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THE GLUCK REPORT, Part I: The Big Three's Tech Plans for 2006

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Fidelity’s RIA division just moved to a .NET platform, Schwab is adding a tool to search an inventory of 15,000 fixed-income securities from more than 300 dealers, and TD Waterhouse is adding an asset allocation program. The three best- known custodians are creating tech platforms with lots of new features for RIAs. As we enter 2006, the custodians are trying to enter a new era of straight-through processing. They are struggling to integrate their proprietary technology with applications from outside vendors, and each is trying to strike a balance between getting their RIAs to use their platforms without making those advisors feel trapped.

To get a handle on new tech initiatives by the leading three custodians to RIAs–Fidelity Registered Investment Advisor Group, Schwab Institutional, and TD Waterhouse Institutional Services–the tech chiefs of each firm gave me an update. Here’s what each of the custodians said is in development now.

Fidelity: PMS-CRM-Planning Platform Still on Track

Fidelity’s Patrick Jancsy started by telling me about how Fidelity had migrated much of the functionality for managing client accounts to a Web-based application. Like Schwab, Fidelity for years has provided a desktop software application, AdvisorChannel, to advisors for trading, downloading client account data, and viewing transactions. Jancsy said many of the features in that desktop application have been moved to Fidelity’s Web site and that AdvisorChannel can now be accurately described as a “thin client” application, but I interrupted him. Before getting too far into the discussion about new features in Fidelity’s Web-based toolset for advisors, I asked Jancsy to address Fidelity’s strategy to integrate with a portfolio management software application.

Fidelity, which custodies $150 billion in investments for 2,900 RIAs, early this year embarked on a major effort to build an integrated platform that would allow an advisory firm to seamlessly connect its portfolio management system with the Fidelity online trading platform and back office. The plan included integration of a financial planning application and customer relationship management software. Integration means that data can be ported automatically to and from Fidelity’s back-office system directly into your PMS, financial planning, or CRM application. No more keying in contact data over and over whenever you open a new account, no more manually inputting all of a client’s assets into your financial planning software, and no more creating model portfolios in your PMS application and then being forced to re-key them in Fidelity’s trading software. All of these applications would talk to each other and swap data.

Alas, the integration strategy went awry this past June when the linchpin of the new platform ran into financial problems. Fidelity’s partner, Integrated Decision Systems, a 24-year old firm with $4 trillion of institutional investor assets on its portfolio accounting systems that was making a push into the RIA market with a new Web-based PMS system tightly integrated with Fidelity’s back office, unexpectedly lost its venture capital funding. IDS was sold in early September to CheckFree, but CheckFree in short order declined to continue development of the PMS system for Fidelity. With IDS already in beta testing with a small group of Fidelity advisors and the solution being touted by Fidelity, the IDS software’s sudden demise was a reversal to Fidelity’s strategy in creating an integrated platform.

Jancsy, talking with me for the first time publicly since the IDS deal got busted, says Fidelity will continue to pursue creating an integrated PMS-CRM-planning platform for RIAs. “In terms of our technology strategy,” says Jancsy, “it has not wavered.

“Given the feedback from our clients who had experienced the level of integration we achieved with IDS during our pilot, we realize that our vision was right on target,” says Jancsy. “Advisors valued the integration and workflow efficiencies we achieved by integrating a PMS system onto our platform.”

An IDS Replacement?

So is Fidelity finding a replacement for IDS? “At this point, we’re not in a position to comment on the integration plans with another third-party provider,” says Jancsy. “But I’d welcome the opportunity to review that in more detail early next year.” That’s about as close as a Fidelity executive ever gets to telling you what’s planned before all the details are worked out by lawyers. It does seem likely that Fidelity is looking for or already has found another third-party Web-based PMS application to integrate with, which is likely to set the agenda for Fidelity’s RIA technology initiatives in 2006 and influence technology plans at competitors Waterhouse and Schwab.

Building an integrated platform that only works for advisors who clear through it is an interesting strategy for any of the custodians. Several years ago, Schwab seemed headed in this direction when it announced that it would stop selling new licenses of the PMS program it owned, now called Schwab PortfolioCenter (then called Centerpiece) to advisors who did not clear through Schwab. The plan sent a shudder through the RIA world because many advisors feared Schwab was headed toward creating a proprietary system that could put pressure on advisors to move all their assets to Schwab. Schwab ultimately reversed itself and has taken pains in the last several years to avoid making any similar moves in this direction. Many RIAs simply don’t like any technology from their custodian that might compromise the advisor’s independence.

With Fidelity, the strategy is a bit different because, unlike Schwab, Fidelity does not own a PMS software application. Fidelity would partner with an outside vendor and integrate that application into its back-office processing. Still, it still raises issues that some advisors feel could compromise their independence. The big issue is that you’d be able to utilize Fidelity’s integrated platform with clients who had all their assets at Fidelity but not with clients who had their assets at different custodians. So if you held the assets of 50 of your clients at Schwab or Waterhouse as well as the accounts of another 100 clients at Fidelity, you’d get the benefit of integration with your Fidelity clients but not with the others. That’s not so bad. But that fact is that you’d still be stuck operating two different platforms, so the efficiency that you’d realize is compromised. Despite this, and despite the fact that many advisors like to have a multi-custodian business because they feel the competition keeps a custodian motivated to provide excellent service and low fees, Fidelity says its goal is to persuade RIAs to move all their assets to it.

“It is our expectation that advisors will see the benefit of consolidating assets on our platform,” says Jancsy. For instance, Jancsy says that Fidelity in 2006 will focus on making it easier for an advisor to take a prospect’s contact information from her CRM system and upload it to Fidelity’s back office with as little data input as possible. Along the same lines, Jancsy says Fidelity is building a tool that allows an advisor to convert clients in bulk from other custodians more easily. “Specifically, we’re investing in technology that will pre-fill forms across hundreds of accounts,” he says.

Another major initiative that will make integration of third-party applications easier is that Fidelity in October launched a new Web site for advisors on a .NET platform. It’s through this site that RIAs will now perform many of the account management tasks previously performed on Fidelity’s desktop software, AdvisorChannel. Among the new features in the redesigned platform:

  • The ability to send a number of trade orders at once. It’s not uncommon for advisors to send multiple orders across hundreds of accounts at once when they rebalance. Previously that could be done only with the desktop software; now it can be done online.
  • You can now use the online trading system to roll up an order for several stocks into one order. The result is that you get one average price for trades made of the same stock in three different accounts, avoiding execution at different prices and the compliance headache that could follow if it looks like you showed a client preferential treatment by giving him a better price on a trade.
  • An asset allocation tool that lets you input or import model portfolios from Excel, Advent, or PortfolioCenter against which you can rebalance stock and fund positions. The tool also generates the trade order list to match your allocations in each account.
  • If a client needs to generate cash, you can set the cash amount that needs to be raised and rebalance the portfolio against your model and it will generate the trade order list needed to raise the specified amount of cash.
  • You can restrict certain stocks or funds so that you don’t buy or sell them. If a client won’t buy tobacco stocks, for instance, you just key the security information into a dialogue box.
  • A new cashiering tool is planned that gives an advisor the ability to send checks and wire transfers from a brokerage account. While Fidelity’s back-office staff now manages this using a tool on an intranet, a user interface will be written to allow the cashiering tool to be used directly by advisors.

Jancsy says that Fidelity plans to announce in December an alliance that will allow advisors to outsource investment management. With its .NET architecture making it easy for Fidelity to create data “hooks” for independent software companies, look for Fidelity to integrate with more applications this year.

Schwab Institutional: Alert Systems, Electronic 1099s, Workflow Status

Schwab is not as focused as Fidelity or Waterhouse on integrating with outside vendors for PMS, CRM, and planning. Maybe it’s because 2,300 of the 5,000 RIA firms custodying assets there use Schwab PortfolioCenter to manage accounts and make performance reports, and because Schwab owns its own relationship manager software application that it sells to advisors. Whatever the reason, Schwab’s technology initiatives, while sharing some commonality with its competitors, in many ways also are very different from its two rivals. According to Dan Skiles, Schwab Institutional tech guru, here’s what’s new:

  • An alert system for its sweep money market accounts, such as SchwabOne, that tells advisors if a client writes a check against the account with insufficient funds to cover it. Before the check could bounce, the advisor receives an e-mail alerting him to look at the details, allowing the advisors to prevent such messes.
  • This past summer, the cashiering alert system was enhanced to let advisors monitor cash movements, including journal requests and wire transfer requests. In addition, the cashiering dashboard also started to separately list recurring transactions, so RIAs can easily see if they previously set up a regular cash disbursement–a handy feature for retirees in the withdrawal phase. In its next phase scheduled for launch in December, RIAs will be able to make requests for checks or wire transfers from this dashboard right from
  • In June, Schwab began a phased launch of a system allowing RIAs to sign up their clients for electronic confirms and statements and electronic 1099s. RIAs can use the Schwab Institutional Web site to ask clients if they would like to receive these items electronically. You can upload a batch of e-mail addresses and ask them all at once. You can send a message saying that if they accept electronic statements and confirms, they get trades of 1,000 shares or less for $12.95 instead of $19.95. Until now, advisors could get a batch delivery of all their client statements and 1099s via CD-ROM. In late January, the 1099 batch download goes live.
  • Linked trades will now be supported via Schwab’s online mutual fund trading application, allowing an advisor to sell two funds and use the proceeds to buy just one fund.
  • If you always reinvest dividends on funds, Schwab’s online trading tool will now let you automatically do so each time you set up a trade.
  • You can now upload a model portfolio of funds from Excel into Schwab’s online platform and generate a trade order list against your fund portfolio models. Previously this could only be done using SchwabLink, a desktop application. This cannot be done with individual equities, however.
  • Schwab has expanded its fixed-income inventory to include 15,000 securities offered by 300 dealers, and it has made this larger inventory available online via its Institutional Web site through an advanced search tool that lets you query the database using more criteria.

One new tech initiative Skiles said is being planned would allow advisors to view workflow through its service centers. When advisors call a Schwab Institutional Service Center in Phoenix, Atlanta, or Denver, they will be able to see the status of their requests online.

TD Waterhouse: Merging Waterhouse & Ameritrade’s Offerings

Waterhouse’s Brian Stimpfl did not have an easy job when I called and asked him to speak about new technology initiatives. Waterhouse, which custodies about $45 billion in assets for 2,500 RIAs, is planning to merge with Ameritrade. While Ameritrade actually purchased Waterhouse, the RIA business at Waterhouse dwarfs Ameritrade’s, which only entered the advisor business about four years go. So it was only logical that Waterhouse Institutional’s senior executives–specifically Waterhouse Institutional President Tom Bradley–were put in charge of the RIA business. Just one problem: while the deal was announced in June, it still has not been consummated and government regulation prohibits the two firms to begin operating as one until the merger is finalized.

Stimpfl has indicated that Veo, Waterhouse’s online application for managing RIA accounts, would remain the front end used by advisors. That’s logical. More advisors with more assets use Veo than Ameritrade’s online RIA platform, and Veo is a full-featured platform.

Some of the trading features being added by Schwab and Fidelity right now have been offered by Waterhouse through Veo for years. This is because Veo was engineered after Waterhouse purchased Jack White & Company in 1998, and it was the first Web-based application offered by custodians for managing RIA accounts. It leapfrogged Schwab and Fidelity, which are now catching up by migrating functions from their desktop applications to their Web sites for their institutional clients. For instance, creating a block trade out of the same stock held in three accounts is a new feature on Fidelity’s institutional site, but has been offered through Veo since 1998, according to Stimpfl. Similarly, bulk distribution of online statements and confirms as well as 1099s–a new feature on Schwab’s Web-based advisor platform–has been offered for years over Veo, and so has the ability to search online through an inventory of 18,000 fixed-income securities offered by 220 dealers.

Still, the back end behind Veo will be based on Ameritrade’s clearing operation, and making the transition from Waterhouse’s clearing system to Ameritrade’s is likely to be a lengthy technology process. Since it would not make much sense to launch a host of new features on its platform when it is planning a massive account conversion, Waterhouse is not planning to roll out as many new features on its back office. My guess is that once TD and Ameritrade close their deal–expected late this year or early in the New Year, Bradley has said publicly–we’re likely to hear an announcement about more new tech initiatives at that time. However, Waterhouse is not standing still. Here’s what’s planned:

  • An integration with Morningstar Advisor Workstation by the end of the year. Veo includes a button for launching Workstation in another browser window. Workstation then queries the Veo database for account information on your clients, allowing you to conduct analytics on individual accounts or households. The cost will be from $1,800 to $2,500 annually, depending on the version of Workstation you choose. Waterhouse would be the first custodian to integrate a Web-based analytics program with its back office.
  • To provide a portfolio rebalancing tool, Waterhouse is planning an integration in early 2006 with a Web-based application from Advisor Software Inc. Advisors will thus be able to globally rebalance all of their portfolios against model portfolios created on Advisor Software’s platform. Households or individual accounts can be rebalanced against your models, and a trade order list will be generated that can be uploaded for execution to Veo.

It appears as though the technology platforms of the three biggest custodians serving independent advisors are becoming more alike. Gone is the huge lead in technology once occupied by Schwab. Still, differences remain, with the key differentiators being service and commitment to supporting the preference of most RIAs for multiple custodian relationships. Gauging where each custodian stands in terms of those differentiating factors is difficult and a matter of personal choice.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (, 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 [email protected].


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