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Financial Planning > Charitable Giving

Envestnet Wants to Help Advisors Beat Robos at Their Own Game

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Almost seven years ago, in another story about Envestnet, we wrote about the major issues facing advisors:

“… performing increased due diligence on investment products; adapting to a fluid regulatory environment; improving efficiency in the back office and directly with clients; finding alpha-producing investments at a time of slow economic growth and continued volatility in the markets; succession planning; deciding which business model — broker-dealer or RIA — to adopt; and providing holistic financial advice to clients on all their investments, not just those over which the advisor has control.”

Sound familiar? Throw in a new pro-business president, the acronym DOL and any compound phrase that includes the word “robo,” and you’d be describing advisor life in 2017.

In that June 2011 cover story, we also declared that “in each of those areas, Envestnet stands at the crossroads.” Today, Envestnet has moved past the crossroads, confidently striding down the less-traveled path toward a near future where a new model of advice prevails. If successful, that new model will provide the user experience that clients demand while revealing a more comprehensive view of each client’s financial picture using big data made personal.

Guided by advisors, the new model will provide to clients cutting-edge apps that will encourage their best behavior and make attainment of their goals more likely since that guidance and those apps are based on the client’s preferences and actual behavior. It will do so while preserving the central role of the advisor as trusted guide and informed confidant while beating the robos at their own improved user-experience, low-cost game while justifying the higher fees those trusted advisors can legitimately charge clients for this enhanced advice.

Calling Envestnet a software provider or an investment management company or a platform provider or a fiduciary enabler or a data company would not be inaccurate, but it’s the integration of all those facets of the company that’s the company’s killer app.

How Envestnet went down this road is a tale of risk taking, capital formation, acquisitions, technology chops, a consistent focus on serving the independent advisor but also, in the end, a story about people; both Envestnet’s founders and employees but also the human capital that came along with a string of acquisitions by the company over the last 18 years.

Six years ago, Envestnet was breaking the box of the TAMP industry, but Envestnet President Bill Crager says “the mission has always been the same: to serve the independent advisor.” It is in light of that mission where “FinanceLogix and Yodlee fit in,” he said, referring to two of Envestnet’s most recent acquisitions, in 2015.

Ah, all those acquisitions that Envestnet has made since its founding in 1999 — some observers have been impressed by that string and what the acquired firms (and their people; see “A Look at Envestnet’s Leaders and Acquisitions“) bring to the company. Other observers have been troubled by Envestnet’s fast growth, and even some internal executives have expressed concern that integrating those companies has been a challenge for the firm. Those in the naysayer camp were particularly alarmed at the big price tag of the Yodlee acquisition, which cost $590 million in 2015.

But Crager and CEO Jud Bergman as well as Envestnet | Yodlee President Anil Arora argue that the naysayers are missing the point.

“If you’re not thinking of them as collectives,” Crager said of those acquisitions and their importance to Envestnet strategically, “one thing becomes more important than the other.” However, “when you look at it as a whole,” he said, “it finishes the job you intended to do.” Moreover, it’s a business-building strategy. “The idea that a firm would work with us on a broader level is because of how we’re structured,” Crager said, which is why a conversation with a potential client “can go from fairly narrow to ‘Oh, man, you can solve a lot of problems for us!’”

Crager said that “when we started the company, the value was access to investment product,” but “quickly it became the portfolio — how does a portfolio help an individual achieve his goal?” He proposed that providing access to products and building the best portfolios for clients is “where the state of advice is; but think of where the state of advice has to go.”

An Incomplete Envestnet

That new model is what Crager calls “the lifecycle of advice: Know your client in a way that gathers all their information — investments, retirement, personal goals — into one place.” Clients have “dozens of ‘envelopes’ of their financial lives,” but Crager said that to really “know your client means ‘let’s bring it all together. Let’s get a picture of it; let’s see how [all those envelopes] interact with each other.’”

In order to accomplish that, Crager said they had to overcome “an incomplete Envestnet,” which required its leaders to “make investments — in digital, in financial planning, in data — and bring all that together now in an environment that is still very much focused on the financial advisor and the institution they work for,” without losing focus on what the investor needs. “We’re not going to the investor; we’re helping our clients engage with them more deeply,” Crager said.

He described the competitive backdrop this way: “Robos will be out there with 20-, 30-, 40-basis-point offerings,” while the traditional advisor is “charging, say, 100 basis points for that same offering that is less convenient” to the client.

So how does the advisor justify her 1% fee? “It comes in connecting all the parts of that individual and guiding them toward their goal,” giving clients the tools to know and monitor progress to their goal “day and night; so the technology holds their hands.” Advisors are delivering a “photograph” of their financial goals to clients, so “the interaction model changes significantly because you’re providing the infrastructure.”

Crager argued that Envestnet’s acquisitions and its integration of those firms’ offerings has “put us on the path toward” that model, claiming “we have the parts; we’re beginning to deliver them. [...] 2017 is early, but by 2018 that path will be defined as the value proposition of the advisor.”

The Data-Based Visionary

CEO Bergman may be a visionary, but he’s also only interested in achieving visions that have a basis in cold, hard facts. In a series of interviews over six months, he exhibited both those traits when it came to explaining Envestnet’s strategy.

First, he believes that Envestnet is still misunderstood by many within and without the advisor industry. As for the company’s beginnings as a TAMP provider, “that’s how the world still looks at us,” he charged, though in the same breath he said, “we’re trying to put into place something that shifts the paradigm.”

Nice phrase, but what does it mean? Bergman delineated the different digital ages. “There was the digital hardware age, all bits and bytes,” before “we moved to the desktop with installed software.” From the desktop, he continued, the industry moved to cloud-based software.

While that transformation remains incomplete in the financial services world, he predicts “we’re nearing the end of installed software; in three to five years, it will be all cloud.” And the next digital wave? “It’s data and data analytics,” which will provide “all sorts of nuggets to the equipped advisor,” leading to “better intelligence within an expert-centric smart system” that in turn will deliver “better outcomes” for clients.

The use of those smart systems “will eliminate a lot of mistakes humans make and free up advisors to use their wisdom and creativity” on more complex tasks for clients like tax and estate planning.

Advisors, he said, will be “freed up to do the things that really add value, producing better outcomes for the end client, the advisor and the enterprise — better lives for everyone.”

Envestnet already sees glimpses of those better outcomes, citing the RIA channel offerings at the company. Adoption of Envestnet’s end-client portal among RIAs, he reported, has risen from 10% four years ago to 60% currently.

Why? Because that portal offers features like a document vault and data aggregation, Bergman said, making the client a more active participant in the process. “It’s what millennials want,” Bergman said of becoming a more active participant in the client-advisor relationship.

Moreover, he said wallet share of existing clients is “more than two times as high” for those advisors who enroll their end clients in the portal, despite it not being a primary motivation for enrolling clients. Those advisors also report much better retention of existing clients when they use the portal, Bergman said.

By contrast, in Envestnet’s broker-dealer channel, he noted that end-client portal adoption “is only a fraction” of the RIA channel’s adoption rate.

So does the financial wellness concept — that a person’s emotional and physical health is tied to their financial lives — become part of that better outcome? “Yes,” said Bergman. While “from the start” Envestnet has been a wealth management software and services provider, he said that “when you include, intentionally, the end client, giving them capabilities like budgeting apps and cash flow forecasting apps, you create this network effect where the end client is more” engaged in financial wellness.

Research conducted by Aite on Envestnet’s behalf — “Aite wasn’t interested in shilling for Envestnet,” Bergman was quick to point out — confirmed Bergman’s contention that true integration benefits advisors in myriad ways. Among the findings of the September 2016 report, “Technology Integration Turbocharges Advisor Productivity”:

  • Advisors using advanced technology integration allocate more time to client investment management compared to their peers with basic or no integration: an increase of 19% for RIAs and 28% for independent BD reps.
  • RIAs with advanced technology integration generate around 50% more financial plans and investment proposals compared to their peers who don’t benefit from advanced integration. This increased advice activity translates into a greater number of clients served by the practices (57% more), larger books of business (78% larger), and greater practice revenue/production (46% greater).
  • Independent BDs benefiting from advanced technology integration dedicate an additional 11% of their time to client investment management, serve a greater number of clients (44% higher), double their books of business, and increase practice revenue/production by 73%, compared to their peers who do not have advanced technology integration.

Enter Yodlee

The data, data analytics and end-client apps tied into the advisor’s financial planning and platform applications are not some future vision for Envestnet. It’s what the company gained from its 2015 acquisition of Yodlee. Anil Arora, who was running Yodlee and is now CEO of Envestnet | Yodlee and vice chairman of the overall company, explained in an interview the problems that Yodlee solves.

It begins with the client, who tends to be “completely overwhelmed and stressed out about managing their financial affairs,” not least because the average consumer has 14-15 financial accounts of all kinds, Arora said, both short-term like bank accounts and longer term like mortgages or 401(k)s. Furthermore, those accounts are “spread out among five to seven institutions.”

What Yodlee solves with its aggregation solution is the “iterative process” that’s all too familiar to advisors and clients in gathering all the financial information necessary to have a holistic view of clients’ overall financial lives. So Yodlee moved to “provide them with the data” for that holistic view, and over time to clean up that data — to “make it usable” for a third party, considering each financial institution’s unique nomenclature.

Yodlee collects and aggregates data from 15,000 financial institutions in the U.S., Arora said, and from multiple account types (35-40 in big banks) at each of those institutions. “Each is in a different language, in a different format,” he said, citing as an example how each institution lists an equity holding. “You may own a stock, like Envestnet, but some institutions may have the ticker, others the CUSIP number.” Once gathered and “made usable,” that data can then be flowed into “goals-based planning” software.

“But then we said, ‘there’s too much information,’” recalled Arora, so Yodlee worked on getting “intelligence out of” that aggregated data. “That’s where we are today: not just providing a holistic view and digital tools to understand the basics” of the end client’s financial situation, but also to answer the questions “what does all this mean and what shall we do” with that data. “That’s where analytics comes in,” he reported, which includes statistical analysis and machine learning that can be both “predictive and prescriptive.”

In other words, the analytics helps “derive key insights” that the advisor can use to help end clients.

But if it’s software that gathers the data and provides the analytics that can be “predictive and prescriptive,” do you need a human advisor at all?

“Absolutely,” said Arora. Using the analogy of a navigation app in your car, if all you need to know is “how to get from point A to point B in my car, you don’t need human intervention.” But an advisor’s role “is not simply mathematical”; it’s also understanding the human being and “their goals, their psychology, what they care about it.” After all, since “managing money is so emotional,” and since behavioral finance shows us that humans don’t often act in their own best interests, a trusted advisor’s role remains crucial.

“They have to be able to read the emotions and motivate” their clients to “do the right thing. Do advisors’ skills have to evolve? Yes, but can we free up more of their time now to do that which they’re best at? This is the opportunity we have in front of us,” since “data provides options; not necessarily the answer.”

When asked about the threat to advisors of digital advice platforms — the so-called robo-advisors — and whether younger people in particular will value robos more than human advisors, Arora’s answer is based partly on his previous experience as a marketing executive at companies like Gateway, the great popularizer of personal computers, and Kraft Foods, where he reports the first brand he worked on was the iconic Kraft Macaroni and Cheese.

“I’ve been in a couple of different industries” and each exhibits “classic segmentation,” where some people will only buy a product or service based on its price, others only on the health benefits or drawbacks of a product and still others just on quality, Arora said.

“We have the same segmentation in managing financial life,” he added. “Some small segment” of prospective and actual clients will “appreciate what the robos do, but most want a mix: robos and human.” It has nothing to do per se with financial services or age or gender. Instead, it is a “human condition; not demographic but psychographic,” that consumers will segment themselves by those preferences.

Since Yodlee’s acquisition by Envestnet, Arora said his primary job is take its data capabilities and “integrate them into the Envestnet and Tamarac” platform and offerings. He’s also responsible for rolling out those “dozens of wellness applications,” called Envestnet | Yodlee FinApps, for end client use, such as apps for determining “What’s my cash flow? When are my bills due? Where am I spending my money?”

So Envestnet | Yodlee’s job is to “make sense” of all this data, increasingly using AI, meaning artificial intelligence (or what Arora prefers to call “augmented intelligence”), which he believes will be a “major addition to advisors’ toolkits” and a “bedrock technology for Envestnet.”

What AI will do for advisors is to yield “the three or four best financial outcomes” for clients if they follow a specific course of action, or put another way, “based on your past patterns, here’s what’s best for you.”

There’s another benefit to advisors and institutions who use Envestnet’s platform for data analytics: improving their own businesses. Envestnet’s 2016 acquisition of Wheelhouse Analytics will allow individual advisors and broker-dealers on Envestnet’s platform to determine “who are the most effective advisors? What makes them more effective? How could they increase their share of wallet” among clients?

Arora said Wheelhouse will give Envestnet clients the ability to benchmark on a “variety of metrics,” including a determination of “which clients are most likely to leave” an advisory firm.

Bergman has the last word on how Envestnet’s strategically built enterprise will lead advisors down that path less traveled. The smart use of technology enables advisors, he said, “to do what only they can do: solve complex psychological problems and deliver wisdom on sophisticated matters.”

— Read Integration Key to Battling Advice Commoditization on ThinkAdvisor. 


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