Envestnet president Bill Crager has been running the outsourcing company since it started twelve years ago. The Chicago-based firm now provides reporting, technology and research services to about 20,000 financial advisors and independent broker-dealers who manage approximately $140 billion in assets. Last year the firm reported $2.9 billion in net new assets.
Envestnet is also right in the thick of an intense battle with other industry heavyweights competing for the business of wealth managers and registered investment advisors who serve high and ultra-high net worth clients.
Acquisitions began to heat up last June when industry giant Advent bought portfolio accounting software company Black Diamond Performance Reporting, which had garnered 340 high-end advisory clients with $100 billion in assets just eight-years. Six months later, LPL Financial, the country’s largest independent broker-dealer, entered the fray and stunned the wealth management world by announcing its intention to purchase Fortigent, the Rockville, Md. outsourcing firm best known for its highly-regarded asset manager search and selection platform.
Not to be outdone, Envestnet came out last month with two big deals of its own. First it agreed to acquire software company Tamarac, a leading outsource provider of technology to re-balance client portfolios, for $54 million. Tamarac serves 500 high-end RIAs and 2,700 advisors who manage $250 billion in assets. Then Envestnet turned around and snapped up boutique due diligence and research supplier Prima Capital for $13.75 million.
“Taking on UMA is the functional equivalent to restructuring the wealth management business model because it impacts every facet of an organization’s operating structure. It changes how an adviser explains services to a client, the portfolio manufacturing process, pricing, profitability and the ability to achieve scale,” says Paul Ahern, managing principal for technology consultants Winslow Capital Group.
Crager, who was a managing director at Nuveen Investments and Rittenhouse Financial Services before joining Envestnet, sat down with Registered Rep to discuss the marketplace, the company’s strategy and the upcoming struggle to win over wealth managers.
How are you going to market Tamarac?
It will be a core stand-alone offering to the RIA market. It will be branded as Envestnet Tamarac and Prima will be branded as Envestnet Prima.
There’s been speculation that you’re going to bundle Tamarac and give it away as a loss leader.
We’re not going to do that. The business model for Prima has been a subscription basis; Tamarac has been a license and Envestnet is an asset-based fee model. We’re going to maintain each model.
What if an advisor wants a bundled solution?
The price will most likely be asset-based. But if it’s pure technology, it will be license-based and if it’s pure content it will be subscription-based. I envision the pieces will stand alone but also be combined in some cases. We think it positions us to offer a solution from the front–end, covering research and investment strategy, to the back-end, covering portfolio administration and data reconciliation.
A lot of people think you needed to boost your share of the high-net worth market.
Over 20,000 advisors use the Envestnet platform. Some have $50,000 accounts and some have $10 million-plus accounts. Our service offerings accommodate all ranges. We believe Prima and Tamarac will accelerate our presence in the highest net worth category. Those offerings could benefit the bank and trust category, which are evolving from proprietary to more outsourced models.
Fortigent has been in the news following its planned acquisition by LPL. Do you see Fortigent as a prime competitor in the high-net worth space?
Comparing Fortigent to Tamarac is apples and oranges. Fortigent has a strong presence in research and portfolio strategy and Tamarac has practical scaling tools that implement portfolio strategy technology and practice management. Fortigent is not a technology solution.
Prima compares to Fortigent. It has institutional quality research and investment strategy and access to investment products that high-net worth advisors want.
The high net worth space certainly seems to be attracting a lot of attention.
Yes, LPL’s acquisition of Fortigent and Advent’s acquisition of Black Diamond are indicative of the focus on this space.
Do you see a move toward unified managed accounts (UMAs) as the primary operating environment for advisors?
The industry tried to establish UMAs as a product, but I think they missed the boat. It is really an enabling technology of portfolio strategy. UMAs can combine multiple strategies and deliver unique individual portfolios. Going forward, UMAs are the direction investment strategy is headed, whether they are called that or not. It will be the way advice is delivered.
Was Tamarac’s expertise in UMAs a major reason you bought them?
Yes. Tamarac’s overlay technology is a great compliment to our UMA strategy.
Will you try to convert advisors from separately managed accounts to UMAs?
No, advisors will make the decision if they want to convert. If they do, we want to enable them to do it, but we have no product bias.
One recent industry report said only about 30 percent of advisors are outsourcing investment services.
That number sounds low to me, but there’s certainly a lot of available market share to be won. I think the direction is clearly toward a complimentary outsourced model. Advisors practices are changing, they’re combining with each other and each firms’ unique technology set can’t be cut and pasted. The business model is requiring a uniform integrated technology to scale. And investment strategies are becoming more complex, with categories like alternatives, tactical strategies, emerging markets and complex fixed-income. Advisors want to outsource those to compliment their internal strengths.
How do you see the market shaking out?
There will be a lot of competition for the hearts and minds of high-net worth advisors as they are about to experience a boom in the capabilities that will help them grow.
The players in the space range from LPL-Fortigent, SEI, Morningstar, Advent and a list of technology advisors seeking to serve wealth managers. I believe Envestnet is uniquely positioned to execute and deliver on advisors’ needs from investment strategy to performance reporting in a scaled, cost-effective way.
What are the biggest challenges you’re facing going forward?
The big unknown for the industry is the impact of regulation and the cost. None of us know what it will be.
This is an industry that is not evolving, it is transforming. So you want to be an agent of transformation, not a follower. Mobility will also be a challenge, as will complete open access to banking and investment products such as lending, insurance and alternative investments. These are all complex challenges but we need to face them.