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Analysts: Envestnet, FNZ Partnership Could Alter RIA Custodial Landscape

With scant details available, industry analysts say the coming Envestnet custodial service could be a game changer for the firm.

During Envestnet’s third quarter earnings call Tuesday evening, Chief Executive Officer Bill Crager announced that the firm, with $5 trillion in assets under advisement across its platforms and ties to over 100,000 financial advisors across almost 5,000 firms, will be getting into the custody business.

Specifically, Envestnet is entering into a partnership with New Zealand–based FNZ. CitywireRIA was the first industry publication to note Crager's comments.

Two years ago, FNZ bought a majority stake in State Street’s custody business, Wealth Manager Services, giving the firm a foothold in the U.S. wealth market. The unit was later renamed FNZ Trust Services, with a minority ownership still held by State Street. State Street acts as subcustodian to the assets held at FNZ.

Little known inside the U.S., globally FNZ is active as the integrated wealth management platform—account opening, portfolio management, reporting and trading—for banks and other financial services firms; it boasts some $1.5 trillion of administrative assets, including those from over 8,000 firms in the U.K., Europe, Australia and Canada, such as Barclays, Lloyds Bank and Santander. It runs the technology beneath Vanguard's direct-to-consumer business in the U.K. 

Nothing has yet been built between Envestnet and FNZ, but Crager said the combined custody partnership would reach the market in the second half of 2023.

The timing somewhat coincides with Schwab's recent announcement that the transition of all TD Ameritrade Institutional accounts onto the Schwab custody platform would occur over Labor Day weekend in 2023.

The question remains what segment of the U.S. advisor market Envestnet and FNZ would look to pursue. The deal also opens up Envestnet's asset management services to FNZ clients outside the U.S. 

In a research note, analysts at JMP Securities said the custodial business “could be one of the (Envestnet’s) biggest opportunities to date.”

Envestnet makes roughly on average 10 basis points on the assets on its platform, analysts Devin Ryan and Brian McKenna have written, while custodian revenue is roughly twice as much on assets held.

"We suspect the opportunity would be nuanced as the company could bundle more services under a custodial umbrella to generate even higher average revenue from users (in addition to incremental custody economics), or it could rebate some of the custodial economics back to the advisor to create a more economically compelling offering relative to existing custodians, which could support accelerated growth," the analysts said. 

When pressed on where they would fit in in the overall RIA custodial market, Rich Aneser, chief strategy Officer at Envestnet, would not name any competing firms or any particular advisor demographic or segment.

“We are going to be open architecture, as we already are across our ecosystem, and we already work with many custodians,” he said.

“It [the new custody platform] will be appealing to clients who have been asking for the end-to-end fully digital features,” said Aneser, noting the complementary nature of what each firm had to offer from Envestnet's “front-end” advisor interfaces and portals to FNZ's “back-end” custodial services around the investment book of record, trading and data reconciliation.

Tom Chard, FNZ's chief executive officer for North America, agreed that the benefits of integrating the advisor-facing wealth management tools with the back-end custodial and reconciliation services would allow for better and more accurate data and record-keeping, as well as more seamless account opening and trading. Aggregated data and analytics "creates some cool advisor insights" as well, he said, which could benefit Envestnet clients. 

While Envestnet did publish a press release outlining the technology partnership with FNZ a little more than a week before on October 27, nothing was mentioned about specifically moving into the custody business.

That announcement did state that Envestnet's Wealth Data Platform will be integrated as part of FNZ's global platform and distributed out to international markets beginning in the first quarter of 2023, thus quickly expanding that portion of Envestnet's business footprint.  

Alois Pirker, research director at Aite Group’s wealth management division, presciently pointed out at the time of the FNZ partnership and investment in State Street that the deal could be envisioned by advisors like "Envestnet, plus a custodian."

Even so, Pirker himself said of the latest news that a lot about it remains unclear.

“I’m convinced this is just a tip of the iceberg. I don’t think the story is fully visible yet, and there are so many moving parts involved,” he said.

So much of Envestnet’s platforms are already fully digital, which includes much in the way of onboarding, yet Crager focused during the earnings call on the onboarding technology available with FNZ.

This prompts questions about where the platforms will begin, and end, following any integration efforts made during the partnership.

"In a partnership like this, the devil is definitely in the details," said Scott MacKillop, founder of flat-fee TAMP First Ascent Asset Management and a seasoned entrepreneur in the RIA space. "These are two very big firms with many competing priorities. If both parties don’t bring great focus to this endeavor, it will have minimal impact for both firms. Competition is fierce in the tech platform and custodial spaces so these two behemoths will need to concentrate their resources and devote great attention to the project if they hope to have any chance of success."

Pirker noted that FNZ’s own acquisition of Appway, completed in February, with technology integration completed two months ago in August, gives FNZ a good onboarding option already.

There is also the potential for some strange bedfellows when it comes to Envestnet as a custodian, when it also serves as a technology partner to the other custodians. For instance, the Managed Account Solution of Fidelity Clearing & Custody is run by Envestnet.

“Envestnet is kind of an industry utility here,” said Pirker, which he noted makes the potential in the partnership with FNZ all the more intriguing when it comes to future developments.

Will Trout, director of wealth management at Javelin Strategy & Research, said that the potential, despite the brevity of Crager’s discussion, is immense, especially as it affects an advisor’s day-to-day workflow.

“Benefits here center on the straight-through flow of data between the broker/dealer and the custodian,” he said, “and that means the elimination of the need to transfer files from and to a third-party fintech—integration solves the hand-off issue and could also provide operational efficiencies around areas like rebalancing, which might be executed in real time rather than via overnight transmission of batch-files.”

Trout also said that the advantages in the partnership could easily extend into certain areas that competing custodians have seen add significantly to the bottom line.

“Pershing, Fidelity and Schwab with strong positions in cash management will face losing that cash and the fat margins on it,” said Trout, calling out Envestnet’s partnership with insurance firm MassMutual's Flourish cash management service, as well as being able to invest it in its own asset management arm.

He also added that Envestnet can capture spread by facilitating credit via the Envestnet Credit Exchange—for example, in the form of security-backed loans, student lending and property loans among other options.

“The ability to tap into these liquidity mechanisms—both cash and credit—on behalf of advisors is a major impetus for Envestnet to do this deal, especially in a rising rate environment.

In recent weeks Envestnet has made a flurry of announcements. On October 21 it announced its Wealth Data Platform, which will be one of the portions of its own technology referenced by Crager in the earnings call that FNZ will benefit from (and distribute to customers outside the U.S.) in the partnership.

Most recently, on October 28, Envestnet announced a “new vision” at the Money 20/20 personal finance conference. This announcement brought to light a complex list of additional data and analytics-related services and technology platforms beyond wealth management, including its businesses serving the banking industry.

New products included a portal specifically for small- to medium-sized business (within both the Banking and Technology platforms), and the partnerships ranged from payments (VoPay) to identity intelligence (Deduce).

At the beginning of October, two advisor-focused cryptocurrency platforms, Flourish Crypto platform (a wholly owned subsidiary of MassMutual) and Gemini BITRIA simultaneously announced integrations with Envestnet.

All these developments follow a major restructuring of Envestnet in June, and rumors in February that the firm was “exploring its options” and potentially up for sale.


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