THE GLUCK REPORT, Part I: A Cautionary Tech Tale

Integrated Decision Systems, a portfolio management and accounting software company that set a new standard for RIAs and was chosen by Fidelity Investments as the centerpiece of its new integrated advisor platform, has unraveled and its survival is in question. According to former IDS employees, two venture capital firms that over the past two years had invested $14 million in IDS began squabbling over the future direction of the company in recent months and in June refused to provide additional funding after the company’s VC-installed management burned through the company’s cash.

On Sunday, June 19, after months of fighting by the financiers, sources say IDS CEO Don Totter asked managers to phone the company’s 80 employees in Los Angeles and New York to tell them not to report to work the next morning. The company could not meet its next payroll, the employees were told, and only a skeleton crew of about 10 people would keep operations running.

IDS, a 24-year old firm with $4 trillion of assets on its portfolio accounting and management platform and a blue-chip client list, had been brought to near-collapse in sudden fashion. Within a few days, sources say, the VCs agreed to fund the company with enough cash to bring back an additional 20 to 25 employees who could keep the business running for two or three months, buying enough time so that its management could explore finding a buyer.

With most of the company’s employees desperately scrambling to find new jobs, however, it didn’t take long for word of IDS’s implosion to travel through the small network of technology firms specializing in portfolio reporting, and the news quickly spread as well to customers and prospective buyers of its software. As we went to press, no deal to buy the company had been announced, and CEO Totter did not return several calls asking for comment.

For independent advisors, the unraveling of IDS is a bigger story than the bickering of two VCs. It is a cautionary story of how RIAs and registered reps are constantly exposed to the changing fortunes of small technology companies that could quickly be taken over or go bust. It’s a story about how portfolio management software (PMS) vendors that independent advisors must entrust with the lifeblood of their business–their client data–could come to be controlled by companies that they might otherwise never choose to do business with. It’s a story about how even industry giants like Fidelity can make big bets on companies that blow up, leaving RIAs on a custodial platform in limbo. Finally, it’s a story about how not to run a small, fast-growing business.

Innovation and Dedication

The IDS story is particularly poignant for me. Having covered portfolio management software in this magazine since 1996, I wrote a series of reviews that appeared from December 2004 through March 2005 about nine PMS packages. After spending about 80 hours exploring details like which packages offer specified tax lot accounting and the most brokerage interfaces, I concluded that the very best Web-based PMS program was IDS. “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,” I wrote in my March 2005 review.

Based on interviews with numerous current and former IDS employees, all of whom would speak only on the condition of anonymity, I learned that the company was coming undone even as I wrote my glowing review of its Web-based application this past February. They helped me piece together a history of IDS that is worth understanding.

IDS possessed a strong entrepreneurial culture led by a core group of loyal employees dedicated to the company’s success. The culture took root under the guidance of Dr. Jerald Jackrel and his wife, Madelyn, who led the management team for two decades prior to the VCs moving in.

When IDS began operations in 1981, it was programmed in Fortran, an ancient programming language. It was backed by a successful insurance sales operation, Kramer-Wilson Company, as an investment. By the mid-’80s, the company had picked up some money manager clients. In 1985, Lawrence Kramer, one of the investors, brought in his stepdaughter, Madelyn Jackrel, and her husband Jerald Jackrel, a physician, to run the company. “They were not professional managers,” said a former employee. “She had been a housewife and he had been a physician, but they put their lives into the company and treated all the employees like they were part of their family.”

Over the next decade, the Jackrels hired a young staff that worked long hours to help grow the business, and they successfully moved their portfolio accounting and performance reporting application into the big leagues. In the the mid-80s, the Jackrels rewrote the software on a relational database, made it a multiuse product, and moved the software to a more stable Unix operating system. According to two former employees, those enhancements helped IDS land a deal with Morgan Stanley in 1990. With Morgan Stanley’s fees funding development of a multi-currency product, Global Investment Manager (GIM), during the 1990s, IDS was transformed into a profitable business with 110 employees.

Rocky Times, and the VC Solution

In 1999, Fidelity Investments signed on to have IDS create performance reports for its retail Portfolio Advisory Services mutual fund wrap product. Fidelity was not interested in IDS’s well-developed processing and accounting capabilities, just its performance reporting engine. Customizing GIM’s code to make a standalone application for performance reporting that could be scaled to millions of accounts would eventually spawn a new product, Caliper. By March 2004 Caliper’s customers included AG Edwards, UBS Financial Services, and Wachovia Securities, according to two former employees. Caliper now supports more than 16 million retail accounts. Brokers at these firms for the first time have been able to get performance numbers daily and run them against benchmarks. These firms had previously provided their brokers only positions and balances.

Despite its successes, the road was rocky for IDS. In 2000, the company was shaken by the near failure of Informix, the maker of the relational database on which its products were built. With Informix’s future in doubt, growth slowed. Business stayed slow even after Informix was purchased by IBM. In the months after the September 11, 2001 terrorist attack, growth screeched to a halt. For the first time since the Jackrels began running the company 15 years earlier, they resorted to laying off some workers, according to two employees. By the end of 2002, the company was in financial straits, say company insiders. That’s when the Jackrels received a call from a local venture capital firm, Los Angeles-based Shelter Capital Partners.

The partner at Shelter who contacted the Jackrels was Bahram Nour-Omid, a bright and successful technologist. He had been the founding chief technology officer at Scopus Technology, which went public during the Internet stock boom and was acquired by Siebel Systems. According to an individual familiar with IDS’s VC partners, since Nour-Omid did not have direct experience in financial services, he suggested bringing in another VC investor, Robert Barrett, a partner at San Francisco-based FT Ventures, which had invested in a number of financial services technology companies, including Financial Engines, Actimize, and E-Loan.

The Jackrels, seeking a way to prop up their business and find a way to take the company to a new level, struck a deal with the two VCs. “The Jackrels wanted to partner with someone who had management experience and funding to take the company to an online product,” says one former employee, “and they wanted a way to transition out of day-to-day management of the business.” On April 29, 2003, IDS announced that it had received $8.5 million in funding from Shelter Capital and FT Ventures. Sources with knowledge of the deal say the VC firms eventually invested another $5.5 million in the company and wound up controlling 80% of its stock. In April 2004, the Jackrels retired from day-to-day management of IDS and became consultants to the company.

Soon after the VCs gained control of the company, they brought in their own CEO, naming Totter to the post in November 2003. Totter had a great track record, with 24 years of experience in the financial services industry. He led sales for the brokerage division of ADP and spearheaded ADP’s growth in the outsourcing of securities processing for the equity and fixed-income markets globally. As his bio on IDS’s Web site says, Totter had “a history of growing businesses at world-class companies.” However, he had no experience in running a small business.

IDS’s VC backers had hired a new CFO, IDS’s first, and Totter brought in VPs of sales, engineering, and for IDS’s new Web-based application. He also hired as VP of marketing Ron LoVetri, who had run marketing technology at Schwab Institutional in the late 1990s. The new team was high-powered and represented a new breed of employee at IDS, which until then had been run by a small group of managers that had been with the company for over a decade and were loyal to the Jackrels’ vision since the 1980s.