Fidelity Institutional Wealth Services, the No. 2 custodian of independent advisor assets, issues a press release saying it would be spending a colossal $50 million on a new wealth management technology platform for registered investment advisors integrating portfolio accounting and management, financial planning and customer relationship management. A week later, Albridge Solutions, the dominant technology provider to independent broker-dealers and their reps, issues a release saying it was being swooped up by PNC Financial Services Group.
These blockbuster announcements, while totally unrelated to each other, together represent a watershed moment in the development of technology systems for independent advisors. The announcements confirm something you know but might easily overlook: This Internet thing is catching on. Nearly a decade since the first Internet applications for advisors appeared, we are seeing their adoption and acceptance in all corners of the industry.
Deconstructing Albridge
Albridge, formerly known as StatementOne, is one of the companies I admire most in the little space that independents occupy in the financial services industry. It's not surprising why PNC wants to own it. But the transaction potentially poses a new business risk to scores of independent B-D's and tens of thousands of independent reps. To understand the influence of this deal on the industry, you must appreciate Albridge's accomplishments.
Over the last decade, Albridge managers and financial backers relentlessly charted a course to make the company the first reliable system for consolidating data feeds from hundreds of brokerages and insurers to produce consolidated client-account statements for independent B-D's. Albridge single-handedly pioneered the implementation and administration of Web-based enterprise-level portfolio accounting and reporting systems for independent broker-dealers. It is the most important technology company serving the independent advisor market, providing independent B-D's with their mission-critical portfolio accounting solution.
Using patent-pending technology, Albridge collects, cleanses and normalizes transaction and position-level securities data from a diverse array of clearing firms, custodians and product companies. The data powers Albridge's Web-based portfolio accounting and performance-reporting solution, which is used by 150 independent B-D's-almost all with independent reps-representing more than $1 trillion in assets, 100,000 financial advisors and more than 12 million investors with 50 million accounts.
Albridge was ranked No. 32 in Inc. Magazine's November 2005 list of the fastest-growing private companies in America, based on its revenue growth for the three years that ended December 31, 2004. The company logged $15.8 million in 2004 reported sales revenue, showing an astounding 1,787% growth. But as it has become more established, the company's growth rate has naturally slowed.
Albridge Too Far
By the start of 2007, the very characteristic that had compelled venture capital firms to invest $17 million in Albridge back in 2000-in other words, the company's growth potential-was over with. Albridge had come too far and was no longer an early-stage play. It was indeed the dominant company in its space.
"For the last four years, there have been a wide number of parties interested in investing in Albridge," says Greg Pacholski, the company's president and chief executive officer. "Over the last three years, private equity firms have been contacting us and our investors, seeking an investment in Albridge. So each investor has been thinking about when was the right time to divest their holding and move on."
Venture capital funds need to show their investors a return. Usually VC investors want to see cash a lot sooner than Albridge's VCs, Pacholski says. "In 2000, the investors were typical early-stage investors," he says. "They took a risk by investing in something that didn't exist yet, and the idea was to look at divesting in three to five years. We're now in the seventh year of showing revenue.
"I hold it up as something to be proud about, that our early-stage investors stayed in because they thought it was the best place for their money," says Pacholski.
With better places for VC funds to invest, Pacholski says Albridge considered raising money to buy out its VCs and go public. Ultimately, however, that idea was nixed and a strategic buyer was sought.
Albridge hired investment bankers from CS First Boston, and last summer an offering document was circulated to 70 possible buyers. "The process was competitive and a wide range of parties were interested," says Pacholski. "And from that point forward, it was a highly managed process and we're thrilled with the outcome."
Neither Pacholski nor other senior executives from Albridge or PNC would comment on the price tag paid by PNC. However, according to one source with knowledge of the transaction, it was in the $100 million range.
PNC Who?
When the news first came that PNC Financial had acquired Albridge, the typical reaction among advisors and tech executives was, "Who is PNC?" "Why would a regional bank unknown in the independent advisor market want to own Albridge?" When you look at PNC Financial, however, you come to understand that it's more than a regional bank. In fact, PNC is one of the largest diversified financial services companies in the U.S. It's ranked No. 231 in the Fortune 500, which is based on sales, having had more revenue in 2006 than Google, State Street, Ameriprise and Starbucks. In 2006, it reported nearly twice the revenue and income of Charles Schwab & Co.
According to a 2006 10-K filed with the SEC, the Pittsburgh-based PNC has two lines of business in addition to retail, corporate and institutional banking. It owns 34% of mutual fund giant BlackRock, which has about $1.2 trillion in assets under management, almost the same as Fidelity Investments. PNC's other line of business is PFPC, which provides custody, securities lending, and mutual fund accounting and administration. PFPC services $2.2 trillion of assets in 68 million shareholder accounts. It is the No. 1 sub-accounting provider to brokerages in the U.S. and the No. 2 full-service transfer agent, and it owns a major managed account platform. Independent advisors may know PFPC's AdvisorPort managed account platform, its AdvisorCentral mutual fund data-consolidation portal and its DAZL data delivery interface.
Why PNC?
Tom Sholes, a senior vice president and senior managing director at PFPC, says the Albridge acquisition was made to expand PFPC's services to financial product manufacturers and distributors. With PFPC's dominant position in the sub-accounting business servicing B-D's, it can take advantage of Albridge's reporting capabilities. "We serve lots of large broker-dealers today," says Sholes, "and this is a way to provide more services to them. We'll be able to deliver more services to enterprise customers."
"Today, PFPC delivers fund company information to a B-D's back office-it's fund-centric-while Albridge delivers product data," he adds. Sholes was responsible for analyzing Albridge's capabilities before the acquisition, and he will manage its integration into PFPC after the purchase is completed. "The acquisition," he says, "will allow us to make it easier for customers and advisors to get a total set of information about their holdings."
Sholes says PFPC's current clients, mutual fund companies and B-D's, are looking for better ways to position their products with their advisors. "They're asking us about how they can get more advisors." By acquiring Albridge, PFPC now has a deep and direct connection with advisors. "And we believe that the closer we are to advisors, the better," he says.
John Simmers, CEO of ING Advisors Network, which is one of the nation's largest broker-dealer networks and serves more than 10,000 independent registered representatives, says the acquisition is "a good thing for ING." "We see the acquisition as providing strength to Albridge in technology, management and expanded opportunities with unified management accounts and other products that PFPC offers," says Simmers. He also says it can bring straight-through processing for ING and other independent B-D's, helping them level the playing field with self-clearing firms like Merrill.
Simmers says independent reps that now submit fund purchases direct to fund companies will now have the option of using custody service provided by PFPC because of the Albridge acquisition. He says this will cut down on accounting mistakes, smooth the way in dollar cost averaging for clients and result in a single 1099 instead of multiple 1099s now being sent to clients. "This could make things more efficient for our reps and bring revenue to independent B-D's," he says.
Time Will Tell
With the vast majority of independent B-D's relying on the Albridge system, the uncertainty posed by the acquisition cannot be ignored or minimized. When these deals are made, companies naturally make them sound like a win for everyone, but it often does not work out that way.
One possible problem could arise from PNC's ownership of asset management firm BlackRock. PNC had owned about 70% of the firm until 2006, when Merrill Lynch merged its mutual fund unit into BlackRock in exchange for a 49% stake in its shares. This allowed Merrill brokers to continue to sell Merrill funds that were rebranded as BlackRock funds. Since Merrill no longer controls those funds and has only a minority stake in BlackRock, the conflicts of interest that had hampered both its brokers and the firm when they previously tried to sell Merrill funds were suddenly diminished.
With Merrill now owning a 49% stake in BlackRock and PNC owning 34%, and with many Merrill brokers being so closely tied to BlackRock, you have to wonder whether PNC can be squeezed in some way. How will the ties between these financial services giants influence their decisions? Could Merrill receive preferential pricing on PFPC services? The firm's sheer size probably merits a volume discount anyway. Could the scores of independent B-D's so dependent on Albridge somehow be handicapped because of PNC's close ties to Merrill through their BlackRock partnership?
Sholes and Pacholski were adamant in saying "no." And Simmers doesn't sound worried. "We view this as a PFPC acquisition," Sholes says. "We view Albridge as a great franchise that will continue to grow and we will not change its growth strategy. Abridge will continue on its same path with the independent B-D's, but we will be looking for ways in which PFPC can leverage Albridge capabilities further."
As evidence of their commitment to Albridge's current clients and strategy, Pacholski says he and his three top executives were given three-year employment contracts by PFPC. In addition, Albridge leased another 15,000 square feet in its current location and is planning on staying there. "The Albridge name will continue to exist," he says, "and we now have more resources and a bigger strategy to help distributors. It strengthens Albridge to be part of a larger organization that has a longer track record."
What is a bit scary, however, is the uncertainty that can follow any acquisition. After Bank of New York acquired Pershing in 2003, for example, some B-D's initially complained of a diminution in services. Companies like Albridge and PNC may also have very different cultures, which could affect the service to Albridge's independent B-D's and reps. However, the biggest risk is that perhaps Albridge's focus on independents may look less attractive to PNC in the future.
The independent contractor segment of the financial services industry has more financial constraints than any other corner of the industry. For a wirehouse or regional brokerage to spend $500,000 on a portfolio reporting system for its clients and brokers is not a big obstacle. For an independent B-D with tiny profit margins, such expenditures can be the difference between a profitable and unprofitable year. With PFPC's focus and reach into large, well-heeled brokerages, you have to wonder whether the independent B-D's that helped Albridge grow into an acquisition target will continue to be its best clients. You have to wonder if Albridge will want to continue to dance with the same firms that brought it to the party.
Fidelity Fallout
For RIAs interested in true independence, the Fidelity news is a mixed blessing. The move to create a proprietary Web-based platform gives Schwab the green light to do the same. When all of the custodians have advisors on their own proprietary platforms, we move closer to the era of the semi-independent RIA firm. This is an RIA firm that is tied closely to a custodian and that receives client referrals from the custodian's retail branches as well as discounted pricing on a proprietary technology platform.
In fairness to Fidelity, however, its new platform is less proprietary than a previous integration effort by Fidelity in 2005. Ed O'Brien, a senior vice president at Fidelity Institutional Wealth Services, says data from other custodians, including Schwab, will be brought into the integrated WealthCentral platform through Advent's Custodial Data Service and fed into Advent a hosted version of Advent Portfolio Exchange (APX), a state of the art PMS system.
Some functionality will not be available, however, on data held away from Fidelity. For instance, only on Fidelity-held assets can you right click to access a trading application, use cashiering features, or auto-fill Fidelity forms. Transaction functions on assets held away from Fidelity will still need to be done through the other custodian.
Still, the Fidelity platform does arguably diminish the independence of RIAs using such a platform. Assuming the Securities and Exchange Commission will stand idly by while the intent of the Investment Advisers Act of 1940 is chipped away, custodians will draw in advisors with such tactics. The independent RIA world is likely to see 20% to 30% of its ranks adopt a custodial platform, which will make it easier and more efficient to do business with a single custodian. While the independence of these firms will arguably be compromised and their custodians will be able to exact a premium price from them for providing a technology integrated with their brokerage systems, the proprietary platforms will allow these RIA firms to operate more efficiently.
The good news is that, for the majority of RIAs, who value their independence above all, independent technology vendors will compete with the custodians by integrating their systems with one another. Indeed, assuming the major custodians follow Fidelity's lead and build their own integrated Web-based technology platforms, small technology companies will see a flight from Schwab PortfolioCenter and Advent Axys as integration by tiny PMS systems, such as Black Diamond Reporting, Orion Advisor Services, AssetBook, PortfolioDirector, PowerBroker, Interactive Advisory Software and other fledgling companies make gains in functionality and then in sales.
O'Brien says Fidelity will increase additional functionality, such integrating with a document management vendor, but there are no plans for Fidelity to add additional PMS, financial planning or CRM systems to the platform. Advisors who want to continue to use those systems will be able to, however, through existing point-to-point interfaces, he says.
While RIAs have been stuck in "PMS gridlock" for many years as Advent and Schwab continue to hold dominant market share in the RIA market with this software, Fidelity's move is likely to begin shaking things up. Advisors will be able to buy an integrated platform directly from tech vendors who integrate their systems. Already a number of these PMS applications have integrated with MoneyGuide Pro, Money Tree, Junxure and others. Those data exchanges will get better. They perhaps won't be as well-integrated as systems offered on a custodial platform, but they will spare advisors from the double-entering of data and will support better client service.
Premature And Puzzling
Fidelity's announcement was curious for a couple of reasons. First, because buried in the 11th paragraph of the company's release on page three is that, "Wealth Central will become available in late 2008."
O'Brien points out that the Siebel CRM and EISI planning applications will go into beta testing before the end of this year, the integrated trio of applications will not be available until the fourth quarter of 2008. "We want our clients to be prepared for what were doing and understand our direction in technology," he says. "If our advisors are thinking of looking for a new accounting system in the next year, we want them to be aware of this now."
The announcement was uncannily timed to coincide with the annual conference for advisors sponsored by Fidelity Institutional's larger rival, Schwab Institutional. Despite competitive pressures, for a large company like Fidelity to issue a press release and do a press tour announcing a technology product that is a year away from being launched is strange, though custodians try to upstage each other all the time.
This is not the first time Fidelity has tried to launch an integrated platform for its RIA clients. About three years ago it announced plans to launch an integrated platform using Integrated Decision Systems, an institutional PMS vendor, as its hub. That deal collapsed after IDS' venture capital backers pulled the plug on funding, leaving Fidelity executives embarrassed. So it is surprising to see Fidelity making this announcement so far in advance of the launch of WealthCentral.
Even more curious is that Fidelity, according to the news release, is "investing $50 million in developing the new platform." How could it be? You could build an integrated wealth management platform with hooks directly into Fidelity's back office brokerage system from scratch. But that's not what's happening.
O'Brien says the $50 million is being spent not just on integration and development but on moving data off Fidelity's current Advisor Channel desktop software platform. "Migrating a system with 15 years of data on it is a lot of work," he says.
Fidelity is building a system using Advent Software Portfolio Exchange for portfolio reporting, Emerging Information System's NaviPlan for financial planning, and Siebel's CRM On Demand for customer relationship management. OK, we all know Advent is expensive, but even Advent can't be that expensive! It's difficult to imagine how Fidelity could spend $50 million integrating three applications that are already developed. Despite these oddities, the Fidelity announcement nonetheless highlights the independent wealth management industry's migration to Web-based applications.
Andrew Gluck, a longtime writer and journalist, is CEO of Advisor Products Inc., a Westbury, N.Y., marketing company serving 1,800 advisory firms.