Brooke’s Note: Most of us think of the old guard in RIA technology consisting of Advent, Schwab and Morningstar. The newer guard have names like Orion, Black Diamond, Tamarac and IAS. But there is also a new, new guard and recently we wrote about Market76 as one example. But perhaps nothing has that next-big-thing aura — with its dream admixture of money, pedigree, holy birthplace and self-assuredness — as Addepar. Is it really all that great? It might be — if not now, eventually.

Addepar’s mission statement, laid out on its website, is relatively straightforward: “We are poised to revolutionize the wealth management industry by creating a new standard for financial technology.“See: Addepar hits $50 billion of assets and turns its eyes to Advent-Black Diamond’s plump RIA market.

Planning to revolutionize the financial advisor industry is not new. But with 65 employees, extensive backing from venture capitalists such as Peter Thiel and David Blumberg, and demos that have wowed all the advisors who’ve seen them, Addepar LLC might actually do just that. One high profile believer is Iconiq, the newly formed RIA serving Mark Zuckerberg and other Facebook execs. See: How the Facebook IPO is creating the mother of all RIAs, Iconiq, and what an in-your-face it is for Wall Street.

“It’s a cloud solution that has multilevel data on mobile devices and offers on-demand access to anything and everything,” says Bill Winterberg, principal of Dallas-based FPPad.com.

Mike Paulus, 24, president of Addepar, confirms some of the flashier aspects of the software system his firm has developed, which aims to be all the technology an advisor needs rolled into one platform. If you wanted to see all your assets in any way connected to Google from any custodian and how they’ve performed over the past six months and you want to see it in multiple currencies, you can do that yourself with the press of a button, says Paulus. There’s no need for an advisor to have someone else run the reports over a couple of days.

The system also has the functionality to analyze hedge fund data and generate automatic alerts when there are irregularities or numbers statistically don’t make sense. In theory, Bernie Madoff would never get away with his scam if his clients’ advisors used Addepar.

“We’re an ambitious company. Our goal is to be transformative from a technology perspective,” says Paulus.

A slice of team Addepar shows the company has no absence of youth.
A slice of team Addepar shows
the company has no absence of
youth.

But, for all its Silicon Valley credentials, Addepar could easily go the way of other high-profile entrants into the financial technology platform field, such as Kinexsys Corp. and Intuit Inc., if it can’t connect with advisors on the ground.

A computer-human triumph

Addepar was founded by Jason Mirra, one of Forbes’ 30 Under 30, and Joe Lonsdale, who worked with Thiel at PayPal Inc. and later as an early executive at Clarium Capital Management LLC, which famously shrank from a high of more than $7 billion in assets to less than $1 billion in the last few years.

Lonsdale, though, left Clarium (in 2004) before it plunged to found Palantir Technologies LLC, a data software company that develops mission analysis systems used for criminal profiling by military organizations, the CIA and the FBI and makes government calculations in the Troubled Asset Relief Program. Palantir Finance, an offshoot, was used by JPMorgan Chase & Co. to fight fraud. Mirra also worked at Palantir, which, Paulus says, was in some ways a forerunner to Addepar in its data collection and focus on human-technology interactions. But the roots of Addepar go back to Paypal.

In the beginning

In Paypal’s early days when Lonsdale was hired, the company was losing nearly $10,000 per month because of fraud. Criminal rings would take payments through the online system and then never ship the promised items. Paypal, in turn, would be on the hook for that money. A computerized system to detect the fraud was effective only briefly before the criminals would adapt. But, a human is nearly always able to tell when internet fraud is happening — you are rarely duped by the e-mail scams from purported Nigerian princes. The key was to build a computerized system that assisted people in being able to affirm fraud that they had detected themselves.

“The goal of the computer system was to assist humans,” says Paulus.

Zack Reynolds studied math at MIT and is now in charge of return metrics at Addepar.
Zack Reynolds studied math at MIT
and is now in charge of
return metrics at Addepar.

It worked and set the stage for Lonsdale’s later companies.

Two years ago, Paulus, Lonsdale and some other Silicon Valley entrepreneurs were looking to invest their money, but were unable to find the computer system they wanted to assist them in their investing their portfolio. Not only did they want all the aggregated data and reporting for a complex foundation-style investment platform, but they also wanted to be able to analyze the risks of their investments.

“A lot of the things we saw in the space look like they were made in the ’80s,” says Paulus. Many advisors are using PDFs as reports or Excel to gather their data, neither of which is really functional. So, Lonsdale built Addepar. “We really built it for ourselves.”

A cut in pay

Paulus, Lonsdale, and a handful of the other early employees are investors in Addepar, along with a number of venture capitalists.

The key, they decided, was to hire top-level engineers out of MIT, Stanford and UC Berkeley. Many of the engineers would otherwise be working at Silicon Valley technology companies such as Google or Facebook, says Paulus. But, most of them were willing to accept about 30% less in pay than they would get elsewhere because they believe in Addepar and get equity shares in exchange. The company now has 65 employees, nearly all of whom are engineers.

“We’re fundamentally trying to bring world-class engineering to wealth management,” says Paulus. “We want to give someone the sophisticated tools.”

Just one needed

James Carney: Addepar is a spreadsheet on steroids.
James Carney: Addepar is a spreadsheet
on steroids.

But the first six months at Addepar made it clear just how hard it was to achieve the kind of data collection they were looking for, that is, aggregating and analyzing any asset from any custodian, he says. While the focus of the system is design, a simple user interface and a platform to analyze the metrics, it all relies first and foremost on data aggregation and reconciliation.

While Addepar is a client of ByAllAccounts, according to the latter’s president, James Carney, it is also working directly with custodians, says Paulus, to improve the data coming in.

“Everyone who has access can get data, but what they do with it is different,” Carney says. “Addepar is a spreadsheet on steroids.”

Instead of using other technology companies to supply customer relationship management, rebalancing or portfolio management software, Paulus says, Addepar has “no significant partnerships,” but aims to be “an end-to-end system” and the only software an advisor needs.

“We want to be best at everything,” he says. Clients are welcome to integrate another specific technology system if they want, but “99% of the total data flows through our pipes.” See: ByAllAccounts doubled advisory assets aggregated to $400 billion in 2011.

5 basis points

And, for the price they’re charging, it should be the only software a client needs.

The cost for Addepar clients is reportedly 5 basis points — significantly higher than other tech platforms But, says Paulus, it really includes everything upfront on Day One. Other software companies, he says, will charge additional fees for archive retrieval or data storage or installation. There are no installation costs for Addepar, no additional fees down the road. The price includes a client portal, hosting, all historical data, a designer to work with the advisor and 24-hour customer support.

“What you’re getting is everything,” he says. “When you look at it like that, we’re pretty competitive with what’s out there.”

It must be worth it for some people. While Paulus won’t comment specifically on clients, the company has about two dozen firms on its platform: large RIAs, family offices and institutional investors. Prominent RIA Iconiq, which serves Facebook executives, is a known early beta tester for Addepar and currently a client. See: How the Facebook IPO is creating the mother of all RIAs, Iconiq, and what an in-your-face it is for Wall Street. But, contrary to rumors, Paulus says, “all our clients pay for our tools.”

The focus, so far, Paulus says, has been on the complex, high-end advisory offices that can take advantage of and are willing to pay for all the analysis tools, mobile applications and cloud-based reporting that Addepar offers. The company also focused on early investors that would be interested in using the product and testing it out. So far, all Addepar’s clients have come through referrals, since the company has no salespeople or marketing.

Downwind

“Our early clients are very large and very complex,” Paulus says. He does add, though, that in the next few years, the company may move somewhat downmarket and offer the product to more mid-level RIAs.

“Addepar is not going to hold fast to any particular asset level,” says Winterberg. It will focus more, he says, on clients with a similar vision and needs, who may be dissatisfied with Schwab PortfolioCenter or Advent. See: Schwab PortfolioCenter may be poised to shed its utilitarian image.

Though Addepar executives won’t comment on revenues, Paulus says, “you’d be surprised” at how much the company is making, despite the investment in offices, research, and extensive staff. With offices in Silicon Valley, New York and a new one in London, talks are also under way with investors in the Middle East to branch out into those markets. The startup has officially opened its doors.

“We no longer consider ourselves in beta,” says Paulus.

Remember Intuit? Or Kinexsys?

Reed Colley: If you can't figure out how to leapfrog your technology, someone else is going to do it.
Reed Colley: If you can’t figure
out how to leapfrog your technology,
someone else is going to do
it.

Of course, Addepar could fail. The company is very much in a Silicon Valley mold, without a firm foothold in what advisors need on a day-to-day basis, say some critics. Other splashy and well-funded software platforms like Intuit and have been unveiled and quickly disappeared when they failed to perform up to the needs of advisors or draw clients.

“This space is littered with failed deployments,” Paulus acknowledges, but that is why the company’s founders spent two years developing the product and avoiding press while they worked behind the scenes. This is the first press interview Addepar has done.

“They have to make sure it’s useful and successful,” says Reed Colley, founder of Black Diamond Performance Technologies, a unit of Advent and likely one of Addepar’s biggest competitors in providing software to RIAs.

Orion Advisor Services, LLC and Black Diamond, says Winterberg, have given advisors a number of cutting-edge tech options and will be watching Addepar closely in the coming months. Orion, he says, is doing “great stuff” with mobile video and Black Diamond’s Blue Sky, introduced two years ago, allows advisors to create better reports. The company also has launched a mobile app. “Every vendor is watching this market and every vendor wants to provide the best options to advisors,” Winterberg says. See: Black Diamond releases BlueSky Mobile for the iPad.

“There’s clearly a need in the market,” he says, for more up-to-date software, and portfolio management and reporting systems. As Addepar becomes fully public, more advisors will become aware of the technologies available to them, which will force other software systems to up their game. “I think that benefits everyone,” Winterberg says.

Addepar wouldn’t necessarily, then, have an advantage in an industry that is already very competitive.

“If you can’t figure out how to leapfrog your technology, someone else is going to do it,” says Colley. “Five years from now, whatever we’re using today everyone’s going to laugh at.”