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Envestnet’s Strategy Opens Window Into Future of Independent Advice

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As an add-on to my blog last Thursday (Four Trends That Will Affect Advisors in 2014), I’ve been thinking about the future of the custodians and broker-dealers that support the independent advisory industry.

My musings were prompted by a story that Brooke Southall posted on on Dec. 11, Envestnet Increasingly Cuts Schwab Out of Its Software Mix, about a growing number of Envestnet|Tamarac users switching from Schwab’s PortfolioCenter to Tamarac’s portfolio accounting software Advisor View. 

In that story, Southall not-so-subtly suggested that Envestnet (ENV) may have designs on becoming a custodian for RIAs itself, quoting Tim Welsh, president of Nexus Strategy, who said that Envestnet|Tamarac “looks a lot like a custodian to me. [They] bought Tamarac for a reason. Now I see Envestnet and all their mutual fund strategies. They control the home screen. Why else would you pay $54 million [for Tamarac] if you already have [Vantage] for RIAs? One day they’re going to rip the Band-Aid off and say: ‘we’re a custodian.’” 

Southall’s story got me thinking about the role that broker-dealers—and later custodians—have played in the emergence of “independent” financial advice. Back in the early ‘80s, when I started covering financial planning, the vast majority of planners were registered reps who affiliated with “independent BDs.” They were “independent” in the sense that they owned their own firms, but still needed a BD for their securities licenses. Around 1985, when the Reagan bull stock market (which had started in 1982 and ended with the crash of 2001) looked like it had legs, independent planners turned their full attention to allocating client portfolios into mutual funds. 

But thanks to the growing no-load fund industry launched by Jack Bogle at Vanguard Group in 1974 (see my upcoming February column in Investment Advisor about Knut Rostad’s new book on Mr. Bogle: “The Man in the Arena”), independent advisors didn’t technically need a broker-dealer. Not coincidentally, Schwab Financial Advisor Services was launched in 1987, to service independent RIAs and their clients. The FAS program enabled advisors’ AUM fees to be deducted directly from client accounts—eliminating the “commission split” taken by BDs, and jump-starting the AUM-based independent RIA industry. 

Here’s the reason for this ancient history lesson: Since that time, independent broker-dealers have been scrambling to find legitimate reasons that independent advisors should pay them a portion of their growing AUM fees. Only a few have succeeded, and we saw massive consolidation of the “indy BDs” into the few giant firms we see today: LPL, ING, AIG, Ameriprise and Raymond James—who can afford robust support programs for independent firms, and make up their falling revenue share with sheer volume. Meanwhile, the ranks of RIAs who work with custodians—Schwab, Fidelity, TD Ameritrade, and Pershing—has skyrocketed.

My point here is that no business model has a lock on servicing the evolving independent advisory industry. which is now not quite 30 years old. As its evolution continues, the firms that support it will have to evolve as well. To get a better understand of how Envestnet|Tamarac fits into the future of independent advice, I talked with Bill Crager, president of Envestnet, and Stuart DePina, founder of Tamarac and now president of Envestnet|Tamarac. 

“To get right to the point,” Crager told me, “there’s a lot of what we do in Brooke’s story. But as far as becoming a custodian, it’s just not in our business plan. The advisory industry is well served by the existing custodians. We offer services not currently being offered to fee-based advisors.” 

DePina added: “We launched Tamarac to help advisors with a number of the challenges that they faced. For years, there has been a shortcoming in help for advisors to be better marketers, to better interface with their clients, to build better portfolios and to deliver the right information to their clients. These were things custodians chose to not to offer—that were not their core competency. We chose to make them our core competency.” 

That core competency boils down to technology. Crager explained Envestnet’s advantage: “It’s a question of where the industry is going. We’re not weighted down with legacy, mainframe issues. We focus on mobility: working through PCs, the tablet and the investment app. The next level is the data: systems are going to get smarter. We are investing very heavily in these areas.” 

As for becoming a custodian, here’s what DePina said when I pushed him: “We have deep roadmap initiatives across all four custodians. The relationship our advisors have with their custodians is richer for it. We think the HighTower model [working with multiple custodians] is the future: we’re looking to empower advisors to go down that path: Best execution; no conflicts.” 

There it is: A glimpse into the future of independent advice. A future where advisors work with all the custodians, having them compete on pricing, on service and on best execution. Like the broker-dealers before them, custodians will increasingly find themselves scrambling to add value. By the end of the interview, I realized the answer to Brooke Southall’s question: Why in the world would Envestnet|Tamarac want to be come a custodian? Custodians are the past— the future is creating technology interfaces that empower independent advisors to better serve their clients. 


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