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ADVISING THE AFFLUENT: Less wealth, more management

Brokers, private bankers and other personal advisers glommed onto wealth management, a term that has survived the downturn as a catchall for money management, tax and estate planning and a cluster of related services for the rich.

Brokers, private bankers and other personal advisers glommed onto wealth management, a term that has survived the downturn as a catchall for money management, tax and estate planning and a cluster of related services for the rich.

Today financial firms are in hotter pursuit of the high-net-worth market than ever before, aided by a new wave of technology that has emerged from the dot-com debacle. But just as the wealth management business suffered with the decline in asset valuations, so have some technology entrepreneurs had to lower their own high, Internet-era expectations for this sector.

Still, technology suppliers in the new niche, like Hartford's DirectAdvice and Falls Church, Virginia-based netDecide Corp., have made an impact on the market, most noticeably by accelerating the individual money management, or separate-accounts, movement. With easier access to portfolio and accounting systems, tax calculators, compliance software and online messaging, advisers can deliver a level of personal attention historically available only to the superrich.

To be sure, financial advisers have been effectively providing hands-on client services for years, and not just at the top private banking tier. Advisers have been able to get account management software and useful data bases by enrolling in networks sponsored by companies like Charles Schwab Corp. and Merrill Lynch & Co.

These established players, with their biases toward homegrown systems, haven't exactly been welcoming the technology upstarts with open arms. "Very few of our platforms are anything you'd buy off the shelf. Few vendors would have been able to think through all the intricacies that we face in our business," says Damian Kozlowski, chief operating officer of Citigroup Private Bank.

"We have looked at every single software package out there, and they are all the same," scoffs Michael Sullivan, an 18-year Merrill Lynch veteran who oversees a team of 48 advisers serving 140 clients. "Everybody thinks you put in the information and you get all the answers. But technology is not the endgame. In and of itself, it does not help you retain clients. It's a commodity."

But as advisers like Sullivan pursue growing numbers of prospects whom marketers describe as "semiaffluent" or "emerging affluent," their older technology is meeting a stiff challenge from the new breed of specialized systems purveyors. Some, like netDecide, offer complete software architectures that can accommodate any and all components of a wealth management service; others, like DirectAdvice and Carmel, California-based Separate Account Solutions, provide outsourced Web site hosting.

These companies assert that their tools can enable the advisory community to serve millions of additional clients. And their hopes haven't been dampened by the economic slowdown. They agree with projections like that of Merrill Lynch, which sees assets in the separate-accounts industry doubling by 2005, to $650 billion.

"Wealth levels are increasing in general, and the technology allows the industry to push minimums lower, meaning it can reach more people," says Erik Davidson, co-founder and president of two-year-old Separate Account Solutions, which includes consulting firm Accenture and Royal Bank of Canada among its owners.

Adds C. Matthew Springer, CEO and co-founder of another two-year-old technology start-up, Seattle-based Tamarac: "The millionaire population will grow by several million over the next few years. The down market doesn't change that fact. Advisers who handle a few accounts will want to scale up to hundreds or thousands, and the only way to do that is with automation."

With the influx of companies like Tamarac, dozens of enterprises are now hawking wealth management packages or components. The group includes established financial systems vendors like Advent Software, IBM Corp. and SunGard Data Systems. Their offerings have attracted customers ranging from Australian financial services giant AMP (DirectAdvice) to U.S. regional brokerage Morgan Keegan & Co. (netDecide) to family office adviser Evensky, Brown & Katz, which has bought the WebPortfolio tool of Woburn, Massachusetts, account aggregation company ByAllAccounts.

Vendors and buyers alike point to a common thread in recent purchase decisions: As times have gotten harder, investors have been turning away from online brokerages and other self-service alternatives and are seeking higher levels of adviser sophistication. That explains why two highly touted Internet portfolio management sites - myCFO and Foliofn - have modified their original direct-to-consumer marketing strategies and are now more closely aligned with traditional advisers and institutions.

In turn, conventional advisers and money managers are seeking to improve their own capabilities with advanced portfolio modeling, asset allocation, retirement planning, customer information management and other online tools.

"We are seeing an increase in business. Investors are not as self-directed as they were when it was easy to win in the markets," says Raghu Chintala, chief executive officer of netDecide, which counts Bank of America, Ernst & Young and Legg Mason as both customers and investors.

Self-service will never completely go away, says Lawrence Wasserman, chief investment officer of West Caldwell, New Jersey-based Panda Investment Advisors. The three-year-old firm manages $5 million and spends $3,000 a year on technology that includes Tamarac's Portfolio Manager system. "There are always some people who want to do things on their own. It's a personality type, and I give them credit if they can use these products meaningfully on their own," says Wasserman.

But he adds, "I'm providing something that individual investors do not have the time or wherewithal to do on their own."

Personal wealth has certainly taken a hit since the bull market ended, but that hasn't deterred Wasserman from aiming to have $100 million under management by 2005. And much of the wealth management industry shares his optimism.

U.S. households with $1 million or more to invest - the high-net-worth people traditionally most coveted by wealth managers - saw their collective assets decline 12 percent, from $9.7 trillion in 1999 to $8.5 trillion as of mid-2001, according to Chicago-based research firm Spectrem Group. But that's still a lot of assets to manage. And the market is highly fragmented, giving competitors a real shot at building assets.

Meanwhile, the financial industry is taking a much more expansive view of the upscale market. With technology promising to lower overhead, many institutions are including in their affluent-market strategies people who are merely upwardly mobile - households with at least $100,000 in investable assets. In the U.S. that's a potential market of 23 million households, almost one fourth of the national total, says Spectrem Group.

"Of those, there are 5 million to 8 million with at least $1 million in financial assets," says Separate Account's Davidson. "And only 1 million have separate accounts today, so the penetration is low no matter how you look at it."

Needham, Massachusetts-based research firm TowerGroup projects that the number of Americans with $1 million or more to invest will reach 13 million by 2005, while total investments, regardless of wealth level, will increase from $32.5 trillion in 2001 to $55 trillion in 2005.

That creates an inviting target for technology companies. NetDecide and Advent Software, among others, focus on supporting registered advisers and brokers, currently numbering 262,000, according to Newton, Massachusetts- based Meridien Research. TowerGroup estimates that these service providers and firms will spend a total of $3.6 billion on technology this year, up from $3.2 billion in 2001.

In attempting to break into the big time, the upstart vendors can only hope that as financial institutions are pressured to tighten their belts and reevaluate back-office strategies, they will be more receptive to off-the-shelf software or outsourcing. And the entrepreneurs now have to contend with newer, much bigger kids on the block: Microsoft Corp. and San Francisco-based Advent Software have joined forces to develop MSN Money Professional, the most ambitious off-the-shelf program of the online wealth management era. Now in test mode, the system enables advisers to design customized Web portals for their clients.

Advent estimates that 8 million people would benefit from using financial advisers, but only a fraction of those are reached by the 6,500 providers using Advent systems. "We have a saying: 'A professional adviser for every investor.' And we think we can make the technology cheap enough and easy enough to use to get closer to that goal," says Charles Record, the company's vice president of new business development.

Record acknowledges that Advent is late to the party, but he likes the timing nonetheless. "We hung back when there was all that hype, and I'm glad it's gone," he says. "It was horribly confusing to advisers."