Legal analysis: The chances that Wealthcare beats UBS or upends the financial planning community

In a lawsuit certain to have reverberations throughout the financial planning profession, Wealthcare Capital Management recently sued UBS Financial Services Inc. for infringing patents recently issued to Wealthcare. Wealthcare alleges that UBS, by providing “financial advice and reports” to clients “utilizing computerized financial advising software and systems, including, for example, MoneyGuidePro has infringed two patents. See: David Loeper is taking on UBS but his patent lawsuit is raising alarms in the RIA business.

What are the implications of these patents, and lawsuit? A full analysis would require the input of many experts, including patent litigation attorneys – and even then the answer may well be the attorneys’ standard response: “It depends.” Yet, a preliminary review of the claims of patent infringement reveals questions regarding the potential validity of all aspects of the patent. Whatever the outcome, Wealthcare vs. UBS patent infringement litigation may have significant ramifications for financial planners everywhere.

Background

On July 27, the U.S. Patent and Trademark issued two patents (Nos. 7,754,138 B2 and 7,991,675 B2) to Wealthcare Capital Management, also known throughout the financial planning industry as Financeware Inc.

Both of these patents involve a “method of providing financial advice to a client that provides sufficient confidence that their goals will be achieved or exceeded but that avoids excessive sacrifice to the client’s current or future lifestyle and avoids investment risk that is not needed to provide sufficient confidence of the goals a client personally values.”

Patents based on a method of providing advice, or a technique, have been seen in recent decades in the estate planning context. Some entrepreneurial attorneys have sought to patent an estate planning techniques – usually ones that save clients significant estate and/or gift taxes – in order to then license their use to other attorneys.

Such “tax planning patents” or “tax strategy patents” are controversial. According to some, “tax patents amount to 'government-issued barbed wire’ to keep some taxpayers from getting equal treatment under the tax code.” (Floyd Norris, Patent Law is Getting Tax Crazy, International Herald Tribune, Oct. 19, 2006.) While bills have been introduced in the U.S. Congress to outlaw tax strategy patents, none of these bills have yet made it into law, despite support from the American Institute of Certified Public Accountants and the American College of Trust and Estate Counsel.

Public policy concerns

Some of the same causes for concern regarding tax strategy patents also relate to financial planning strategy or process patents – and even greater public policy concerns may exist.

Such concerns center around limiting the ability of consumers to receive financial advice or paying higher costs for same. Additionally, the grant of financial planning process or strategy patents may complicate the provision of financial planning advice by professionals.

Given the huge need for financial planning advice in this country, and the strong public policy supporting its extension to greater segments of the populace as a means of better ensuring the financial security of Americans (and thereby lessening the burdens upon government in an era of diminishing resources), public policy concerns may well influence the outcome of the Wealthcare vs. UBS litigation.

Is WealthCare rolling the dice?

Hiring a patent litigator is no small matter. Good patent litigators are a combination of extraordinary litigators and engineers, with a good dose of steroids thrown in for good measure. The high degree of knowledge, expertise and tenacity required make patent litigators some of the highest paid attorneys around.

Patent infringement lawsuits often involve years and hundreds of thousands – if not millions – of dollars in legal fees. Defendants in patent litigation cases frequently contest each and every aspect of the patent claims, and expert witnesses play a large role in such cases.

Indeed, patent litigation is often said to be a classic David vs. Goliath battle, in which, typically, a relatively small business such as WealthCare takes on an large corporation like UBS for patent infringement.

Given this, one must wonder if, in taking on UBS with its deep pockets, and its bevy of law firms on retainer, Wealthcare has chosen the appropriate target, and whether the lawsuit might consume Wealthcare’s limited resources. However, some patent litigation law firms work on contingency, especially when the case is perceived as strong from the standpoint of the plaintiff’s attorney.

Examining the patent: Defensible?

This brings into question the validity of WealthCare’s patent. Is the patent defensible? I can only examine these issues from my own perspective, as a financial planner and investment adviser of ten years. Furthermore, while the author is an attorney, I do not profess any expertise in patent litigation.

One or both of the patent applications denote “a need in the industry for a new method of financial advising that eliminates the substantial uncertainties associated with investing the client’s assets in actively managed portfolios ….”

Upon first glance, the fact that “manager risk” exists is nothing new, nor is the fact that many investment advisers have chosen to minimize manager risk through the use of passive investment strategies.

The patent application notes that “the method includes investing exclusively in passive investments, for which it is possible to mathematically prove in all material respects the risk of underperforming or potentially outperforming the asset allocation strategy.”

Again, the patent application eschews the added risk and greater range of potential outcomes that result from active portfolio management. At first glance, statistical analysis has been applied to hypothetical portfolios constructed of passive indexes for decades, so in itself this does not appear to be novel or new.

The patents also note a need for a “new method of financial advising … that does not position clients at their maximum tolerance for risk if there are more appealing choices the client could make that enable them to have sufficient confidence of achieving the goals they value ….”

The patent application notes that “generally accepted 'best practices’ also include identifying the client’s risk tolerance and creating an investment allocation aimed at producing the highest return for the client’s risk tolerance … Often, investors are advised to accept a risk tolerance that is at or near the client’s maximum endurance level for losses and or risk in their portfolio value.”

The patent application goes on to state that “there is a need in the industry for a new method of financial advising that … does not position clients at their maximum tolerance for risk is there are more appealing choices the client could make to enable them to have sufficient confidence of achieving their goals.”

What’s new?

This author questions the “newness” of this aspect of the method. I have always thought of “risk tolerance analysis” as a mixture of tolerance for short-term market declines, tolerance for longer-term market declines and also a consideration of the need to undertake risk to achieve the client’s financial goals. In this regard, many of the portfolios designed by this author have long been designed not to produce “the highest risk for the client’s risk tolerance” but rather emphasize far more minimal levels of risk that can lead to the accomplishment of client goals.

While the foregoing aspects of the patent may be questionable, other aspects of the patent appear to have stronger probabilities for a successful defense. The patent application notes that “there is a need to provide clients with periodic feedback that does not simply chart how their portfolio has performed relative to the market, but rather provides clients with a practical understanding of the concrete impact that the performance of their portfolio has had [on] their desired goals.”

At first glance, this aspect of the “method” is again nothing new, for goal-centered portfolio and financial planning reviews have long been a mainstay of many financial planning practices.

However, the patent application then states that there “is also a need for a more nuanced approach to evaluating client goals, which comprises more than a simple linear ranking of goals, but rather which interrelates all of the client’s goals so that the client can make more informed and satisfying choices about their goals in light of the performance of their portfolio.” The invention sets forth a “new method of identifying and assessing not only the client’s goals, as in traditional services, but also identifying and assessing the price that the client is willing to pay in one goal to 'buy’ another goal (or portion of a goal) that is valued more highly.”

Many financial planners would suggest that goals-centric planning has always been done, and that trade-offs between various alternatives or goals are frequently discussed with clients. However, does the method used by Wealthcare, in its software, by using probability analysis to model contrasting goals in conjunction with modeling expected returns of the client’s portfolio, along with other inputs, comprise, taken together, a new, unique method, worthy of a patent?

There are many, many nuances in this patent, and the length of this article does not permit the author to examine each and every one of them. Suffice it to say that many financial planners will find aspects of the new “method” to have long been used, at least by some financial planners and investment advisers, in providing advice to clients. Other aspects of the Wealthcare software may be novel, or the manner in which various competing considerations are taken into account in holistic fashion (with probability analysis applied) may be novel. Or not. Only time will tell, as this litigation takes its course.

Implications for MoneyGuidePro

MoneyGuidePro has become the industry-leading financial planning application. Indeed, this author utilizes the MoneyGuidePro software in training his undergraduate students enrolled in my college’s financial planning curriculum. While the suit by Wealthcare is nominally against UBS, a large aspect of the suit will likely involve claims that MoneyGuidePro software, or its utilization, infringes upon Wealthcare’s patents.

MoneyGuidePro has long been known for its goals-based planning software. By no means has MoneyGuidePro been the exclusive provider of goals-centric planning software, but its software has successfully enabled thousands of financial planners to become more focused not only on the mathematical calculations themselves, but on how the data relates to the goals of the client.

If the lawsuit is successful, WealthCare vs. UBS will likely challenge MoneyGuidePro’s licensing revenue. No doubt MoneyGuidePro will soon, if it has not already, retain its own hired guns – experienced patent litigators – to evaluate the potential impact of the suit on MoneyGuidePro’s own future.

Financial planners in danger?

Indeed, if certain aspects of the WealthCare patent were upheld, or construed broadly, one wonders if all financial planners using goals-centric approaches to their clients would be required to pay WealthCare royalties. This may seem far-fetched, but as shown above, various methods used by financial planners – assessing risk tolerance on the basis of need for risk and assessing statistical probabilities of future investment portfolio performance by eliminating active manager risk – appear to invade the realm of many financial planners who have long utilized such techniques. Moreover, can a weighing of client goals – the often-heard “if you do this to achieve Goal A, it may endanger Goal B” discussion – become the exclusive domain of Wealthcare?

This litigation is likely to be watched closely by the various financial planning associations – especially the Certified Financial Planner Board of Standards., Financial Planning Association, and the National Association of Personal Finance Advisors. While immediate involvement in the litigation by these associations is unlikely, should the case proceed to trial and judgment and then be appealed, strong impetus would exist for the associations to participate in the appellate process by means of filing “friends of the court” briefs.

For the present, it is likely that each side in the current litigation will line up their experts to examine each and every line and word of the patent, ascertain whether or not the methods and processes claimed are indeed “new,” and then seek to either attack or defend each and every aspect of the patent. The battle will go on behind the scenes for many months or even years. And, while cases of this kind often result in settlements, for the good of the financial planning profession one can only hope that the significant concerns that arise from this litigation will be addressed, with finality in the courts.

Ron A. Rhoades, JD, CFP® is Program Chair for the Financial Planning Program at Alfred State College (New York), and owns his own investment advisory firm. He can be reached by e-mail at ron@scholarfi.com.