A look at three companies offering portfolio management software for your firms.

    Since portfolio management software (PMS) is critical to running an investment management practice, it's wise to keep up with the latest developments, not only at your own PMS vendor but also at other vendors. Unless you benchmark your performance reporting and portfolio accounting solution against other PMS vendors, how will you know if your application and service to clients is lagging? To find out what's new in PMS systems, I spoke with three of the newer PMS vendors that are targeting RIAs, the companies that have appeared on the scene in the last few years to challenge the dominant PMS vendors.

I checked in with AssetBook from Major Technology Resources, PortfolioMinder from Intuit and PowerAdvisor from Cornerstone Revolutions. All are making progress in their effort to compete with Schwab, Advent, dbCAMS, CapTools and other programs that have been available for many years. The newcomers are nimble and challenging to understand. On the one hand, they're able to innovate and make changes to their software much more easily than the established vendors because they are not hampered by having thousands of users on a mature or aging technology system. On the other hand, the upstarts often don't have the money and expertise to make needed improvements to their software. Before getting to the specifics about what each of these three PMS vendors is doing, it's important to address the issue of switching PMS systems.

Conversion Conundrum

It always has been true, since I started covering PMS vendors ten years ago, that only a fraction of independent advisors-my guess is 3% in any given year-risk the pain of conversion and make the decision to change their PMS applications. Converting your portfolio accounting database from one PMS package to another can wreak havoc on your business, because this data is the lifeblood of an advisory practice and tinkering with it is scary. You don't decide to convert the database with all of your clients' transaction histories just for a few nifty features or even to save a couple of thousand dollars a year.
    Since 2002, advisors have been even more reluctant to switch PMS vendors than they were in the past. It was in 2002 that TechFi, a start-up PMS vendor, was purchased by Advent Software. The acquisition of TechFi sent a chill through the independent advisor world that's still felt today. For nerds like me who closely follow the business, it was a watershed in PMS history. But maybe the influence that acquisition has had on independent advisors is beginning to fade. Maybe the conversion climate has begun, or should begin, to change.
    Tiny TechFi, which had about 500 clients and a few million in revenue, was acquired for $23 million after it developed what was then the first desktop PMS application on an SQL database and a Web-based system for portfolio management. The software had calculation errors, the company's service was spotty and many users had a bad experience, but TechFi was a competitive threat to the market leaders and advisors were starting to convert to it. That's why it was acquired-to eliminate the threat it posed. Advent, a year ago, stopped supporting the desktop version of TechFi's software and has stopped selling new licenses of TechFi's Web-based application, AdvisorMart.
    Seeing promising young TechFi get acquired only to be tossed aside by Advent left advisors extremely wary about converting to an application sold by a start-up company. Now, whenever a new PMS company tries to enter the market, we all greet it skeptically.
    Some things have changed since then, however, that make switching PMS systems less chancy for advisors. One big change is that paying crazy sums for start-ups with little revenue is looked on much less favorably by shareholders at publicly held companies these days. When a behemoth pays a wild sum for a fledgling start-up and then essentially folds it, shareholders can get angry. It may be only coincidental, but in 2002, the year of the TechFi deal, Advent's shares lost over 75% of their value and have only started to recover recently. So even a publicly held company, like Advent or Intuit, which unlike a private company can leverage their market multiple to make acquisitions of start-ups, may not be willing to pay an astronomical amount to buy an unproven PMS software company and may instead choose to develop a PMS application on its own.

In addition, developing PMS software is far easier than it was five years ago. With database development tools and standards established by Microsoft, development is not as expensive or as difficult. Established vendors can't afford to buy every new upstart that comes along. A new one will come along soon after the last one is bought. The barrier to entry is low in the fragmented RIA market, where a small PMS vendor only needs 100 clients to eek out a decent living for its owners and can make up in service what it lacks in scalability. That's why we've seen several new entrants in recent years.

Moreover, advisors learned a lesson from TechFi. They now better understand the risks of buying software from a small technology vendor that could be acquired or face financial and service problems. They're not as naïve, and assess the risks much more warily before converting. Advisors now insist on knowing how they can move their data out of a PMS application, for instance, before they move into it, and insist on a contract clearly laying out how their data is exported into a usable file format. Plus, most of the new applications are built using a Microsoft SQL database and are easier to migrate from than were the proprietary database systems more common five years ago.

Because of these factors, it may be that the chill over switching to a new PMS vendor is beginning to subside, or should be. Although converting to another PMS application remains a huge undertaking for an established RIA with a long transaction history and a large client base, some of the scariest parts of converting to a new PMS vendor have become less frightening. My guess is that as advisors discover this over the next couple of years, Advent and Schwab are likely to not see a lot of growth from independent advisors and advisors will assess the newcomers more favorably and be more willing to make a switch to them.

Power Advisor From
Cornerstone Revolutions

Of the three newcomer-PMS companies targeting RIAs, this one progressed the most over the past 18 months. When I last looked at this desktop application in January 2005, I reported that the company's software was promising because of its SQL back end, but that business challenges could prove more formidable than technology challenges. So I was not surprised to learn that the company received a capital infusion about six months ago. While some might say that accessing outside capital is a sign of weakness, I see it as a positive. Cornerstone Revolutions is now unlikely to go out of business for financial reasons. The company is now financially stable and it could turn a profit by the end of this year.

Last December, Arthur Zaske & Associates, a money management firm in Troy, Mich., raised the capital from about ten clients on behalf of Cornerstone. While the money management firm did not invest its own money, it received no banker's fee, according to Tarek Abouljoud, a portfolio manager at Zaske responsible for the Cornerstone relationship. Zaske is acting as a consultant on how to build PowerAdvisor into a better application for advisory firms to use. Zaske principals, along with the clients, now own about a third of Cornerstone Revolutions.

Abouljoud says Zaske & Associates, which manages about $375 million and has ten employees, had been using Advent Axys for portfolio accounting and management. After paying Advent an initial fee of about $50,000 and annual licensing fees of about $8,000, Abouljoud says the firm began several years ago to explore alternatives to Advent. A year ago, Abouljoud says he came across PowerAdvisor and downloaded the free trial software from its Web site. "I was ecstatic," he says. Abouljoud says he called Cornerstone's CEO, Angie Lyles, and began exploring the possibility of partnering with her company. It led to the capital-raising last December.

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