The dirty little secret of the investment-advisory industry is that most advisors are winging it. Because they deal with only a portion of their clients' assets, advisors tend to make asset allocation and other financial-planning recommendations in a vacuum, ignorant of what the rest of their clients' money is doing. "In a relative sense, that hasn't really been a problem up to now, because all advisors, mutual fund companies and brokerages are dealing with the same limitations," says Ken Schapiro, president of Condor Capital in Martinsville, N.J. In other words, everyone has been operating at an information deficit, and clients have been none the wiser.
That's about to change. In the past year, aggregation-the consolidation and reporting of financial data from a variety of sources-has hit the radar screen of savvy financial advisors. A host of Web-based aggregators, such as Yodlee (www.yodlee.com), VerticalOne (www.verticalone.com) and Corillian (www.corillian.com), have sprung up in recent months to provide consolidation services to large retail financial institutions. In the high-net-worth space, companies like J.P. Morgan, in partnership with Yodlee, are beginning to offer statements on everything from trust, bank, credit-card and brokerage accounts to frequent flyer miles for their millionaire clients. And Fidelity Investments Institutional Brokerage has launched an Internet portal to provide aggregation features to its corresponding broker-dealers.
"We think there's going to be a tremendous first-mover advantage for early adopters of this technology," says Harold Evensky, chairman of The Evensky Group in Coral Gables, Fla. Evensky is one of a handful of advisors who plans to make investments in the new technology within the next quarter. He has been looking seriously at existing providers and may well plunk down the $200,000 set-up fee required by Yodlee, plus $10 per year per client after that.
At the most basic level, aggregation is simply a mechanism for providing a lot of financial information in one single location, such as a Web site or performance report. Yet what many consider to be the end-game of aggregation-true consolidation-is not that simple, says Charles Palmer of Charles Palmer Software Consulting in La Quinta, Calif. An independent consulting firm, Palmer provides aggregated reporting services to a giant $100 billion public pension fund, as well as other large pension funds and companies.
The difficulty of aggregation is that in order to report performance across sectors and asset classes, you have to calculate it," says Palmer, who has spent the past five years developing a proprietary reporting system for a large municipal pension fund and knows firsthand the complexity of the underlying math involved. "This is not simply a matter of calculating beginning and ending values, but the timing of each deposit and cash flows," he says. "The end result is a sector-based, asset-weighted performance calculation." The fact that large companies and mutual funds have been slow to adopt aggregation on their own accounts, despite the fact that they have all the relevant data on hand, gives some idea of the complexity involved in integrating account data from even one source, let alone from more than one provider, says Palmer.
"No one has the killer app yet," agrees Schapiro. Yodlee and similar providers are not true aggregators, he contends, because they offer only account balances and positions but do not provide transactional data, making accurate tax and performance reporting impossible. Two things are required to make aggregation work, he says: data (often from a variety of tight-fisted providers) and a consolidation engine capable of handling sophisticated calculations. For his part, Schapiro is placing his bets on Advent Software, which recently signed Yodlee as a partner in its Trusted Network, a transaction-based aggregation service currently in beta testing. "Advent has the relationships with advisors, as well as the software that can handle the reporting," says Schapiro, who was chosen by Advent to test drive the new software. "Yodlee has agreements with some providers. We think this is potentially the best solution going forward."
For financial advisors who already have Advent software in place, the network would deliver actionable data culled directly from providers, via authorized interfaces, into their Axys portfolio-management systems, says Steve Lewczyk, vice president of AdventTrustedNet-work. Advent charges no set-up fee but would collect $3 per account per month, he says. Lewczyk warns that the distinction between "dashboard-style" data collection, such as is offered by Web-based firms, and transactional data may well be lost on consumers. Advisors will have to educate their clients on the differences, he says, especially as they are barraged in the coming year with millions of dollars worth of advertising campaigns touting aggregation.
Yet not all advisors cringe at that prospect. "Yes, aggregation will be huge," says Rob Fletcher of Shine Investment Advisory Services in Englewood, Colo. "So huge that Schwab and Fidelity are going to get into the act and start partnering with the Yodlees of the world to offer this service to independent advisors at a much more attractive rate." Fletcher dismisses the fears of advisors like Evensky, who worry about putting even more client data under Schwab's control. "We don't believe Schwab controls diddly," says Fletcher, who is also unconcerned about "being 43rd in line" to adopt the new technologies. "We'd rather let Mother Fidelity spend the hundreds of millions of dollars to develop the technology and educate consumers."
Luckily for advisors, says Lewczyk, the industry has not yet caught up with the technology, creating the perfect window of opportunity for advisors to prepare for the coming changes. Advisors should start by surveying their clients to validate market need. Aggregation may not make sense for all firms. For example, pure money managers, newer firms and those that market primarily to middle-class clients may not need the functionality immediately. Rather than letting themselves get overwhelmed by the technology, Lewczyk says, advisors should question the value of aggregation from a business perspective. "Advisors should ask themselves, 'Now that all this data can be gotten to, how do I add value?'" he says.
The main benefit of aggregation, says Schapiro, is that advisors will be able to monitor all of their client's assets. "In essence, you become the quarterback for all of your client's assets, even if you don't directly manage them," he says.
Second, aggregated reporting would create the kind of "sticky" relationship that most advisors crave, says Evensky. "The public is overwhelmed with information. The very wealthy have upwards of 13 financial relationships on average. If they can centralize all that account data in one place, that's going to make them think twice about leaving the relationship." Evensky notes another advantage to his own practice: "If I have a $1 million minimum, I can't take a client who has $2 million tied up in a pension fund. With aggregation, that same client suddenly becomes attractive, because I can advise, or at least monitor, all of their assets."
Aggregation would put advisors in a management-control position, similar to what pension-fund managers have enjoyed for years, says Palmer. He creates executive summary reports for his pension-fund clients that allow them to benchmark their own performance, as well as sectorize returns, and he bets advisors could do the same. "Once you have all the information in place, you can do thorough analytics on why you're getting the returns you're getting. You can calculate your performance by sector or class. You can benchmark your performance against some stated bogey. Over the long run, that has enormous implications for investment policy and downside risk." Palmer believes that similar boilerplates would work in both markets, "minus a few zeros and some additional tax implications," and he is frankly surprised that the smaller pension funds and 401(k) providers have not adapted their services for the retail market.
Aggregated reporting also offers the advantage of peer-group management, Palmer says. "Each quarter, we provide our municipal pension client with its relative performance against their peer group, other municipal pension funds," he says. Advisors could do similar analyses, demonstrating exactly how each client is doing in relation to the entire client base. "That allows your client to continually focus on his investment policy," says Palmer. "For example, is he underweighted in a given sector based on how his peers are performing?" Advisors who do incorporate such techniques will be able to refine and evaluate client investment policies consistently, he says, and eventually compare their returns with their own peer group-other advisors.
Once the need and business rationale has been established, advisors should sit down with providers to hash out the features and benefits of the models they are considering. How advisors eventually will market enhanced services to clients is still uncertain. There is some debate as to whether advisors should charge for these services, with those in Lewczyk's camp suggesting they'd be crazy not to, and others, like Fletcher, insisting that they do not plan to "nickel-and-dime" their clients. (His firm has already signed a $2,500 check to Morgan OnLine, on behalf of a client who has $8 million at J.P. Morgan.
Regardless of how they structure their services, advisors have few excuses to neglect aggregation for long. Their clients will be asking for it, and in many cases, they already have the platforms in place to deliver the goods. "Even if they don't have the software yet, advisors should be putting all this data together for their clients," Palmer says. "That's their job."