John Norwood Recognized For Achievement In RIA Technology
Saturday, April 04, 2015 14:37
John Norwood, who drove technology systems at Schwab Advisor Services from 1995 to 2008, is inventing important RIA technology systems again, earning him A4A’s first-ever Lifetime Achievement In RIA Technology Award. Norwood deserves recognition.
Norwood has been a central figure in the development of independent advisor portfolio management and reporting technology since 1986. And Norwood’s latest work — integrating Global Investment Performance Standards (GIPS) with PortfolioCenter, Advent and other widely-used portfolio management software applications — will be his most important contribution yet to independent financial advisors.
Watch this video after reading this story. The video tours through Norwood Consulting's CompositeBuilder software for RIAs, which enables independent investment advisors to provide performance reports in compliance with GIPS to the mass affluent and HNWIs. RIAs with as little as a few million under management might find adopting the system a profitable investment because it promotes transparency, and advisorswill need more of that in the future to survive an onslught of robo-advisors. CompositeBiulder will allow an RIA to publish its performance track record monthly on the Web while meeting state and federal advertising rules. You may not market based on peformance, but having it to verify you are someone who can be trusted is the point. As automation of financial advice shakes out the investment advice business over the next decade, the transparency afforded by GIPS will naturally propel growth at advisors adopting Norwood’s system. Norwood’s literally back to the future again.
To be clear, Norwood’s encore to spending 14 years at Schwab Advisor Services, over the coming decade will enable RIAs to give clients and prospects a way to verify their investment performance results — a basis for trusting you. Although Norwood’s latest work is shaping the RIA of the future, this award is about his past — about what got him to where he is. Here’s his story.
Norwood comes from a close-knit family. His father, 88, invests in real estate, specifically, timberland. He’s operated sawmills for years and is an avid stock investor. Investing always interested the younger Norwood since his youth. John’s intellectual interests were broader, however.
Norwood received a college degree in Classical Greek in 1976 and a Master’s in Theoretical Linguistics from UNC in 1981. Having completed just two computer programming courses as an undergraduate, Norwood landed a job in the business office at University of North Carolina in Chapel Hill as a programmer. “You could do that back then,” says Norwood, “because it was such a new field.” Two years later, Norwood, UNC placed Norwood in the investment office. He liked the field.
For six years, Norwood worked at UNC and then as a contract programmer, and he began looking for an entrepreneurial opportunity. Something right in Raleigh emerged. Carl Schultz, an advisor at a local Dean Witter Reynolds branch, had started a company in 1985 called Performance Technologies, Inc. (PTI), which would enable money managers like Schultz to track investment returns on personal computers. Schultz was a client of the senior Norwood’s CPA, who had invested in PTI and was on its board. The CPA introduced the Norwoods to Schultz.
Schultz did not like selling securities for commissions, Norwood says. Schultz wanted to manage money. But Dean Witter did not make tools to support a business model in which an advisor would charge fees for advice instead of commissions for securities transactions. Advisors did not do business that way. Nonetheless, in 1985, Schultz raised money from friends and family and hired a programmer, who wrote the first version of Centerpiece. Today it is called Schwab PortfolioCenter. Centerpiece would become a foundational technology piece of Schwab’s pioneering RIA division.
In late 1986, Schultz was raising money again, and Norwood says Schultz was a “killer salesman.” The Norwood family invested about $75,000 of $500,000 raised by Schultz from 25 investors. Norwood’s parents invested $50,000 and John, who had been gifted a piece of real estate in 1982, invested $25,000. Moreover, he got a job. He became the new head of development at PTI.
It was a decision Norwood would regret for the next five years because PortfolioCenter was not good software. “It did not work very well,” Norwood recalls of the first version of the program, which was built in 1985 before he joined PTI. “For a time, you could not delete a transaction. To correct an input error, you had to delete an entire portfolio and start all over.”
Norwood says Schultz used the $500,000 to create the second version of Centerpiece, a plan hatched before Norwood joined up. However, once he accepted his role in the company in December 1986, Norwood says he felt obligated to his parents and investors to make PTI a success.
Schultz hired five recent graduates from NC State along with a semi-retired psychology professor, who taught himself to write code. While the first version of Centerpiece ran on two floppies, the second version operated off a hard drive. “But it didn’t work very well either,” Norwood recalls.
“We were such fools,” says Norwood. “We ran a full page ad in The Wall Street Journal announcing the launch of CenterPiece in mid-1986, but we did not actually finish it until a year later.” The ad worked anyway. Norwood says 300 copies of Centerpiece were sold for $325 based on the WSJ ad. There was no maintenance fee because there was no maintenance plan!
By the end of 1987, however, PTI was running out of money. “The business plan had been to sell an array of add-ons but everything we developed took much longer than expected and what we had done so far was not very good.”
“By end of 1988, we had run out of money completely, and the board and all of us including Carl had put ourselves in hock,” says Norwood. “Six of us personally borrowed $50,000, which was a ton of money back then.” The two primary investors were the Norwoods and an angel investor named Al Purrington, the largest investor.
“Finally, in January 1989, we let everyone go except for me, one developer, Henry Smith, and a halftime secretary, and we gave up our office space and moved to an abandoned farmhouse on my dad’s farm,” says Norwood. “We had running water and electric but it was a barn, and we cleaned out the junk from a couple of rooms and moved in. At that point, I was not paid for a couple of years, but I did okay because I made a killing on that property I had sold, which was bought by a big real estate developer who needed the property for access to a large residential project,” says Norwood.
“I ran the company starting in January 1989, when we moved to the farm and built the new version,” says Norwood. “But the idea was Carl’s.” Norwood was now in full control of development of Centerpiece and managing his one developer, Henry Smith, from his father’s barn.
For a year or two, running PTI from the barn, and turning it into a real company proved difficult. “Henry and I used to just look at each other and ask ‘What are we doing?” says Norwood. “But there were people depending on us and who ran their business on the software.”
Norwood began charging Centerpiece users a $150 annual maintenance fee, and he grew the user base to 800 licensees. “It was enough to pay the two employees and I did not get paid.” Says Norwood: “Henry and I didn’t want to let down all the people using this thing.”
In 1990 and 1991, the RIA business started to develop, and the CFP Board was the big thing among the growing number of professionals moving into the financial advice business. Tax shelter deals were killed in the 1980s and the movement toward financial planners being fiduciaries would find its roots.
Along with a new version of Centerpiece, Norwood says he started building interfaces to custodians to get transactions downloaded over dialup connections. Schwab had built an advisor interface called “PC broker” that allowed RIAs to download transactions from an omnibus account sat Schwab, and other custodians followed suit. PTI by then had 12 employees, two of whom still work at Schwab.
“We built interfaces with Schwab. Fidelity, Waterhouse, T. Rowe Price, Vanguard, and DST,” says Norwood. Remarkably, Norwood goes on matter-of-factly to say, “That enabled the RIA business to develop. We kind rode that wave.”
No, Mr. Norwood, you did not ride the wave. You created it! You enabled a new way of doing business for independent professionals. You helped give birth to the independent advisor industry. Your early work enabled independent advisors when the market was in its infancy. And, as this nascent movement begins to find its stride and gain market share at the expense of traditional brand-name brokerages and move into its prime growth years, here you are again, John Norwood! You are innovating yet again with your work ion GIPS. But we are getting ahead of ourselves.
“In 1992, we developed Performance Monitor,” says Norwood. It was built it to match the feature set published in a brochure about Advent Axys. “We looked at the brochure and needed to generate the same kind of reports.” Performance Monitor was a huge success for PTI and would later be included in every license of Centerpiece.
“We did a mailing to clients,” Norwood recalls, “and we only had one fax machine for receiving orders. It did not stop for three weeks. We sold hundreds of that add on and it was great.” At that point, Centerpiece cost $875 a year.
In 1992, University Analytics offered to buy by PTI for the $50,000 personal debt owed by Norwood and the other—Purrington, Schultz, Norwood, etc. It would have allowed Norwood and the board to get off the hook for the personal guarantee of the $50,000 bank loan, but it would not have returned their initial investment, or that of the 20 other investors.
In 1994, in a deal orchestrated by David Diesslin, a financial advisor in Dallas, John Cammack, a senior T. Rowe executive, offered Norwood $1 million to buy Centerpiece in a phone call. “We turned it down,” says Norwood. “Stephanie DeMarco (founder and CEO) of Advent Software also called me and wanted to know if there was a way to work together” To me back then , it was like talking to the devil. Advent was the enemy and I politely told her, “No, there was not. We really did not want to sell to Advent.” Norwood knew he had made it over the hump and PTI would be successful.
Then, in April or May 1994, John Philip Coghlan, CEO of Schwab Advisor Services, telephoned. “We were doing fair amount of business and we had more Schwab clients than Fidelity or Waterhouse,” says Norwood. Norwood remembers attending the very first Schwab IMPACT conference in the basement of the Sheraton Palace Hotel in San Francisco, which reportedly attracted 300 attendees.
“At that point, there had been three IMPACT conferences,” says Norwood. “Coghlan and Rob Gaynor came to my office and said, ‘We’d like to buy you. Can we talk about that?”
“We started due diligence, and they acted like they were buying a $10 million firm and it took several months,” says Norwood. The deal closed in August 1994. “That’s when I cashed out and all the investors got their money back,” says Norwood. “The 25 investors didn’t make any money but they got their money back.”
Schwab paid $2.3 million for PTI. Norwood personally netted about $700,000 for building the software application that became the foundation of Schwab’s RIA business, which earns tens of millions of dollars year after year.
Norwood parents received some extra options on PTI stock in lieu of rent payments on the barn. “All of us who loaned the company money received options in return for making the loans, and I had gotten an option grant and wound up making quite a bit more than my investment, and I got a job and was a VP making $90,000 a year,” says Norwood. “I was on top of the world.”
“We liked Schwab but felt like it was an 800 lb. gorilla,” says Norwood. “We didn’t mind because it was a good ethical company, and we did so much business with Schwab’s clients. We felt like we did not have any alternative.
“It was okay,” Norwood adds, “and it was an exit strategy for our investors and insured the future of the product for our users.”
After the purchase, Charles Schwab visited the farm. “Chuck came to the farm and a chauffeur brought him out in a limo, and he walked around with me,” says Norwood. “I have a picture of us standing out in front of the farmhouse. I still think the world of him, he is a very nice man.”
For three years, Schwab did little with Centerpiece. In 1997, however, Schwab moved to converted Centerpiece from DOS to a Windows application. Norwood remembers being asked to go before Schwab’s board of directors in 1997 to ask for the $2 million to do the upgrade. “I was really nervous and before I started, Chuck raised his hand, and I said, ‘Yes, sir,’ and he said, ‘I just wanted to say hey, John.’”
But Norwood was never a perfect fit for a big company like Schwab. He was an entrepreneur. He remembers going to dinner with Schwab and some of its senior executives and feeling uncomfortable about how deferential they were to the CEO. “I was out of my element,” he says.
And that was how I came to know Norwood. as a senior executive who did not fit into Schwab’s corporate culture. When I began covering Schwab in mid-1996 for Dow Jones Investment Advisor, Norwood seemed enigmatic. I did not know he was an entrepreneurial visionary struggling to fit into a corporate culture — until February 15, 2002.
A week before I was scheduled to moderate a panel about portfolio management software at the T.D. Waterhouse Institutional conference on February 22, 2002, I received a phone call from TDAI. Chris Murtha. who was responsible for putting together the TD conference schedule, had received a telephone call a day earlier from PTI informing him that Norwood, the president of PTI would not be appearing at the TDAI conference. Here’s an excerpt about the incident from The Gluck Report in April 2002.
It was a shocker. How could Schwab and PTI do such a thing?
Centerpiece, the software Norwood had developed years earlier before PTI was purchased by Charles Schwab, is perhaps the most popular software package used by Registered Investment Advisers with less than $100 million under management. While PTI is owned by Schwab, PTI has never shown favoritism toward Schwab Institutional at the expense of other custodians, and there was an implicit promise never to do so. In fact, TD Institutional in the last couple of years had purchased Centerpiece licenses in bulk and given away them away to advisors as part of a soft-dollar arrangement. Schwab and PTI executives would proudly boast that PTI was independent of Schwab Institutional. Norwood’s decision to back out of his appearance just days before the TD Institutional conference shattered any illusion that PTI was independent.
But the decision was a bombshell for immediate practical reasons as well as political ones. Norwood was scheduled to appear at a general session that would be attended by all 500 advisors attending TD Institutional’s annual conference in Orlando. Norwood was to appear on a panel that included the director of marketing director at Advent and the president of TechFi and the session would put the three top-rated software packages used by RIAs on one stage. It was a fairly important session in the overall conference schedule. Standing up TD Institutional, when so many Centerpiece users are TD customers, was a slap in the face.
When I got off the phone with Murtha, I was dying to know why Norwood had canceled so abruptly. I’ve known Norwood for about five years and this was completely out of character. Unlike the shrewd politicos Schwab often provides for me to speak with, Norwood is always straight and honest. He’s a good guy. To learn why Norwood was backing out and to try to convince him to change his mind, I tried reaching him at his office. No luck. Then I tried his cell phone.
“John, what’s going on? Is it true that you are not going to be on my panel?”
“I can’t talk to you about it, Andy.”
“John, this is really strange. Do you still have a job? Is PTI being sold?
“Andy, I just can’t to talk to you.”
Schwab spokesman Lance Berg knew nothing. He tried getting an answer but all of the top Schwab Institutional executives were sequestered in several days of meetings at Schwab headquarters in San Francisco, and Berg could get no answers. Three days after I learned that Norwood was backing out of the TD conference, Schwab spokesman Glen Mathison explained to me why: Schwab was changing its strategy and would stop selling Centerpiece to advisors who did not have, or plan to have, a custody relationship with Schwab.
Mathison said Norwood had little choice but to cancel. If he went to the TD conference, the decision by Schwab to stop selling Centerpiece to advisors who are not Schwab customers would look like an attempt to upstage TD at its own conference. Norwood would be on the panel talking about a product that could not be sold to advisors who were TD customers but not Schwab customers. And, if Norwood did attend the conference and make no mention of the policy change only to see it put into effect a few weeks after the conference, he would look like liar who had been completely disingenuous. A TD executive says that while it was disappointing that PTI backed out of the appearance, it was understandable under the circumstances.
Schwab had miscalculated. Advisors were in an uproar that the firm they relied on to run their business would use Centerpiece as a competitive weapon. It undermined the trust advisors had placed in the company. The column set off a feeding frenzy in the trade press. If Schwab could stop selling Centerpiece to advisors that did not hold assets at its firm, would it cut off Centerpiece users who did not custody assets at Schwab? Would it impose a minimum share on RIA AUM versus assets held at other custodians? It was a PR nightmare. The incident was one of a string of PR setbacks for Schwab Institutional that I had reported on.
In 1998, Glen Mathison, a senior Schwab executive told me I was “banned for life” from press conferences held by Mr. Schwab after I quoted him saying “Brokers don’t give a shit about an investor’s outcome. They only give a shit about their income.” (I loved Chuck’s sense of right and wrong in business! And it was not my fault the two other reporters in attendance didn’t have the guts to report something Schwab said on the record.)
In addition, in 1999, I had reported on an incident in which CPA financial planner Margie Meyer said a Schwab retail representative from a branch outside of Boston had solicited some of her clients after learning that she was selling her firm. She went on the record in a story that would frame coverage of Schwab’s uneasy symbiotic relationship with RIAs for years to come.
Not long after I reported on Norwood backing out of the TDAI conference general session, a senior Schwab marketing executive responded in a letter to the editor questioning my credibility as a reporter because I owned a company that made websites for advisors. It was a personal attack on my character.
Despite all that nonsense, the incident never affected our relationship. To be clear, even though I had essentially ambushed Norwood by calling him and asking, on the record, why he wasn’t coming to the TDAI conference, he never said a harsh word to me about it. He knew I was just doing my job. He won my admiration. This was a man of character.
Norwood and I always enjoyed seeing each other after that, while he reigned over Centerpiece through 2008, overseeing its transition to a more powerful SQL database. In 2011, three years after he had left Schwab, I ran into Norwood at an IMPCT conference. He had a long gray beard and ponytail and looked like an old rock star. This was the real John Norwood.
“One of John’s hobbies is going to Europe to find old books in old bookstores,” says Dan Skiles, CEO of Shareholder Services Group in San Diego, who worked with Norwood at Schwab for a decade. “In his house, he has hundreds and hundreds and hundreds of ancient books. That tells you a lot about John and how he likes to operate.”
Norwood’s work on portfolio software from 1986 to 2008 at Schwab Advisors Services played an important role in the development of the RIA business from its infancy to today. His latest work on CompositeBuilder, which facilitates compliance with Global Investment Performance Standards (GIPS) will influence RIAs for years to come. That’s why John Norwood has earned A4A’s RIA Technology Award For A Lifetime Of Achievement.