Putting The Envestnet Puzzle Together
In case you’ve been living under a rock, Envestnet acquired MoneyGuidePro for half a billion dollars this week. This news landed with more clout than usual. This wasn’t just another Envestnet press release announcing an acquisition, these were two industry titans combining. After 34 years in business without a single dollar in venture capital raised, making conference presentations great again and pioneering a huge shift in the financial services towards industry with the motto of “everyone deserves a quality financial plan” it is hard not to be happy for my friends there.
Back in November I tweeted the following:
Clearly, I was wrong.
They didn’t throw away their work on Logix and it looks like they have executed a strategy where they do not need to compete with the clearing firms all while setting themselves up for a powerful end game.
There have been some good takes on this week’s news and it feels like more people than usual are weighing in. The entire industry seems to be asking the same question- What is Envestnet up to? Rumor has it that Apex could have been purchased for about the same amount, so this is my attempt to answer that question and find out where I went wrong in November.
Envestnet’s Sandbox
I don’t know a lot about Jud Bergman, the CEO of Envestnet, but I do know this: Jud is an intense student of the game of chess and rumor has it that he is a tremendous player as well.
To set the table, you have to understand how important relationships with the clearing firms are for companies like Envestnet. Fidelity and Pershing are the king makers in the enterprise wealth management space. If they decide to support you life can be very good! If they view you as a threat, life can be very difficult. Every single wealth management shop needs a clearing firm, you really cannot do business without them which gives them tremendous leverage because their clients want to have the best experience possible. Clearing firms made life VERY good for Envestnet — they exploded in growth for many years.
So what’s the problem?
If Envestnet was going to continue down the path they were on by growing their dominant position as a platform for IBDs and large wealth management firms they were going to become too big of a threat to Fidelity and Pershing.
With the kind of big ambitions that Envestnet has it is very difficult to tie a huge portion of the success of your business to partners like Fidelity and Pershing who then get to determine how big you are allowed to get.
At that same time Envestnet had become a target for countless companies in the space. Foliodynamix, SEI, Assetmark, Vestmark, FTJ FundChoice, and Adhesion were all presenting a considerable challenge to Envestnet at that time.
At this point, they were 15 years in and their technology had officially become legacy. They were dealing with a huge crop of more nimble competitors being built on the cloud and it would have been remarkably difficult and costly for Envestnet to reinvent their platform.
As they were squeezed in the middle of this reality, Envestnet had two choices to change their sandbox: Become a king making clearing firm or become the data engine of financial services.
All signs point to the latter.
Data, Data, Data
Up until this point, Envestnet had been sitting in the middle of every transaction for millions of investment accounts on their platform. They had boatloads of data and it was more insightful data than the clearing firms had, they pressed this advantage.
The series of acquisitions they made from the beginning of 2015 until now supports the idea of becoming the data engine for the industry. Some of them were centered purely around the data strategy and three of the others were advantageous — and also happened to support the data strategy. Let’s take a look.
Febuary 2015: Envestnet acquires Upside
This was an advantageous and somewhat defensive acquisition during the robo craze. Betterment and Wealthfront were gaining steam and the sky was falling! If you didn’t have a robo that put a button on a website that just collected assets you were toast. So Envestnet went out and got their robo. It was also advantageous to the data strategy because Envestnet was in need of a UI upgrade and Upside would provide an important piece to this.
May 2015: Envestnet acquires Finance Logix
Hindsight being 20/20 this acquisition makes a lot more sense and was brilliant. FinanceLogix has come up a bunch in the MoneyGuidePro news with questions like “Did it fail?” or “Is Envestnet going to throw FinanceLogix away?”
Does Envestnet wish that perhaps this had solved all of their planning needs? Probably. Was this acquisition a failure? Far from it. If you remember any of Oleg’s presentations about FinanceLogix, he promised to “widgetize financial services!” Put another way, he had the architecture to put Envestnet’s data into containers and make it more nimble. This is the Logix strategy they have been working on where they are breaking apart their platform. Jud didn’t want Oleg to widgetize financial services… just Envestnet. This part was crucial to their future.
August 2015: Envestnet acquires Yodlee
The market hated this acquisition mostly because it was the first acquisition of this data strategy that wasn’t cloaked in their “dominate wealth management strategy” they were already running. Buying a robo and a financial planning company? That made sense. Buying aggregation? That makes sense too, but not for the price. Well, this deal was foreshadowing for the justification of the MoneyGuidePro purchase price too.
Yodlee is a the extraction tool for the data that Envestnet is currently collecting. They needed this piece to make it all work.
Oh and it came with a giant payload of data as well.
October 2016: Envestnet acquires Wheelhouse Analytics
If Yodlee is the extractor for the data, consider Wheelhouse analytics to be the refinery. Logix and Upside are the gas pumps.
A ho-hum purchase of an analytics company that was the final piece they needed for the tooling to run this strategy. They use this today to provide extremely valuable insights back to their asset management partners and enterprise clients which provided immediate value — but I’m sure they have been working hard in the labs of Envestnet to mold this analytics engine in a fashion that works specifically to slice and dice this data in all manner of ways that they aren’t showing today. This will be the workhorse of the data strategy.
Sept 2017: Envestnet acquires FolioDynamix
This was purely advantageous. The price was too good to pass up, they took out their largest competitor, effectively locking down the entire market and oh yeah.. acquired an additional 3.2 million accounts worth of data.
February 2019: Envestnet acquires Portfolio Center
Tamarac is built on top of Portfolio Center so this was as much defense as anything, but it was cheap and it bought them the data of thousands more firms. If they can retain all of the clients despite all of the onslaught from competitors, it is more fuel.
March 2019: Envestnet acquires MoneyGuidePro
You don’t spend 500 million dollars on at least a 10x multiple for low cost legacy technology with a slowing growth rate and very little cross-sell opportunity. Just like the Yodlee deal, I am certain that there is more to this deal than meets the eye.
This take from Craig Iskowitz is the most on point.
Jud claims that he has been after MoneyGuidePro for 9 years which leads me to believe that they would have bought this right after FinanceLogix if possible. The biggest weakness to the FinanceLogix deal was that they just didn’t have that many plans in the system. The architecture was great but it lacked scale.
MoneyGuidePro has the opposite problem. They had 34 years worth of scale but their technology was not all that nimble. Financial Planning data is RICH and full of valuable insights.
Combine planning data with portfolio management data from Tamarac, held away account data from Yodlee and the asset management data of the Envestnet platform — you have as close to a complete picture of the industry that you can get now.
Planning Sells Insurance
If you have read anything about this industry in the past three years, you have heard that investment management is commoditized and advisors need to find a new way to add value. Comprehensive financial planning has become the go-to strategy to enhance the value advisors can add.
This may work for a while, but we are going to see a renaissance of a full service wealth management firm where the plan will be the foundation of everything they do for the client — but they will bring insurance back in house and offer total money management services. Technology will empower advisors to provide the mass affluent with family office services.
Buying life insurance or annuities is extremely inefficient for advisors right now and it is also clouded in controversy.There is a ton of innovation happening in the insurance product space today and there is no shortage of cash to be made which leads me to believe that insurance is the next battle ground.
The single best way to sell insurance is through planning software, full stop.
While I think MoneyGuidePro was more so about the data, providing Envestnet with the best insurance sales tool in the industry is a wonderful deal sweetener and the justification for the price tag of the deal.
The End Of Open Architecture In The Enterprise
This is an unpopular opinion but I believe the pendulum has swung away from the fascination with open architecture for large wealth management firms. For small nimble independent RIAs with a small number of advisors, open architecture is a dream. For firms like Cetera, Advisor Group and LPL the trend towards open architecture may have made a bunch of advisors happy but it also created more headaches than ever. Every new piece of technology increases the complexity and risk exponentially. I think the biggest firms in the space long for simplicity and Envestnet is happy to oblige.
Open architecture was supposed to help these firms differentiate and it did.
So, how do you get the benefits of the differentiation from open architecture without the headaches? You own the user experience of the platform but outsource the engine. Every platform needs to have CRM, planning, portfolio management and investment management connected in to the clearing firms. This would also explain why Envestnet hasn’t investing in updating their UI.
Envestnet can now allow firms of all sizes to build and own their experiences without having to spend millions of dollars in budget maintaining technology.
That is… if they don’t get acquired themselves.
When Blackrock Swallows Envestnet
Here is my hot take! Blackrock will acquire Envestnet. Here is why;
Blackrock CEO wants 30% of their substantial revenue to come from technology. They have been dabbling and learning but they won’t achieve this without a massive move.
No asset management firm has more insight into how money is flowing through technology platforms than Blackrock.
They are long time partners of Envestnet and had a considerable amount of success on that platform. They have also managed to get on to every model marketplace that has launched in the past two years.
Have you seen any press releases come out about the raving success of any of those model marketplaces? Yeah, me neither. For as big of a threat as they were supposed to be to TAMPs, that just hasn’t become a reality yet.
Blackrock has also been busy using their very large sales force trying to distribute their own technology from Blackrock Digital Wealth. It’s going to take a lot longer than they thought to get their home grown technology deployed to that many firms.
I believe this is what prompted Blackrock to make their substantial investment in Envestnet. They sat back, they surveyed the landscape and they placed their bet. Heck, they pretty much bought MoneyGuidePro for Envestnet as a thank you gift for the partnership.
Blackrock has shown that they are very hungry for the combo of data and distribution.
They savvily invested in Acorns, which provides millions of data points on accounts not held at wealth management firms and don’t sleep on the asset flow it can provide. There are currently 3.7 million accounts on Acorns, if just $5 per month gets invested by each account in Blackrock funds, that is 222 million dollars in fund flows per year without a single wholesaler being involved. Not too shabby.
Envestnet gives them the other side of the spectrum with millions of high dollar accounts that Blackrock wants the competitive advantage on capturing. Envestnet is a data and distribution powerhouse and no other firm has even come close to showing the same ability in the wealth management space.
After a couple of years experiencing technology distribution for themselves, Blackrock is happy to let Envestnet complete the build out of the platform then scoop it up and pump value out of it.
If I am right on this, it also explains why Envestnet didn’t acquire a clearing firm like Apex. That is the last thing that Blackrock would want because it cuts off the breadth of distribution.
Post acquisition, Blackrock will have it’s targeted data from Acorns and data from millions of wealth management accounts as well as 93,000 financial advisors on the platform.
All of this will be used to feed their AI research lab in Palo Alto. With AI already in playing a role in portfolio construction for Blackrock, it is only a matter of time until all of this data is used to expand their capabilities in full service wealth management pressing this technology advantage heavily against Vanguard and State Street.
Final Thoughts
Envestnet has all of the pieces in place to execute this strategy, but can they pull it off? The big ugly truth about acquiring all of this data is that the technology it sits on is not easy to work with.
How far along are they with adapting their Yodlee and Wheelhouse technology for this strategy? Are they going to add a CRM as well?
Envestnet engineers have quite the challenge in front of them.
If they pull it off, it’s hard to see a better position for them to be in. Envestnet has secured themselves a seat at the table in every conversation for enterprise firms looking at a platform and they can make every other firm, especially startups pay a toll to get to market much faster and more efficiently by leveraging the Envestnet data engine.
We will have to wait and see.
I have to end this post with the thought on everybody’s mind:
Keep building everyone.
