companies we examined this month with the help of a group of advisors: IDS and Investigo.

IDS popped up last spring when the Fidelity Registered Investment Advisor Group announced a partnership (Investment Advisor, June 2004). IDS’s great strength is that it has been dealing in the institutional world. It is the performance reporting engine behind Fidelity’s Portfolio Advisory Service, a wrap mutual fund program for wealthy retail investors. IDS also provides portfolio reporting technology for some of the nation’s major financial services firms, including UBS, AG Edwards, and Morgan Stanley. All told, it claims to be the portfolio management and performance tracker for $4 trillion in assets.

With the Fidelity RIA group relationship, IDS is seeking to expand beyond the institutional market, which has been consolidating. It wants to leverage its sophisticated institutional PMS technology by going down-market to serve RIAs who work with high-net-worth individuals. That makes IDS unique among the new entrants to the RIA arena. Other recent entrants, such as Albridge (StatementOne), Interactive Advisory Software, Cornerstone Revolutions PowerBroker, Advisors Assistant, and Investigo, all started their businesses targeting registered reps and independent B/Ds or RIAs. None started out targeting wrap account managers, bank trust departments, private banks, hedge funds, and other institutional investors IDS serves.

As you might expect, IDS’s application has the look and function of an industrial-strength system aimed at sophisticated wealth management firms. This puts it in the top of the class of PMS vendors targeting independent advisors. Among the four Web-based PMS applications that we’ve looked at, IDS is the most impressive. The application is deeper and contains more PMS features than any of the others we’ve reviewed. For instance, it handles all forms of tax lot accounting you can think of and has the best portfolio modeling and rebalancing capabilities–advanced features that most of the other applications we’ve reviewed are weak on.

In doing our nine reviews, we asked all of the PMS vendors to fill out a checklist containing 80 items. We asked about everything from whether the vendor has a way to reconcile accounts without running a paper report to the number of graphical reports that the system comes with and whether advisors can create multi-period custom benchmarks to measure portfolio performance against a custom-weighted index across periods when investment policy changes. IDS seems to have more features and capabilities than Schwab PortfolioCenter or Advent Axys, which until now have been the leading candidates for demanding RIAs. In fact, IDS seems to be aimed squarely at competing in the RIA market against Advent, which in my review last month was credited for having the most sophisticated PMS application but is built on 1980s technology.

“From the very start of the IDS demo, when they said that you won’t find a flat file in their entire database, they seemed to be targeting Advent,” says Zdravko Daskalov, director of operations at Keats, Connelly, and Associates in Phoenix, who is an Advent user. “All of the reports they showed looked like Advent reports.”

Rebalancing Against Models

One of the impressive features that IDS is offering is the ability to rebalance against model portfolios, a tool that alerts you when a portfolio is out of whack. You can define a sensitivity level that will trigger the alert. If you are supposed to be holding 5% in municipal bonds or a particular stock, you can set the rebalance sensitivity to 50% and you would be alerted when the position grows beyond 7.5% of your portfolio. IDS is working on taking this a step further. An upgrade to its trading tool, which is integrated and priced into its PMS application, will allow you to automatically make trades and globally rebalance.

Another practical feature advisors would appreciate is that IDS’s software will recommend an optimal tax strategy when selling securities. In other words, when selling a security, you can choose from an array of tax management methodologies, including highest cost, lowest cost, average cost, first in/first out, and last in/first out, as well as choosing actual lots. Only IAS, Advent, and Schwab PortfolioCenter match IDS for this tax management capability, which for advisors is critical since after-tax investment returns are important to a client’s success.

But trumping all its competitors, IDS also lets you automatically select for sale the high-cost long-term gain, lowest-cost long-term gain, highest-cost short-term gain, and lowest-cost short-term gain lots. It also does that for losses. Better yet, it automatically seeks the best tax methodology for you. IDS lets you run the tax methodologies before you execute trades so you can see how they will affect your portfolios before you move. Moreover, IDS is developing a tool that will integrate its trading module with its rebalancing and tax management tool so that the system will automatically make the trades needed to rebalance globally. You’ll be able to trade all accounts against their respective models at once and rebalance them.

While IDS has so much going in its favor, it’s not perfect. One wild card is that the company is not yet serving RIAs. It has four beta testers and is adding another five, but its PMS product will not be officially released until mid-May. IDS is offering discounts to advisors who custody with Fidelity, but its executives make it clear that they intend to offer their PMS to those who custody at other firms as well. While IDS’s advisor product now has interfaces with Fidelity and Schwab, the firm is deploying five others written by Evare, a Burlington, Massachusetts, firm that specializes in financial database connectivity. IDS plans to acquire dozens more from Evare.

Data Scrubbing and Price

Another concern is how well IDS’s automated data scrubbing will work. RIAs are sticklers for proper reconciliations. Since they can actually touch the database themselves to manually fix problems or input data on positions where there is no interface, this should not be a major issue. A third risk is that IDS could sell out to a company that wants to use its role as an RIA’s central data repository to somehow dominate the business. This issue is rapidly diminishing in importance, however. All the Web-based applications, including IDS, provide one-button on-demand downloads to XML feeds or spreadsheet files of your data.

The biggest criticism IDS is likely to face from RIAs, however, will be over its price. The company has a $25,000 annual minimum. But when you consider that IDS is Web-based and will eliminate the time an RIA spends on downloading and cleaning data, it may not look so expensive.

Most RIAs have a dedicated staff person who handles downloads. While this only takes an hour or two a day for the average firm, there are many days when a problem with security or a custodial feed may require half a day or more to clean up a data mess. As a Web-based application, IDS frees up the time your staff must spend on updating software installed on your local network. So comparing IDS’s price to Advent Axys, Schwab PortfolioCenter, and other locally run applications is an apples- versus-oranges situation. The staff time saved by using a Web-based application must be figured into the equation.

To give you a precise idea of the cost of IDS, we asked the company to provide the cost of serving and converting three advisors: a sole practitioner with $20 million under management spread among 50 clients and 150 accounts, who needs two custodial data interfaces and has four years of data to convert; an RIA with three advisors, $95 million under management, spread among 145 clients with 350 accounts at four custodians, and with some transaction data dating back to the mid-1980s; and an RIA firm with seven staffers who access the system, 219 clients, 540 accounts, $214 million under management at four custodians, and 11 years of transaction history. The results (see The Costs of Conversion below) show the pricing we received from IDS and the three other Web-based vendors we’ve recently reviewed.

Trends and Investigo

Now for the trends we’re seeing develop in the PMS category. A growing number of serious, affordable Web-based PMS applicants are capable of competing with the long-dominant players–Advent Axys, Schwab PortfolioCenter, and dbCAMS–all of which offer desktop or local network programs. These Web-based applications are moving from serving reps and B/Ds or institutions into the independent RIA market order to leverage existing platforms. Most importantly, we’re seeing segmentation, with each of these programs serving a niche in the RIA market.

Albridge, formerly known as StatementOne, is priced higher than IDS. Albridge, reviewed in my February Investment Advisor column, is a robust application that has had huge success in attracting independent B/Ds but does not have the depth of IDS. It is still finding its place among RIAs. The two lower-cost vendors, IAS and Investigo, are likely to offer good value for many firms.

IAS, reviewed here in February, is a deep PMS application. But what makes it special is that it is integrated with a CRM system and, by adding $2,400 to $3,600 a year to its annual fee, an RIA can also get IAS’s comprehensive cash flow financial planning module that is integrated into this PMS/CRM system. This all-in-one system is priced at a level likely to attract many RIAs who do a lot of financial planning and want an all-in-one program.

Investigo is also a good value. The company has been focused over the past four years on attracting independent B/Ds, with success. “Investigo shows some streaks of brilliance,” says Bill Ramsay, an advisor in Raleigh, North Carolina, who taught himself programming to customize his PMS, CRM, and planning applications. Investigo’s integration with MoneyGuide Pro’s goal-based planning software, Ibbotson Associates’ style analysis, and billing system flexibility is a good base to build on. Its effort to move into the RIA market will be aided by its development of better tax lot accounting functionality, and advances in its rebalancing reports and tools.

With its favorable pricing and knowledgeable management, however, you can expect to see Investigo become a more serious competitor for RIA business over the next year.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (www.advisorproducts.com), which creates client newsletters and Web sites for advisors. Advisor Products may compete or do business with companies mentioned in this column. He can be reached at agluck@advisorproducts.com.