Two years ago in this column I coined a phrase about portfolio management software: "PMS gridlock," a term that describes the competitive stalemate among software vendors who provide performance reporting and accounting systems for registered investment advisors. This stasis has lingered for yet another year with little hope of breaking up soon. At least not for a few months until a new application, FinFolio, goes into production and possibly shakes things up a bit.

The software is being developed by Matt Abar, an entrepreneur best known to RIAs for his previous run at the PMS business, a venture called TechFi that began in his Denver home ten years ago and produced an application called Portfolio 2000. Abar succeeded in attracting hundreds of users to this program because it was the first PMS system based on the open architecture of a Microsoft SQL database.

Portfolio 2000 threatened to undo the lock on market share held by two other big PMS applications-Advent Axys and Schwab PortfolioCenter (then called Centerpiece). Then, as now, these two applications controlled about 70% of the PMS market among RIAs serving high-net-worth individuals; Advent has claimed that about 4,000 firms use its Axys application and Schwab said PortfolioCenter was used by about 3,400 RIAs.

But TechFi's ambitions were never realized. Advent Software Corp. bought the company for $23 million in June 2002 and soon killed off TechFi's desktop application and fledgling Web-based PMS system, AdvisorMart. The story enthralled advisors because it had all the elements of a TV soap opera, with Advent playing the role of a villainous corporate giant snuffing out a tiny innovative startup and young Abar playing the role of the entrepreneur who forsakes his clients when he's seduced into taking the money and running. Abar netted $12 million on the sale, split with Advent within a few months, and was prohibited from competing in the advisor software business-at least not until January 1, 2008.

What most advisors don't know is that Abar was embarrassed and regretful about the way things turned out for TechFi's clients. Sure, it's hard to feel too bad for a 30-year-old who gets a huge buyout check and is forced into retirement for five years. But Abar has been itching to get back into the game since then and is now wiser and more mature. He wants to make things right. So it was with great anticipation that I got a tour of his new software program in early January, just a few weeks ahead of a planned beta release.

For advisors, who are always looking for PMS alternatives, Abar has differentiated FinFolio mainly by improving on-screen graphics, by building a data-scrubbing engine, by creating more elegant custom client reports, by enabling the use of free pricing services over the Web and by building the application on the latest Microsoft architecture. He originally succeeded with TechFi largely because he saw the benefit of using Microsoft developer tools and the latest Microsoft technology, and he's adopted that approach again.

Abar says he's using Windows Presentation Foundation, an interface for developers programming graphical under interfaces in .NET applications. WPF is used in Vista and will be in the upcoming release of Windows 7, and it can also run on the XP operating system. A big advantage of WPF is that it allows Abar to create a browser-based version of FinFolio as well as a desktop application without much added effort.

Abar is also adopting another new Microsoft graphical user interface tool-ribbons. For those of you not familiar with Office 2007 or Vista, ribbons display the commands for Word, Excel, PowerPoint, Outlook and Access in a strip across the top of the screen. Office 2007 has favored the ribbon and ditched pull-down menus, and FinFolio has adopted it too. In the months ahead, computer users will become very familiar with the ribbon as they use Microsoft Office, and this should promote more familiarity with the convention among FinFolio users and make it easier to access the program's commands.

Like Portfolio 2000, this application will attract users because it can drill down deeper into numbers. While many PMS applications still require you to run reports to retrieve deeper data, FinFolio lets you dig for more details from lists of portfolios, asset classes, positions-even from some graphics. If you have a mutual fund position, for instance, you can double-click on it to see its underlying transaction details and you do not have to run a report to access that data.

FinFolio also incorporates graphics on screen. So when you see a list of securities in a portfolio on the left side of the screen, the right side can simultaneously display a pie chart of the positions or assets. While the three-dimensional pie chart graphics are nifty, Abar was still working out how to best display data labels for them.

The feature that he seems most proud of is the data-scrubbing function. Embedded in FinFolio is a set of rules that cross-check data that are input or downloaded. The goal is to make the data more reliable but lessen the work involved with daily reconciliation. "The biggest problem in portfolio management is data reconciliation because the tools for troubleshooting data are very limited," says Abar. "It's basically a share-balance check and if your share balances match the custodian's, then you assume everything's OK. The problem is that there are so many other types of problems that can get introduced into your database without you being aware of it."

For instance, Abar says that if a dividend reinvestment gets downloaded from your custodian as a purchase, then your share balances still match but you're actually missing the dividend. When you run a report with your gains or rate of return, you're going to be underreporting your return. Abar says this is one of 20 or 30 common data reconciliation problems that occur regularly when downloading data from a custodian. "We've wrapped an error alert system into the transactions download process and we're checking the data every which way, and I think that we've gotten it to the point where it's literally impossible to get bad data in here without it throwing a flag of some kind," says Abar.

He says he has about 15 beta testers lined up, about half of them old users of Portfolio 2000 that have not had an update to the software in many years. Most of those users have a license that expires at the end of this year or by mid-2010 and Abar says the migration for them from Portfolio 2000 will be relatively easy because the programs have a lot in common-chiefly, Abar himself.

He thinks he will be able to let beta testers install FinFolio on their machines in February and says the beta could last until June or July. Among the lessons he has learned is to test his software thoroughly before launching it. In the meantime, he has hired an operations director.

So what will it cost? He says a firm that manages $200 million, has four product users and needs two custodial interfaces would pay about $20,000 for the product the first year and $15,000 a year after that. A firm with $1 billion under management, ten users and four custodial interfaces would pay $70,000 in the first year and $56,000 annually after that. This does not include setup, training, data conversion, custom reports or the development of custom reports.

PMS gridlock, a natural outcome of the strange competitive dynamic among system vendors, remains in full force and continues to stifle innovation. The key application for RIAs-the data warehouse that feeds all other parts of their practice-remains a desktop application dominated by Schwab and Advent, and there seems little will change anytime soon.

Charles Schwab is pursing a smart strategy: It does not regard portfolio reporting as a profit center and keeps prices for PortfolioCenter low because it makes its real money on custody services. Advent, which actually does need to make money on the software it sells, is thus unable to hike prices for Axys for fear that its users will bolt.
And that keeps the software from moving away from its proprietary 1980s programming language and ancient architecture. These issues also keep other large software companies from entering the PMS software market. And those that do don't last-if Intuit's short-lived 2006 in-and-out adventure with PortfolioMinder is any indication.

The gridlock does allow small, underfunded new entrants to create fledgling ventures at low prices while they struggle to grow slowly and gain market share. But advisors are likely to continue to be unhappy with or fearful of betting their practice on these small, fledgling PMS vendors.

Abar's effort with FinFolio is different from the usual startups. He presumably has the money to self-fund a long development process. He's had three programmers working out of his home for months. He has the experience in the business and is charging a price that's on par with or higher than that of PortfolioCenter or Axys. That should make it easier for him to afford supporting the product and further developing it as an application that produces accurate, attractive-looking reports with an easy-to-use interface. He also knows it's likely to take three years to build enough momentum and trust. We'll see.

Andrew Gluck, a longtime writer and journalist, is CEO of Advisor Products Inc. (www.advisorproducts.com), a Westbury, N.Y., marketing company serving 1,800 advisory firms.