Schwab Institutional will seek to acquire or partner with more technology vendors, a strategy that follows a doubling in the company's tech budget in 2007.
Last year, the San Francisco-based company spent $55 million on technology, up from $23 million in 2006. Schwab declined to quantify its 2008 tech budget.
In its first acquisition of a technology company in years, Schwab Performance Technologies of Raleigh, N.C., acquired Etelligent Consulting Inc. of Overland Park, Kan., last month, and it is "absolutely" seeking more deals, said Dan Skiles, vice president of technology for Schwab.
The aim is to create a platform that will allow Schwab to attract representatives from wirehouses. To attain that goal, however, the firm needs to offer technology that is as similar as possible to what a wirehouse provides brokers, eliminating the need for servers, maintenance and data downloads.
That will allow Schwab to provide the plug-and-play atmosphere to which wirehouse brokers have grown accustomed, according to financial advisers and industry consultants.
To be sure, the tech strategy attracts more software customers and more custodial clients, said Pablo Perez, senior research manager with Tiburon (Calif.) Strategic Advisors.
"We see their approach as a very smart surround" strategy — tie up the components your clients use, and more business flows to you," he said.
SKEPTICAL ADVISERS
But what is smart for Schwab may not please some advisers, said Ravi Dattani, vice president of Schiavi + Dattani of Wilmington, Del., which manages $250 million in assets. The company uses PortfolioCenter from Raleigh, N.C.-based Schwab Performance Technologies, while the firm's assets are held at
Fidelity Investments of Boston.
PortfolioCenter is the back-office software that Schwab licenses to advisers.
"Most advisers don't want to be attached to somebody who owns everything," he said. "That's what makes people feel uncomfortable about dealing with Schwab," compared with Fidelity and TD Ameritrade Holding Corp. of Omaha, Neb., which have straight outsourcing relationships with tech providers.
The custody divisions of Fidelity and TD Ameritrade are increasing tech spending for advisers.
Fidelity has added $50 million to its custody technology budget, or about $17 million a year over the next three years. But it won't quantify its annual tech budget, said Stephen Austin, a company spokesman.
Declining to elaborate, Jim Frawley, a TD Ameritrade spokesman, said that it will spend a "similar amount to Fidelity and Schwab."
This summer, TD Ameritrade will unveil the upgraded Veo platform, a web connection between advisers and their broker-dealers. It is designed to improve scalability and to provide seamless applications, Mr. Frawley said.
For custodians, the goal is to make the web browser the most significant piece of technology on an adviser's desktop, said company officials, advisers and consultants.
For example, Schwab's acquisition of Etelligent means that an adviser can go directly to Schwab through an online back-office platform.
Although web offerings have been around for years, the acquisition will give advisers more confidence in Etelligent because it has the backing of Schwab, according to Christopher Cordaro, chief investment officer for RegentAtlantic Capital LLC. The Chatham, N.J.-based firm manages $1.9 billion in assets.
"We looked at Etelligent a few years ago," Mr. Cordaro said.
"We weren't going to trust a mission-critical application [such as back-office software hosting] to a tiny firm [such as Etelligent]," he said. "I need to know there's quality assurance and deep pockets. Schwab has that."
As a result, RegentAtlantic plans to use Etelligent's web services.
There are 130 firms, with $35 billion of assets under management, that use Etelligent technology to host Schwab's PortfolioCenter.
While the acquisition will help some veteran advisers, the Etelligent purchase is more attractive to prospective clients than established ones, said John Burns, chief executive of Burns Advisory Group LLC in Oklahoma City, which manages $350 million in assets.
ATTRACTING BROKERS
"[Schwab is] trying to make it easier for [full-service brokers] to get into the business," he said.
Mr. Skiles agrees.
"We don't want [breakaway brokers] to have to go to another provider, another contract, another entity in order for them to go fully independent," he said.
That is a mixed blessing if you are a client, Mr. Cordaro said.
"Schwab wants to tie us [as] tightly as they can to them," he said. "The tighter we get to them, the more risk we're taking, because we have one provider."
But Jim Starcev, principal with Etelligent, disagrees.
"We talked about a partnership with Schwab, but an acquisition is much stronger," he said.
"The problem [with a partnership] is that in five years, you're going to have to renegotiate," Mr. Starcev said. "And [advisers] really don't have that much control."
Fidelity has long-term contracts with its partners, and options to renew them, said Edward O'Brien, senior vice president of technology product management for Fidelity Institutional Wealth Services.
Fidelity advisers sign on to their computers and rely on the firm for training and support, he said. Also, Fidelity will offer access to Advent Software Inc. of San Francisco; planning software from Emerging Information Systems Inc. of Winnipeg, Manitoba; and Siebel on Demand software from Redwood City, Calif.-based Oracle Corp.
However, Mr. Skiles thinks that the Etelligent acquisition was necessary.
"We talked to our clients, and they wanted us to hold a stake, make a true commitment and to say, 'This is part of our brand.'" he said. "They didn't want us to pass the buck to a provider."
Brooke Southall can be reached at [email protected].
