Financial advisors are suddenly finding that their choices are slim when it comes to one of their most critical tools-portfolio management software.

The big squeeze began earlier this year, when Schwab Institutional announced that its Centerpiece software would be sold only to advisors who use Schwab as their custodian. Advisors not affiliated with Schwab who already used Centerpiece were promised continued support, but as far as the future was concerned, Centerpiece would essentially be a proprietary Schwab product.

Coming on the heels of Schwab's protracted legal battle with Advent Software, the biggest player in the portfolio management software business, the move sent chills down advisors' spines. Both Advent and Schwab seemed intent on creating closed architecture platforms, leaving advisors feeling that they are pawns in a battle between two Bill Gates wannabes. "I'm concerned about my financial data being held captive," says Michael Martin, whose Columbia, Md.-based firm, Financial Advantage, manages $600 million.

Then came another bombshell. Advent announced in June that it was buying its lower-priced competitor, Techfi Corp., for $23 million. "It's like Exxon buying an alternative energy supplier," grumbles one advisor.

Although Advent has pledged to continue developing and marketing Techfi products, many advisors view the acquisition as a bold play by Advent to corner the portfolio management software market. "I think it's a bad thing for advisors," says Jim Starcev, managing principal of Etelligent Consulting of Overland Park, Kan. "I really think it takes it down to almost a one-man race."

Starcev, whose clients include Centerpiece, says all the other players in the market offer either aging products that are losing customers or unproven technology. That leaves advisors, for the time being at least, to choose between Advent and Schwab. "With all due respect to [other software companies], Techfi, Centerpiece and Advent were really the three clear choices advisors were making," Starcev says.

In two years, Techfi had managed to win about 550 customers, predominantly small and mid-sized advisory shops looking for a low-cost alternative to Advent. Several advisors say that Techfi saved them at least one staff position. Many others still were checking Techfi out. "We looked at Techfi and liked what we saw. I was very disappointed they sold the business," says Karen Spero of Spero Smith Investments in Cleveland. "I think they would have been worth a lot more than $23 million in a few years. Advent's products are excellent, but they are also expensive."

Advent and Schwab reject the view that advisors have no other alternatives.

Collin Cohen, Advent's executive vice president of client solutions and corporate development, says the company sees at least a dozen viable competitors in the portfolio management market. Advent includes Microsoft Excel and Intuit's Quicken as part of the competition, as well as Captools and dbCAMs. "We feel extremely strong about our position, and we hope we can sit down with the Department of Justice and educate them," Cohen says.

But the U.S. Department of Justice appears to believe the cries of alarm are worth investigating. Shortly after the Techfi deal was announced, the department's antitrust division said that it was investigating the sale.

Observers were surprised by the move because, under pre-merger notification laws, only mergers and acquisitions valued at more than $50 million are subject to antitrust law review. By going out of its way to stall a deal of smaller value, Justice has raised hopes among some advisors that the merger could be blocked.

Even if that scenario is unlikely, advisors at least feel the investigation will pressure Advent to provide more than lip service when it comes to maintaining Techfi's products-Financial Office and AdvisorMart-as viable alternatives in the market. "It could be either good or bad," says Norm Boone of Boone Financial Advisors in San Francisco.

Boone, whose office uses Techfi, says the deal's impact on his office will depend on how sincere Advent is about supporting Techfi's line of products. "If it takes Techfi's service and attitude and has it supplemented with Advent's capabilities, it would be the best of both worlds," he says.

But some aren't hopeful of a positive outcome. Joel Bruckenstein, a technology columnist for Morningstar, says advisors have reason to worry about being backed into a corner when it comes to choosing a portfolio management solution. "If you look at the histories of monopolies-and to me, essentially Advent has a monopoly-that usually doesn't end up being in the best interest of consumers," he says.

Independent advisors in the middle to low end of the market have the most reason to worry, Bruckenstein says. Advent historically has targeted high-end institutional customers managing billions, and earned a reputation for neglecting smaller advisors. Advent has made a push in recent years to go after the booming smaller advisory firm market, and company officials say that this commitment is demonstrated by its plan to buy Techfi. Even Advent officials acknowledge it must overcome its reputation of arrogance towards independent advisors to succeed in that market.

Aside from the future of Techfi product pricing, Bruckenstein says, independent advisors "have to worry about Advent's commitment to them. If Techfi ends up not being as profitable as Advent thinks, maybe they won't commit the resources."

Advent's Cohen says his company is committed to supporting Techfi's product line. "Clients and prospects will continue to have the same choices they already have. We'll continue to invest in the Techfi product lines."

What it all amounts to is a pile of concerns about the future for the thousands of advisors who use Advent, Centerpiece or Techfi for their portfolio management. The decision by Schwab to move in a proprietary direction on Centerpiece rubs some advisors the wrong way because it may limit their flexibility. If a Centerpiece user wants to drop Schwab as a custodian, does that mean they will eventually have to drop Centerpiece too?

While Schwab insists that in such a scenario the advisor can continue using Centerpiece, advisors say that the policy could change. "This is a big brother issue of what Schwab wants to do to make themselves more tightly intertwined with advisors," says Jerry Wade, president of Minneapolis-based Wade Financial Management, which uses Centerpiece.

Other Centerpiece users express concerns. "I'm happy with Centerpiece, but I would wish there were a couple of more choices out there," says Chris Cordaro, chief investment officer of RegentAtlantic Capital in Chatham, N.J.

Not that Cordaro wants to make a switch. He took his firm from Advent to Centerpiece in 1998 and has never had any regrets about it. He finds Centerpiece's customer service easier to work with, and the product easier to customize and operate.

Trying to get a custom report out of Advent could take weeks and cost thousands of dollars, while Centerpiece goes out of its way to try to accommodate customers, Cordaro claims. "Suggestions and comments we've made to Centerpiece have shown up in subsequent releases of the program," he notes.

Yet Cordaro feels his hands are tied in case he runs into a situation in which he does need to drop Centerpiece. "It's a concern. I don't lose sleep over it, but it's a concern," he says.

Perhaps in reaction to such concerns, Schwab has made an effort of late to soften its stance on making Centerpiece proprietary. David Peck, senior vice president of Schwab Institutional Advisor Business Solutions unit, says that Schwab will continue selling Centerpiece to prospects. "We will sell to Schwab clients or non-Schwab clients that we will expect will do business with Schwab in the future," he says. "We don't just sell to Schwab clients."

If the recent moves by Advent and Schwab have created a void in the competitive marketplace, are any companies poised to fill it? There is that possibility, some observer say, but any new players will be saddled with the exorbitant costs it will take to develop and support a competitive product. "I think there are companies that are capable, but whether they will or not remains to be seen," Bruckenstein says.

Some mention account aggregators as potential competition. ByAllAccounts, for example, has taken its service beyond just data gathering by introducing performance analysis.

But aggregators still have a long way to go to provide all the capabilities provided by Advent and Centerpiece. L. Patrick Gardner, president, CEO and co-founder of ByAllAccounts, scoffs at the idea of aggregators mounting a competitive threat to the portfolio management market leaders. "ByAllAccounts is in the business of data gathering," he says. "They offer portfolio accounting solutions. We do not."

Another potential entrant is StatementOne, which specializes in providing portfolio management solutions to broker-dealers, says Starcev. The company already has bulk, with four million accounts, he notes.

"They're a big player," Starcev says. "The problem is you can't independently choose them. Your broker-dealer has to make the decision."

A third company, Optima Technologies in Atlanta, has a portfolio management product that's in the testing stages, he says. Beta copies of the program have looked promising, but the product is still unproven, he says. As for dbCAMs and Captools, Starcev says, "I think both of them are struggling. We don't see a lot of growth in either of those programs. People are leaving them."

Just because there are few viable alternatives today doesn't mean there won't be more in the future. The $23 million price tag Advent put on Techfi, only two years after the firm was launched, caught the attention of many financial software developers. And other RIA custodians and broker-dealers are likely to follow Schwab's lead and develop their own platforms.

"There is nothing that unique about what Advent offers," says one CEO at a large independent brokerage. "RIA and broker-dealer platforms are increasingly positioned to eat up Advent's business. Their competition isn't just other software companies. It's Schwab, it's Statement One, it's Raymond James, LPL and SunAmerica's Vision 2020."

Most of these large brokerages have annual technology budgets in excess of $30 million, significantly above what it took to create Techfi. One veteran financial software developer estimates that a viable portfolio management software system could be created for "$4 million, maybe less, and that's for a simplified system. But you would have to have people who really understood the business. To seriously compete with Advent, you would need about $20 million. To do it properly is very expensive."

One of the biggest costs isn't software development; it's ongoing service. That's where Advent comes up short in the view of many advisors. But it's not just an Advent problem. Early adopters of Techfi raved about its service, but as the young company continued to add users, service suffered. Privately, many software specialists say advisors' own lack of technological dexterity compounds the problem.

The competition "in the future will come from above, not below," argues Charles Palmer, a veteran software developer with his own consulting firm in La Quinta, Calif. "The big trust companies and custodian banks are sophisticated, and if they could hook up with a third-party administrator, high-end services could move downstream to small and mid-sized advisors." He cites State Street, DeutscheBank, and Mellon as institutions capable of moving into this business.

Perhaps in anticipation of such future alliances, Advent already is striking deals on its own with custodians like TD Waterhouse, designed to position the software company against arch-rival Schwab. Martin, who uses Schwab's Centerpiece, says TD Waterhouse has offered him Advent software at a substantial discount. "Under their arrangement, Waterhouse will control the pricing and the service of Advent's products," he explains. "Clearly, they would have a much greater interest in keeping us happy than Advent would."

Such alliances are likely to proliferate in the future. That means advisors won't simply be choosing a portfolio management system in a vacuum; they'll be choosing an array of services from different companies and joint ventures.

If they want to use software systems and custodial platforms that don't do joint ventures, the cost could be significantly higher. "Switching systems is a daunting project, so you don't do it lightly," Martin says. "The back-office part of our operation is an extremely important part of what we do. But it's not a significant cost."

Can Advent Shed

Its Bad-Guy Image?

By Eva Marer

When I first heard the news, I had to sit down," admits Keith Huber, president of Huber, Cardono & Moring in Houston. The report that Advent Software had just acquired Techfi Corp. seemed like a bad joke to Huber, whose firm had just made a painful transition from Advent to Techfi last year.

Huber may have had more reason than most to get steamed, but his reaction mirrored that of thousands of independent financial advisors across the country. Complaints about Advent-from predatory pricing to cavalier service-have long been scrawled on the proverbial bathroom wall. And the company is all too aware of its tarnished image.

"We are not proud of some of the reputation we've had," concedes Collin Cohen, Advent's executive vice president of client solutions and corporate development. "In the past, advisors have had every right to criticize our service." But Cohen insists that change is afoot, and that the company is aware of-and ready to shed-its bad-guy image. In fact, he says, improving service to the lower end of the market-RIAs and independent advisors with less than $100 million under management-is corporate priority No. 1. Advisors like Huber are taking a wait-and-see approach but, in the meantime, they're buying the new corporate line. After all, as a public company with an eye toward steady profitability, Advent must constantly develop new avenues of growth, and already may have squeezed the headier reaches of the high-net-worth market. They reason that reaching out to a niche it has traditionally scorned makes good business sense for Advent.

Huber is not the only advisor who's willing to give Advent the benefit of the doubt. As a long-time user and outspoken critic of Advent, Mark Balasa, co-president of Balasa Dinverno Foltz & Hoffman in Schaumberg, Ill., thinks he's seeing a new Advent in executives like Cohen who are reaching out to advisors. "It would be frightening if the historical Advent, with its pompous attitude and predatory pricing, took over the market," he says. "But given what Advent has been through in the last year [see main story], their long-term prospects in this business would not be good if they didn't take this opportunity to build a bridge and reach out to advisors." Advent has already taken a step in the right direction, Balasa says, by assigning dedicated service reps to RIAs and independent advisors.

In another early peace offering, Advent execs have been adamant that they will keep Techfi and its product line intact. That's good news for Techfi users, who can expect the same open-architecture platform that makes products like AdvisorMart and Financial Office flexible and easy to use. Advisors employ these account aggregation and portfolio management tools primarily for investing in mutual funds and annuities; they represent "additive", not competing, products for Advent, according to Cohen. He says that advisors like Huber who switched from Advent to Techfi are rare, representing significantly less than 1% of Advent's 6,500 clients. While Huber is mollified in the short term, he questions what the company will look like five years down the road.

The real question, of course, is just how long it will take Advent to raise prices. Cohen won't discuss prices, but a likely scenario is that Advent will reap profits over time by adding new products and functionality to Techfi's offering. That won't be all bad news for Techfi, which claims it was forced to turn away fully 50% of its prospects due to scalability problems. In the future, Cohen says, new products-starting with more custodial interfaces, data services, and integration tools-will still be sold under the Techfi banner, and priced for Techfi users. Overall, Advent has shown its willingness to make its products more affordable by cutting deals with the likes of Fidelity and TD Waterhouse through its outsourcing program. And Advent has taken some pricing lessons from start-up Techfi by offering all new clients the option of term licenses. Paid quarterly, term licenses are a double-edged sword: they cost more in the long run, but are more affordable up front than the lump-sum "perpetual" license, and will enable smaller users to come on board.

In a move to expand its service, Advent recently signed a deal with TD Waterhouse, whereby the brokerage firm will host three key pieces of Advent's software-Axys, Moxy and Qube-on it own network, essentially reselling them to advisors at a reduced cost. "We can get a better deal than a lone advisor could get and then pass on those savings to advisors," explains J. Thomas Bradley, Jr., president of TD Waterhouse Institutional Services. The new service would likely be offered free of charge to advisors who commit $100 million or more in assets, he says. In the future, the company may even offer an alternative to Advent TrustedNetwork by providing online account aggregation through its parent Toronto Dominion Bank in Canada. "With aggregation, it's becoming less important where you custody assets and custodians have to address this," says Lou Stanasolovich, president of Legend Financial Advisors in Pittsburgh, who is thrilled with the new service. Indeed, the real threat to Advent's pricing hegemony is likely to come from brokerage firms that see an opportunity to gain assets and advisor loyalty by underwriting the cost of technology.

Cohen says that from unbundling Advent Office and creating Advent Office Essentials last year, to future plans to "make Advent's architecture more open," the company is serious about improving the scope and quality of its products. Independent advisors are ahead of most institutions in delivering relationships and trusted advice, and Advent realizes that it is dependent on those advisors for the future of its business. As Cohen says, "The proof will only be in hindsight." But, he adds, "The footprints are in the sand."