Taking Sides: Schwab, Advent secret deal smacks of market collusion

Secret agreements? Broken promises? Lawsuits? What is this, more pulp fiction from John Grisham? Not exactly.

It’s a glimpse of some of the behind-the-scenes maneuvering that has been going on between Charles Schwab & Co. and Advent Software Inc.

The stranger-than-fiction tale first surfaced last month during Schwab Institutional’s abbreviated Impact 2000 conference in Seattle. Here are the details to date on this unfolding saga.

During a forum on adviser software, Advent vice president Steve Lewczyk was discussing some of the company’s new products. Among them was a recently launched service known as Advent Custodial Data, or ACD as it’s known in the industry.

The service targets advisers who may have assets with more than one custodial firm. Advent consolidates the data on one of its websites, and advisers can access it in one easy download – for a price. And that’s the rub.

Right now, custodial firms such as Schwab and TD Waterhouse Group Inc. supply the information largely for free using what’s known as a “point-to-point” interface.

Advent has a healthy slice of the adviser software market. Advisers who use its product say the new service is swell, but some express fear that Advent is using it to create a Microsoft-like monopoly that eventually will allow the company to raise prices for the service significantly.

Despite offering assurances that it had no intention of gouging advisers, Mr. Lewczyk was vague about Advent’s pricing plans.

At about that time, J. Nicolas “Nick” Georgis, Schwab Institutional’s senior vice president of sales and investment managers, spoke up from the back of the room.

He said that it is his understanding that Advent has to continue supporting the current point-to-point interface between Schwab and its advisers at least through the end of next year. But he declined to offer any more details.

InvestmentNews reporter Brooke Southall astutely picked up on the controversy at the Schwab forum and broke the story in our Oct. 22 issue. But there were a few missing pieces to the puzzle, which he finally discovered in – of all places – Superior Court in San Francisco.

As it turns out, Schwab sued Advent two weeks ago, claiming that Advent was about to trample a four-year-old agreement between the two San Francisco companies. Wait a minute, what agreement? Nothing was ever publicized about any such agreement.

But now we know why. It was hashed out in secret.

As part of that deal, Schwab claims, Advent provided assurances that it would continue to support Schwab’s point-to-point interface with advisers. In exchange, Schwab agreed to make its systems compatible with Advent’s new Internet-based technology.

The confidentiality of the deal would explain Mr. Georgis’ oblique comment at the forum.

The question is, was he unaware of the agreement, or was he purposely evasive to avoid letting the cat out of the bag?

We have no way of judging the legality of the agreement at this point, but it certainly smacks of market collusion, and at the very least, the deal raises questions about whether Schwab and Advent were being honest with their customers.

The issue is important because Advent’s Axys software is one of two leading portfolio management programs used by advisers, and as one adviser says, the whole deal looks like an effort to manipulate the market.

For his part, Irv H. Lichtenwald, Advent’s chief financial officer, calls the matter a tempest in a teapot, though he acknowledges that “we’ve done a crappy job of communicating.”

We wholeheartedly agree. Both companies owe advisers a full explanation – and an apology.