Smaller advisory offices face tough choices about what they will pay for their portfolio management programs.

    Advent Software, a leading provider of portfolio management software (PMS) to independent advisors, has released a new PMS program built on a relational database and capable of integrating cost-effectively with other software programs in your office. It's called Advent Portfolio Exchange (APX) and it seems like a fantastic new accounting system for investment advisors.
    APX includes relationship management capabilities allowing you, for instance, to e-mail all your clients that hold a particular security or to set investment policy restrictions. It also includes packaging capabilities, allowing you to automate creation of a client report packet that might include a letter personalized with account data, other documents as well as a performance report. And APX lets managers at an advisory firm create a customized dashboard so they can quickly see all of the critical portfolio management numbers they need to see at a glance.
    There's just one problem: Advent may not be interested in selling it to you.
    If you read this magazine, then chances are good that you advise high-net-worth individuals and manage less than $1 billion, and Advent is not targeting this product to you. "Advent Portfolio Exchange, launched in 2005, gives larger firms (generally over $1 billion in institutional and high-net-worth assets) the functionality of portfolio management, client management and reporting in a single solution that integrates front and back office functions," says a brochure for APX on Advent's Web site.
    The $1 billion figure is not a hard cutoff. Firms with $300 million in assets might be interested in the enhanced functionality of APX. However, even firms that have $500 million under management and that are current licenses of Axys, Advent's flagship PMS application, may have difficulty justifying the cost of moving up to APX, since it is likely to carry an up-front data conversion fee of $75,000 to $150,000.
    Most of the Advent Axys users that I contacted to write this story don't know much about APX. While Advent launched the product in September 2005, it has not reached out to RIAs I interviewed, who all manage well below $1 billion, to tell them about the product. But among the handful of advisors I interviewed that have asked Advent about APX, the reaction is sticker shock. In fact, the long-awaited launch of APX appears to be prompting some longtime Advent Axys users to re-evaluate their relationship with Advent, and they say they are concerned about Advent's commitment to serving "smaller" advisors with less than $500 million under management. To understand why, let's first look at Axys.

The Evils Of Axys
    Advent Axys is a reliable PMS application used by 4,000 firms that produces elegant performance reports and accurate portfolio accounting data. However, it was launched in 1993 and built on 1980s database technology. It is written based on Advent's own programming language, and it uses a "flat" database file for storing all account data. When Advent was founded in 1983, proprietary databases were standard-that was all there was.
    Over the last decade, however, development of applications used by small- to medium-sized businesses, including PMS software for financial advisors, has centered on utilizing Microsoft SQL. SQL is the lingua franca of database software. Its Structured Query Language has standardized how applications organize and retrieve data.
    It's no longer necessary for software development companies to create their own proprietary language when writing a database application. In fact, doing so is a huge disadvantage because businesses want their main database application to feed other applications.
    As an advisor, you want your PMS system to feed data to your financial planning, analytics, contact management and other software applications. You want to key in client data one time and have it populate all your other applications. Call it straight-through processing, integration or whatever, that's what you want in your business and that's the key benefit of SQL.

The SQL Revolution
    SQL allows you to hire a programmer to come into your shop and customize interfaces that make your PMS talk to your CRM system. That's because all database programmers these days write code to SQL-the standard language across industries. SQL makes customization affordable to even little guys. It might cost $2,000 to $5,000 to make your CRM system pull data from your PMS system, for instance. It's within reach of many of our readers.
SQL has also made software development simpler. Microsoft gives application developers tools that make it easier to make database tables of data relate to one another. This has spawned a revolution in the software business because even small companies can write a program built on SQL, and you no longer need legions of programmers trained in your proprietary language to support the program.
    In fact, in 1998, a programmer named Matt Abar locked himself in a room for three months and emerged with an SQL-based PMS system that became the driving product behind Techfi Corp., which was purchased by Advent in 2002 for $25 million. Advent, incidentally, never actively sold Techfi's product and stopped supporting it altogether about 18 months ago, and it now seems clear that Advent bought Techfi only to put it out of business and remove the competitive threat posed by this tiny upstart that was coded to rely on an SQL database.
    The beauty of an SQL database is that, instead of all your data being warehoused in a single table with hundreds of rows and columns, SQL stores your data in many smaller tables that can be programmed to handle specific tasks, and one table can be related to another. Hence, the term relational database.

Axys, The Cadillac
    While Axys is written on a "flat" database in Advent's proprietary language, desktop software rivals such as Schwab PortfolioCenter, Cornerstone Revolutions' PowerAdvisor, and Interactive Advisor Systems (IAS) as well Advent's new Portfolio Exchange are written on an SQL database. Put simply, Advent Axys is the Cadillac of PMS systems. Cadillacs don't hold the road or offer the luxury of a Mercedes, BMW or Lexus. It's not the top-tier luxury car anymore.
    But here is Advent, selling its outmoded Axys software-the central application used to run 4,000 advisory firms-for more than the cost of a new license to Schwab PortfolioCenter, PowerBroker or IAS. And, now that Advent has revamped its system for portfolio accounting and is rolling it out as APX, what does the company do? Instead of giving its 4,000 users an upgrade, it's telling them that it's a new product and that they must pay a steep conversion fee.

Advent Versus Schwab
    Along with Advent, Schwab is one of the more controversial vendors serving RIAs. Advisors for years have voiced fears about being too dependent on Schwab, and many have avoided buying its PMS system because they did not want to rely on Schwab for both custodial and technology services.             However, the stark contrast between how Schwab handled the rollout of its SQL PMS system versus what Advent is doing with APX is unavoidable.
Like Axys, Schwab's old PMS product, Centerpiece, was built on a proprietary database. The company spent several years re-engineering the product and two years ago launched PortfolioCenter, which is built on an SQL database, to replace Centerpiece. Schwab took an entire year to do a staggered release of the SQL product to its 3,000 customers because conversions threatened to be so disruptive and require a lot of support. But Schwab did get the job done.
    Advent's decision to market APX as a new, high-priced product for large advisory firms makes sense for Advent, but is in sharp contrast to what Schwab did. Converting 4,000 Axys users from the proprietary database to SQL would be a daunting task. But Schwab did that and it did not charge Centerpiece users for the conversion. It was an upgrade and not a new product.
    In fairness to Advent, the difference between Advent and Schwab is that Advent is a software company and obviously must make money on its software business. Schwab is a brokerage. Converting its RIAs was a cost of doing business, because it has not viewed its PMS software operation as a moneymaker but instead as a way to serve and to sell to more RIAs.

Troubled Past
    To understand Advent's current strategy, it's wise look back at the trauma the company has endured over the past few years. Advent was an Internet darling at the dawn of the millennium. It got caught up in a string of bad acquisitions and distractions. After peaking at more than $60 a share in March 2002, its stock price plummeted to less than $10 a share in October 2002. Advent's acquisitions, paying $45.5 million for Kinexus, an account aggregation service, and $25 million for Techfi, have not worked out well. Here's how Advent explained it in its annual report:
    "From 2001 through the middle of 2003, our strategy focused on growth through the acquisition of additional complementary businesses," Advent reported in its 2003 annual report. "During these years, we made five major acquisitions and also acquired all of the common stock of five of our European distributor's subsidiaries. These acquisitions resulted in substantial duplication and excess capacity in our infrastructure, as well as certain product and service redundancies.
    "As we pursued this strategy, we were simultaneously engaged in serving asset managers, retail broker/dealers and high-net-worth individual investors through both in-house and outsourced applications. Because our strategic intent had broadened, our resources became stretched, our expenses increased, and we were forced to focus on managing business models and resolving integration issues outside of our traditional core competencies."

Mounting A Comeback
    On May 13, 2003, Advent announced that its CEO, Peter Caswell, resigned effective immediately and that its chairwoman and founder, Stephanie DiMarco, would return to day-to-day operations and retake the helm. DiMarco slashed the workforce from 980 at the end of 2002 to 764 at the end of 2003. She also halted Advent's push into the independent broker-dealer market, pulling the plug on Techfi's AdvisorMart Institutional product for broker and independent registered reps.
    In 2002, Advent lost $19.2 million, in 2003 it lost $93 million and in 2004 it lost $16.2 million. In 2005, Advent showed a net profit of $14.1 million. Trading a 72 times earnings with an 8.4% year-over-year quarterly growth rate, its stock seems fully priced at $32 per share. However, 70% of Advent's revenues are from recurring sources. But what seems to be a key to its turnaround in the last couple of years is its focus on larger clients.

What Advisors Say
    Most advisors I spoke with did not want to be quoted by name. Advent has asked some advisors to sign a nondisclosure agreement about its prices, and many advisors are uncomfortable challenging Advent. But a couple of advisors did go on the record.
    Bill Ramsay of Financial Symmetry, an advisory in Raleigh, N.C., points out that a recent study by Moss Adams, a prominent consultant to advisors, found that firms with $250,000 or less in revenue had budgeted $1,000 in 2005 for software expenditures, while firms with $250,000 to $1 million in revenue had budgeted $5,000 for software expenditures. Those with revenue of $1 million to $5 million had budgeted $22,000 for software expenses. These spending levels are so inadequate, it's almost laughable. Even if you double them and assume advisors are willing to spend twice as much as the amount the survey reported, paying for Advent's new APX product would leave little or nothing for other software expenses.
    "When you consider that most advisors are budgeting $5,000 or less for all of their software expenditures, Advent has priced itself out of our market," says Ramsay.
    Tom Connelly, of Versant Capital Management, which has offices in Minneapolis and Phoenix, says he is looking for an alternative to Advent Axys because so many less expensive solutions have popped up, including Investigo and PowerAdvisor. "Financial planners are a really small piece of the pie for Advent," says Connelly. "I don't think this market is a good business proposition for them, especially when you look at what they've done with their product line and how they're pricing it."

Doing The Math
    Many of the advisors who read this magazine may not be customers Advent wants. It's not that Advent is evil, it's just that Advent is all about business. Do the math.
    Advent has 4,000 firms using its Axys software. One of the advisors I spoke with says an Advent sales rep recently told him that one-third of Axys' users have less than $200 million under management. The advisor also told me he pays Advent about $8,400 annually for three users and he manages $125 million. This is actually more than some of the other advisors I spoke with, including one who manages $85 million and pays just $1,400 annually for a single-user license.
    If you assume that 1,000 of Advent's 4,000 Axys clients pay an average of $7,500, that's $7.5 million in revenue. For Advent-which will have about $180 million in annual revenue this year-serving a large part of its "small" advisor client base using Axys brings in only a fraction of the company's overall revenue. When you're a publicly held company trading at 72 times earnings, The Street expects growth from you. Serving small advisors may not provide the kind of growth Advent needs.

Advent's "A" Clients
    Anyone who regularly reads this magazine has seen articles in which marketing experts tell you to divvy up your clients into four groups-your A.B, C and D clients-and to cut your D clients. It's a way of making your company more efficient. My guess is that many Axys users are D clients to Advent.
Keeping this in mind, take a look at a slide from the investor presentation available on the investor relations page of Advent's Web site. The slide, entitled "Advent's Addressable Market Today," shows that the 10,000 firms at the bottom of Advent's addressable market spend, in aggregate, $50 million annually on software, while the 7,000 firms in the middle of its target market spend $1.2 billion and the 600 largest firms at the top of its market spend $1.4 billion. It's not hard to see why Advent might want to focus on sales to larger firms.
    Advent's made strides in selling its Geneva accounting system to large asset management companies-mutual funds, hedge funds, global asset managers. According to the same presentation, typical Geneva customers are firms with $30 billion under management. "Our Geneva product is also a key element to our growth strategy," according to Advent's 10-Q for the first quarter of 2006. "In the past two years, we've nearly doubled our Geneva customer base as we now have 72 customers on the Geneva platform." As of August, according to a company release, Geneva had attracted 80 clients.
Serving a smaller group of firms that each pays Advent more would be a wise strategy, especially since, according to Advent's estimates, money managers at the top of its target market typically pay Advent $150,000 to $1 million annually, while the firms using APX pay $50,000 to $150,000. These are Advent's "A" clients.

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