IN NEED OF A BETTER AGGREGATE VIEW OF HIS OWN HOLDINGS, AN ENTREPRENEUR BUILT ONE.
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Chris Snyder (right) and Joseph Dionne have created Private Client Resources to collect data on 70,000-plus investment types. |
F. Scott Fitzgerald once wrote, “Let me tell you about the very rich. They are different from you and me.” Hemingway’s rebuttal: “Yes, they have more money.”
Chris Snyder learned how the rich are different after he sold Loan Pricing Corporation to Reuters for $50 million.
“I had money to worry about for the first time in my life,” he recalled. “When you cash out of a company, you become your own trust fund baby.” He went to see several private bankers and came away underwhelmed. They all sounded the same with recommendations of a mix of stocks, bonds and a few miscellaneous investments.
“If you have a complex financial life you just can’t put all your eggs in one basket,” he explained. “The old saying is that you have to concentrate to get rich and diversify to stay rich.” A wealthy person is apt to have deferred pension plans, some insurance investment vehicle bought from an old college friend, and investments in real estate such as apartment buildings, marinas or warehouses, private equity and hedge funds and commodities like timber or gold.
“No institution can offer full aggregation and without full aggregation of your assets, you are kind of stuck; you have to do it yourself,” he said.
He wound up directing his own investment program using Quicken and Excel to aggregate information from six statements he had coming in.
Snyder, who has a Ph.D. in Economics from Lehigh University, had created Loan Pricing Corporation to provide investment banks with a clear view of the value of their loan portfolios from the complex and fragmented price information.
Through his work on Wall Street he had met several highly successful executives including Roy Smith, a retired Goldman Sachs partner who is now Professor of Finance at NYU’s Stern School of Business, and Joseph Dionne, former CEO of McGraw Hill, who joined him in founding Private Client Resources, LLC (PCR).
Snyder had found that he was not alone in finding it difficult to piece together information from multiple types of investments; Smith was keeping his financial information in a shoebox – not exactly the latest in high tech money management, and not so unusual either.
As a PCR white paper notes, the world of the super wealthy is extremely complex, but with too many advisors chasing this small universe, no one has the margins to make the necessary investments to aggregate the data. Custodians are squeezed. But even more importantly, the various institutions are reluctant to share any information with each other, fearing that rivals will use knowledge of assets held away from them to steal the wealthy clients.
On average, according to PCR, a $100 million household will work with four custodians, six hedge funds, several private equity investments, multiple partnerships, at least six trusts and hold hundreds of securities and liabilities.
“Moreover, clients are demanding more transparency, even as their financial lives become more complex. Ideally they would like to compute performance over whatever time interval they wish. They may like to see this information by tax status, beneficiary, asset class manager, etc. No matter how many analysts are hired the spreadsheet approach cannot deal with this much detail,” said Snyder.
If no institution can do the aggregation, the investor or his advisor ends up doing it using spreadsheets, an inefficient and time-consuming exercise.
Enter PCR with a Web-based outsourced solution running on an entirely Microsoft platform. Once a client has authorized PCR to obtain his investment data from all the parties he is working with, it can gather the information. But that’s just the first step. The second is to clean and normalize the data, which PCR finds often contains mistakes, especially in complex actions such as reorganizations and distribution pricing.
“We contact the custodians to clean up mistakes and they are willing to work with us. But Institution A cannot call Institution B about straightening out an error because Institution A is not willing to provide a feed. There are only 40,000 households in the U.S. with a net worth of $24 million or more, and banks guard those clients jealously,” Snyder said.
And with good reason. It is rare for a client to have more than one alpha advisor, and the first mover advantage is strong.
“Our data has shown that when an advisor or institution is entrusted by the client to see everything, a number of things happen. They can charge for it, and within six months or so we see a lot of re-custodying of assets. New money managers come in and old ones get tossed aside once the client can see a complex portfolio through a clear system like ours,” he said.
Northern Trust, which uses PCR, is an example of a bank that gets to wealthy clients early and holds onto them by providing excellent returns, he added.
“Northern Trust is actively searching for yield and liquidity, and wealthy people are obsessed with growth and liquidity. They want their assets to grow fast enough to meet their obligations for cash flow to support their children and causes,” Snyder said. “While constantly searching for liquidity and yield, they have to mitigate the effect of taxes and risk; it is a continual balancing act. It was much easier during the bull market but it has become very complicated since then. It is a sea change for the wealthy and that is leading to greater complexity.”
Snyder describes PCR as the first new service for high wealth individuals in 25 years. Now advisors and trust companies can go to clients and say that for a few basis points they can see all their investments in one place.
A second pattern that emerges among PCR clients is in their organization of activity. In the fall they do their tax planning followed by reallocation of assets, and in the spring they look at the yield and activity and in the summer they act on the results.
Because the system was developed by CEOs, it offers flexible reporting.
“These guys are used to having information their way,” said Snyder. “Among powerful people, each one has his or her own preferred view. Some ran their companies on charts and want to manage their investments that way. We deliver information however the client wants to view it.”
An advisor can use a shared view of the Web page report to walk through investments with a client over the phone. They can pull up information by manager, asset class, tax status or by beneficiary.
“That means that in a conversation with an advisor, you’re both looking at the same screen and you can get your questions answered; it changes the relationship between an advisor and client,” Snyder said. If a client wants to know his level of liquidity, for instance, the advisor can find it with a click of a mouse and answer the question during the session rather than looking it up and calling back later.
PCR sticks to data and leaves analysis to others. Northern Trust, for example, uses RiskMetrics, also running on a Microsoft platform, to provide portfolio risk analysis for its clients. Advisors using PCR reporting can quickly see if a money manager has dumped his company’s worst-performing funds on an unsuspecting client, because the results will show up clearly in the reports.
The next step PCR will take with its data is to provide clients with benchmarking reports showing, for example, the average returns of $100 million portfolios among its clients.
“We have been benchmarking for two or three years, but it is still in the lab,” said Snyder. “We are doing things like looking at how clients are doing in hedge funds compared to the Tremont Index; our clients tend to buy hedge funds in $2 to $3 million chunks; they enter the market differently.”
To provide this information to clients, PCR has built its data aggregation for the very wealthy on a Microsoft platform. The custom-built data warehouse is on Microsoft SQL Server 2000, and the firm is evaluating SQL Server 2005 to take advantage of its improved engine, new reporting capabilities and its integration with Web services. PCR is now producing its reports with ColdFusion MX7 running on Windows Enterprise Edition 2003. The company has seen its transaction volumes double over the last year and is projecting continued strong growth in client transactions. Both Windows Enterprise Edition 2003 and SQL Server have handled the growth easily, according to Gary Fullenbaum, the company’s CTO.
In Europe, Financial Objects is continuing to develop a sophisticated wealth management solution for high-net-worth clients on a Microsoft platform. It has sold its system to a Cyprus bank that uses it to serve its 10 Russian clients, each worth at least $1 billion.
As PCR’s CEO Chris Snyder noted, the competition for very wealthy clients is keen because they can be so profitable.
Providing the service they demand requires technology as a base, but technology is not enough, according to Gary Linieres, sales director for Financial Objects’ ActiveBank in London. His company’s platform runs on the Microsoft .NET Framework and the SQL Server database and provides information for fund managers, portfolio managers, and financial advisors, along with a reporting service that can provide reports to advisors and clients.
In the past, technology providers could talk to the asset managers. Like PCR, Financial Objects provides expanded coverage that includes equities, bonds, and unit trusts but also extends to valuable assets for which data feeds are not readily available – yachts, art and collectibles.
“The bankers who are in this very competitive high-net-worth market have to position themselves as offering holistic wealth management; they almost provide a concierge service,” Linieres said.
The private banking industry is looking for a layer above the assets to contain information on what the clients value, including their lifestyle aspirations. The new generation of wealthy doesn’t want to simply hoard their money, they want to use it. And to make it more challenging for bankers, they are very sophisticated about financial products and have access to an immense amount of information. Private banks will need intelligent technology for advisors to manage these new demands, he said.
“We are working on it, but no one is there yet.”
In many cases, the private banks are boutiques, often set up by a few bankers who have left a large investment bank with their clients and set up a business on their own. Their challenge is to grow their assets under management while improving service by using cost-effective technology well.
“The small to medium shop will operate in Excel, but then it takes them three to four days to pull together their client data. We show bankers a structured elegant way to do it on a low-cost platform they can integrate with existing platforms,” said Linieres.
www.pcrinsight.com
When it comes to an advisor platform, John Catalano at Raymond James thinks he knows what time-pressed advisors want.
“First is ease-of-use. I cannot stress the importance of that enough because they are extremely busy people who have to multi-task on a wide variety of areas. The last thing they want to do is spend six to nine months learning how to use a very complex software package,” Catalano said. “Second, they are looking for an application that is reasonably robust – it can do a lot of things well.”
Before selecting SunGard’s WealthStation, Raymond James, the St. Petersburg, FL-based financial services firm, examined systems from several vendors, added Catalano, who is manager for financial planning software at the company. In most cases, he found an extreme tradeoff between robustness and ease-of-use.
“The really simple applications that your 12-year old could use lacked the necessary robustness and flexibility to cover the typical areas of concern such as asset allocation, and analysis for retirement, insurance, long-term care, and education,” he said.
John Deglow, senior vice president and director of wealth strategies at Hilliard Lyons in Louisville, KY, agrees about how important ease-of-use is.
“I provide software solutions for 430 financial consultants,” he explained. “I think many firms make the mistake of having a high-end planner in my position, and that person finds software that suits his needs and forgets that the financial consultants in the field aren’t necessarily at that same skill level. What we like about SunGard is that it offers tools at every level. We can do in-depth comprehensive planning and we can do low-level, quick-and-easy five-minute retirement plans. The planner can mix and match from 50 different tools and calculators.”
Catalano said advisors, who never have as much time with clients as they would like, want to use the same system, with the same interface, for all their work. “SunGard’s planning station gives our advisors the ability to dial up their choice of how they approach a particular situation,” he added.
Meanwhile, he wanted a system that was easy for the clients to understand with charts and graphs that are clear and readable. Some vendors, he suggested, should spend a lot more time with end users to learn what they want from a system.
“We looked at output that was so complicated that sophisticated financial planners in our home office had to think two and three times to figure out what they were trying to say,” Catalano said.
Cameron Tanner, a product manager at SunGard, a Microsoft global partner, said their goal is to support advisors who want to be the trusted quarterback in a client’s wealth planning. For that, the advisor needs a way to understand a client’s complete portfolio, including assets held at other firms, so they can provide a sensible asset allocation plan.
“Advisors want a single point of client entry, unified reporting, and a consolidated client view,” she added. SunGard also offers a view of an entire household, so an advisor can see a spouse’s holdings to get a comprehensive view of taxable and non-taxable accounts, insurance coverage, and risk exposures.
CheckFree, which got into wealth management with the acquisition of Security APL in 1996, takes a similar interest in providing advisors with a comprehensive view of client assets. Its unified managed account tracks all the assets a client has and is willing to divulge to his or her planner, whether or not the planner’s firm controls them.
“I worked at AT&T,” explained Hilary Fiorella, vice president of marketing at CheckFree, “so when I go to my financial planner, I need him to take into account my existing AT&T investments.” CheckFree’s next step is the unified managed household that can include a spouse’s or other family assets that will benefit the client.
Good advisors want to establish a long-term relationship with a client, because that’s the way to make more money, she added. But with margins tightening, and the number of clients growing, advisors have to be hyper efficient.
“Advisors need more face time with their clients, and the way to do that is by having efficient processes in their offices – automating the things that can be automated so the advisor can spend time with the clients,” she said.
SunGard’s WealthStation runs on Windows 2000 or Windows 2003 with SQL Server as its default database.
AdviceAmerica provides financial planning online and to advisors, through different modules.
In Ogden, UT, where Glen Olpin is the senior vice president and chief economist at American First Credit Union, members have been signing up for the AdviceAmerica AdvisorVision at a steady rate.
The $3.5 billion credit union has more than 400,000 members, he said, and more than 56,000 have logged into AdviceAmerica and about 18,500 have created financial plans.
He suspects that many members will want to work with an advisor, but they probably are reluctant to invite one to call them. He’s interested in how this is going to work for members.
“It’s the member’s option to decide if they want to share data with a rep even after they have decided to talk to an advisor,” he said. “They don’t have to share the information until they want to, and then they can click a button to do that. AdviceAmerica can pre-populate the advisor system to make it faster for the advisor to develop a plan.
The program provides a link to CUNA (Credit Union National Association), which sells brokerage and insurance products to credit union members, but Olpin said CUNA isn’t catching onto the online investing concept very well.
“They make the money selling products and services face-to-face and they are not big in online services,” he said. Many of his members are savvy enough to work entirely online, but he thinks many would like to meet an advisor and discuss investment ideas.
“The meetings are free; commissions pay for it,” he said.
Purna Pareek, CEO and founder of AdviceAmerica, however, thinks many people will use a mix of self-directed investing and advisor planning.
“In 1999-2000, people came out with self-directed tools and E*Trade was going to take over the world,” he recalled. “That didn’t happen. Now there is a mixture of the channels…collaboration, completely dependent, self-directed. So, the platform needs to address all three different segments of the population.” He expects that 20 percent of investors will be self-directed while another group of delegators will never use an online channel.
AdviceAmerica’s AdvisorVision is built on Microsoft’s .NET Framework and uses services-oriented architecture for quick deployment. Because it is Web-based, AdvisorVision simplifies screen sharing between advisor and client. Harris Investor Services, part of the BMO Financial Group, has selected AdvisorVision as an efficient tool to support its financial planners.
“At Harris we take a long-term, disciplined approach to financial planning with an emphasis on asset allocation and diversification,” said Barry Streit, president, Harris Investor Services, Inc. “For clients in our advisory programs, we continually monitor their investments to ensure that the strategy remains aligned with their goals. As a central part of our approach, AdvisorVision allows our financial advisors to efficiently work one-on-one with clients.”
The next trend that financial firms are pursuing is helping retirees plan how to spend their retirement savings.
“That’s a hot opportunity that everyone is trying to pursue, because that is the only way they are going to sell some risk management products. We are supporting our customers there.”
As the largest U.S. population group – the “Baby Boomers” – begins retiring, a major shift in financial focus is about to occur. For this large segment of the population, planning will become less about accumulating assets and more about having a stream of income that lasts a lifetime. Traditional tools used to assess and target someone’s retirement goals are changing to support this new focus. While many principles of a sound financial strategy, such as asset allocation, may still have a role moving forward, new approaches to retirement will need to be considered. Technology will play a key role for any companies that want to effectively compete in this marketplace.
“The tools we are building today differ from traditional analytical tools we have in the wealth management space,” explained Dan Weinberger, assistant vice president, individual business at MetLife. “Traditional wealth accumulation strategies, such as asset allocation, rebalancing, and dollar cost averaging to minimize investment risk and optimize growth, are important during a person’s working years. In retirement, longevity risk will be more of a factor, since many people will be living 20 to 30 years or longer in retirement. The strategies need to shift to focus on ensuring a stream of income that can last a lifetime. The technology to support that focus must evolve as well.”
Meeting the needs of retirees is complex. A simple example, said Weinberger, “is that in the United States, 75 percent of Americans sign up for Social Security at 62, the minimum age, even though they would receive around a 30 percent raise if they waited until their NRA.” (Normal Retirement Age, or NRA, is the age at which an individual receives 100 percent of his or her entitled Social Security Benefits. It now stands at between 66 and 67 for anyone born after 1942.) The decision to wait for Social Security may be simple by itself. But when combining this decision with other factors – assets, other income sources, the best age to retire, or the best asset preservation strategy – the right approach can get very complex.
Of course, the key is taking the complex and confusing, and presenting it to the client in a way they can digest it and make decisions. “From a consumer perspective, the question is really ‘I’d like to retire, but do I have enough today?’ They need to see a strategy with options to help them ‘have enough,’” said Weinberger.
To that end, MetLife is working closely with Impact Technologies, a key Microsoft insurance industry partner, in the development of Impact’s Retirement Road Map. The Retirement Road Map is designed to provide a simple yet complete look at how someone needs to approach retirement. The focus is on making retirement income sources (social security and pensions) and assets (401Ks, 403Bs, IRAs, and personal savings) last a person’s lifetime by protecting them from longevity risks such as inflation, and increases in medical and long-term care expenses.
The resulting software platform, to be piloted later this year, will support the company’s salesforce when meeting with their clients and analyzing their retirement situation.
“Whether they’ve saved enough or not, they need to sit down and educate themselves, work with a retirement specialist, and come to terms with what their retirement picture looks like,” said Weinberger. “The Retirement Road Map, along with other information and resources, will help clients get started on their retirement journey.”
Since the majority of us will not be in a position to take advantage of the private banking-style personal attention that is devoted to the affluent and ultra-affluent, firms like MetLife focus intensely on cost-effective delivery, but the company knows from over 135 years in the business the importance of personal relationship and trust in the sales and service process. For example, Web sites and Internet calculators have their place, but only as part of a holistic solution.
“In most instances, people are not making these kinds of decisions and resultant transactions alone, nor is a simple retirement calculator sufficient to analyze and define the actions someone should take to meet their retirement income needs,” said Weinberger. “We are in a face-to-face business and will continue this business model. Customers want to know they have someone who is personally engaged in their situation, and has the expertise and the tools required to look at their individual situation. Of course it is also important for the client to know that a company with the experience, financial strength, and long-term commitment to a client’s retirement success is backing their decisions.”
Weinberger explained that the technology will support rather than replace traditional sales channels.
“As for the technology support, the expectation is that Impact Technologies Retirement Road Map will help our financial services professionals in the field explain to their client what they have to be concerned about in retirement. And it will show clients how they can use their income and assets to their best advantage to ensure a lifetime of retirement income,” he said.
MetLife’s financial services professionals are all equipped with Windows XP-based laptops and desktops in their local offices to take advantage of the technology. Once it is rolled out, Impact’s Retirement Road Map will be coupled with email and standard fair like the Microsoft Office Suite and IE Explorer. These are only a fraction of the tools that MetLife’s teams will have at their fingertips.
The goals of Impact Technologies Retirement Road Map tools are threefold: First, assess and present a simple strategy to help retirees manage and meet their income needs over their whole retirement; second, ensure that assets and income sources are protected from the unforeseen; and third, maintain the person’s lifestyle in retirement as much as possible with the assets that are available.
Impact’s Retirement Road Map approaches these areas by looking at a client’s income needs in stages. One aspect of the software’s planning tool is that it separates basic living needs, such as food and a place to live, from lifestyle goals like travel and recreation. Five thousand dollars a month may meet a couple’s needs in good health, but what if a sudden illness occurs?
“In addition, to address lifetime income needs, the Retirement Road Map will address issues around protection against unforeseen expenses such as long-term care, and survivor income in the event of a death,” added Weinberger. “MetLife also utilizes Impact Technologies’ Wealth Suite tools to address issues with estate preservation strategies as well. A one-two punch from Impact Technologies when combined.”
Once the client can understand what gaps need to be filled, companies like MetLife are in a stronger position to demonstrate how the products they manufacture and sell fill those gaps.
“We have a full line of income and accumulation annuities, long term care insurance, life insurance and investment products we can bring to the table,” said Weinberger. “We are constantly evaluating and evolving our products to continue to meet our customers’ needs and we are very much focused on our clients who are nearing retirement.”
Traditional approaches are emerging for “post accumulation” retirement planning strategies. Companies that plan on winning over this complex market will need to increase their focus and evolve their technology to provide a complete solution to their clients that are retiring.
As the first wave of Baby Boomers turns 60, the focus of wealth management has expanded beyond a focus on accumulation to planning for retirement spending. Hal McIntyre, president of The Summit Group, a consultancy that specializes in financial services and appropriate technology solutions for systems integration and straight-through processing in banking and securities, spelled out some of the challenges retirees face, and the opportunities this offers financial institutions.
Assets need to last longer since life expectancy continues to grow. Middle income retirees may have enough saved for retirement, but they don’t know how to use their assets. For financial institutions, the challenge is to help them make intelligent choices.
“We are moving from accumulation of assets to de-accumulation, and that is a tremendous change for the industry’s mindset,” McIntyre said. Today’s financial advisors often don’t understand this next phase of planning. The structure of the financial industry may work against effective planning, because it looks mainly at investable assets, he noted.
“If people have net assets under $250,000, a lot of that is going to be in real estate,” he said. In that case a financial plan should consider strategies such as downsizing or a reverse mortgage.
Now financial firms tend to offer simplistic solutions such as annuities, which guarantee income but don’t offer much flexibility.
The industry needs to move from product sales to consultative sales, but it is still struggling with delivering advice, he added. Firms should assign their advisors to financial planning and outsource the asset management, but many advisors spend just 10 percent of their time developing plans.
Another area of concern will be paying for healthcare costs that are not covered by Medicare.