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.