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Envestnet Logo on a building

Industry Spotlight > Clearing and Custodial Firms

Pros, Cons of Envestnet’s Move Into the RIA Custody Space

By Jeff Berman

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What You Need to Know

  • Industry experts provided a mostly positive take on Envestnet’s plan to enter the custody business for RIAs.
  • But they provided a more mixed prediction on whether the move will hurt its relationships with Big Three custodians Schwab, Fidelity and BNY Mellon’s Pershing.
  • Timothy Welsh's prediction: This will be more like Russia-Ukraine than the friendly neighbors Envestnet and the custodians have been.

Envestnet’s recently announced plan to enter the custody business for RIAs is generally seen as a positive move by a group of technology executives and consultants. These experts, though, had more mixed predictions on what effect this new business could have on Envestnet’s  relationships with the “Big Three” custodians — Charles Schwab, Fidelity and BNY Mellon’s Pershing.

The custody offering — set to be rolled out in the second half of 2023 — relies on the firm’s recently formed partnership with New Zealand-based FNZ, which offers custodial and technology services and owns a majority stake of State Street’s Wealth Manager Services‘ business.

Envestnet, mainly known for its turnkey asset management program, or TAMP, disclosed some details about its move into the custodial field during a quarterly earnings call earlier this week.

“I think this is an AMAZING development,” Doug Fritz, founder and CEO of F2 Strategy, told ThinkAdvisor by email on Thursday.

“AssetMark has offered custody on its TAMP platform for years, and it’s very well adopted,” Fritz explained. “While the call didn’t specifically reference which client types they’re [introducing] it to, it’s safe to assume TAMP first.”

While “we welcome additional entrants to the RIA custody world,” Fritz said, “advisors need choice and new entrants like this might come with far more automation and integration than their legacy U.S. peers.”

“I am not surprised” by the news, said Joel Bruckenstein, head of Technology Tools for Today (T3). “There have been suggestions that this might happen multiple times over the years.”

Envestnet “certainly has the advisor base to make a successful run,” Bruckenstein said. “The challenge is that custody is a low margin business, so it requires tremendous scale. I don’t think it will be easy, but the market could use another custodian, and I never count Envestnet out.”

Timothy Welsh, president of Nexus Strategy, agreed: “While this is very big news, it is not surprising. The industry has been speculating for a number of years that Envestnet had to go there to continue to grow with RIAs. Its past strategies for growth via acquisition have stalled out for a variety of reasons, most importantly, there’s not much left to buy.”

Some new TAMPs “making traction with RIAs are GeoWealth and SMArtX,” Welsh said via email, noting that these two firms have “modern, tech forward platforms.” Meanwhile Envestnet’s systems are older and “have not integrated” technology added via acquisitions — like MoneyGuidePro, Tamarac and Yodlee — “into one user interface.”

Envestnet’s plan “once again proves out that RIAs are the top of the food chain and that if you want to grow, no matter who you are, you have to enter the RIA space in a big way, or else get left behind,” the consultant added.

Tough Challenges

Still, Envestnet faces a tough road ahead, Fritz said” “I don’t see advisors suddenly switching/re-papering all their clients to Envestnet. Switching and operations costs would be prohibitively high vs. any value FNZ can bring.

Furthermore, adding FNZ/Envestnet an RIA’s list of its custody providers — aka “going multi-custody” — entails “a huge new set of challenges for CRM integrations, oversight, billing, etc., [which] few RIAs are ready for,” he explained.

Although FNZ has “caused a lot of excitement in the market,” Fritz said, “I haven’t seen them execute broadly on anything yet. I’ll remain suspicious of their abilities to deliver on custody offerings for U.S. clients until I’ve seen it ‘in the wild.’”

Fritz added: “Assuming that FNZ can do this without heavily testing [such a move first] would be a mistake.”

A New Rival

As to whether Envestnet’s decision to enter the RIA custody space will harm its relationships with Fidelity, Pershing and Schwab, Bruckenstein believes “it is too early to tell.”

Fritz, however, said: “Nope. No harm there. … Bank trusts and firms like AssetMark already do.”

But Welsh disagrees. “This is a highly dangerous move as some of Envestnet’s biggest clients (Fidelity is its largest) will now be direct competitors for RIA custody” services, he said. “I’m sure this is what has kept them at bay for opening a custody business, but it has now changed.”

Still, many RIA custodians currently benefit from their work with Envestnet, because “their RIA hybrids do a lot of business with Envestnet through Schwab/Fidelity,” Welsh said, noting that Schwab sold its PortfolioCenter to Envestnet three years ago.

But Welsh’s overall prediction is more negative. “This will become more like Russia-Ukraine than the friendly neighbors they once were,” he said.

When asked about Envestnet’s move into custodial work, an executive from Charles Schwab gave a more upbeat, diplomatic view: “The RIA industry is dynamic — and we are confident in the continued growth of the profession,” said Jon Beatty, COO of Schwab Advisor Services, in a statement. We welcome any new entrants seeking to help advisors do what they do best — and that’s serving clients.”

Fidelity and BNY Mellon’s Pershing declined to comment.

(Photo: Shutterstock)

Jeff Berman

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