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Envestnet is honing its business model -- and message -- as it drives toward an IPO

The giant product clearinghouse is recasting itself as a purveyor of fiduciary process

Wednesday, June 30, 2010 – 6:42 AM by Brooke Southall
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Bill Crager: We do have a very large presence in the broker-dealer market, but most of the fiduciary work we've built will be delivered to the RIA market initially.

Most brokers don’t know what their legal obligations are to their clients and advised investors strongly agree (75%) that “advisors should not receive hidden incentives to choose one investment over another for their clients.”

But at the same time, more than half of advised investors agree they can’t assess well whether their financial advisor gets such incentives. , according to a study released yesterday by Envestnet.

But the study is not exactly the point. The fact that Envestnet sponsored a major study and released it just after news broke that the SEC may impose some form of fiduciary duty on brokers shows how the giant TAMP is positioning itself as a provider of fiduciary processes. See: Improbable win for the fiduciary standard: Congress set to hand SEC power to impose fiduciary duty on broker-dealers

Because of the depth and choice of investment management strategies on its platform, and the way that it can offer record-keeping and track an advisors’ choice, the company is making a pitch that it can help show clients and the SEC that an advisor is acting as a fiduciary.

“Imagine an advisors who’s pitch is: 'here’s my process step one through eight,” says Bill Crager, president of Envestnet. “I am going to do this for you and be transparent as far as decisions, fees, work in your best interests.’ That’s much more powerful than 'here’s a portfolio of mutual funds.’ Investors want it; good advisors will react; Envestnet wants to empower it.”

The study was based on a poll of 504 financial advisors (171 wirehouse brokers, 167 advisors at regional/independent firms, and 166 RIAs) and 1,023 investors (761 advised and 262 un-advised) was conducted between April 14 and April 30 by the national polling firm Mathew Greenwald & Associates. The study reported on fiduciary issues relating to both advisors and investors.

The Chicago-based company is already a dominant player in turnkey asset management and managed accounts among IBD reps and it is positioning itself for an ambitious future of growth — predominantly from RIAs. On the strength of its industry standing, it has filed for an initial public offering. See: 10 reasons the Envestnet IPO filing is for real

Envestnet may indeed be positioned to deliver on this far-reaching promise of aiding advisors in providing better financial advice, according to Charles “Chip” Roame, managing principal of Tiburon Strategic Advisors.

Not cookie-cutter advice

“Platforms like Envestnet are perceived to deliver more cookie cutter advice but it may be just the opposite; Envestnet may handle some of the labor intensive manager research and reporting activities, may leverage technology to help FAs deliver better asset allocation and tax advice, and all the while may free up FAs’ time to deal with other more complex financial planning issues,” Roame said. “Manager selection and reporting are not the rocket science; financial planning is. Too many financial advisors invest too much time in inferior manager research and laborious reporting.”

Crager says Envestnet’s platform is not a one-track TAMP offering. Rather, it “enables an advisor to provide a consistent process to their clients—financial planning, risk assessment, asset allocation, research and due diligence, investment product selection, implementation and overlay, ongoing portfolio/risk/activity alerting, performance reporting and aggregation.”

Yet, Crager says, the company offers choices that allow advisors to establish their own risk policies, asset allocations, 3rd party fund selection and PMC’s due diligence. PMC is Envestnet’s in-house investments company.

He went on to list some of the investment strategy choices available to advisors: UMH, UMA, Advisor as portfolio manager; outsourcing to a third party or managing themselves.

Advisors can chose among hundreds of investment products and trade and custody across a broad range of providings, he said, including Fidelity, Schwab, TD Ameritrade, Pershing.

“This flexibility gives advisors choice to deliver the advice they believe is in the best interest of their clients—and to set those choices into a process that they mold and can scale across all their client.”

Yet Michael Stier, CEO of Adhesion Wealth Advisor Solutions, a Charlotte, N.C.-based North Carolina TAMP and outsourcer of RIA technology, says the new focus on fiduciary processes by Envestnet is more about a shift in message by the company than a shift in business model.

Great marketing angle

“It’s definitely a great marketing angle for them,”’ he says. “It’s probably not much different from what they’ve been doing in the past.”

Crager mentioned one new fiduciary aid to advisors: the company has launched Fiduciary Oversight Notes.

“These notes act as breadcrumbs for the advisor. Why did we choose this mutual fund over that ETF? Why did we use this strategist and not the one with better short term performance? Throughout the platform, these FONS (Fiduciary Oversight Notes) will proliferate to create a detailed trail of the decisions the advisor has made on behalf of their client. They can be tied together for a client as a composite report of the decisions that they’ve made and the value the advisor offers—a transparent road map of the advice offered.

“And with the SEC looking more deeply into a single standard for all advisors, a powerful archive of the interactions and decisions that will be readily available for review. “

Stier says that Envestnet’s efforts to up its fiduciary game appear to be targeted more at IBD reps than RIAs – especially considering that so many of them will need to change to survive under new regulatory demands.

“This is targeted at the broker space,” he says. “RIAs have been [carrying out a fiduciary process] all along.”

But Crager says that the new offering actually tilts toward RIAs.

“We do have a very large presence in the broker-dealer market, but most of the fiduciary work we’ve built will be delivered to RIA market initially,” he says. “The tracking enabled by the FONS is unique, and very much sought by the RIA market.”

Other findings from the Envestnet study include:

• More than four in 10 financial advisors polled by Envestnet
(including 63% of wirehouse brokers and 29% of registered investment advisors, or RIAs)
say that, to the best of their knowledge, all financial advisors are currently subject to the
same obligation to act in their clients’ overall best interests.

• About four in 10 investors
agree, but one third of investors say they are not sure. (In fact, only RIAs are currently
subject to the fiduciary standard to hold the client’s interest above its own in all matters;
brokers are generally subject to the less stringent transactional suitability standard.)

• Just 18% of advisors (12% of wirehouse brokers and 22% of RIAs) say they are “very familiar” with the debate on fiduciary
standards; nearly three quarters of investors say they are either not very familiar with the
discussion (50%) or not familiar at all (23%).

“Even as legislators at the national level debate whether all financial advisors should
follow a uniform professional standard, it’s clear that many financial professionals – and
certainly the great majority of investors – don’t know how to accurately define the scope
and nature of an advisor’s responsibility to clients,” Crager said.

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Mentioned in this article:

Tiburon Strategic Advisors
Consulting Firm
Top Executive: Charles Roame

Envestnet Inc
Top Executive: Jud Bergman

Stephen Winks

Stephen Winks

June 30, 2010 — 3:02 PM


Under regulatory reform recently reconciled in Congress, if a broker or advisor renders investment advice they are held to a fiduciary standard of care based on objective, non-negotiable fiduciary criteria of statute, case law, regulatory opinion letters. If firms can not support their brokers being held to the objective fiduciary standard of care, they are not advisors but salesmen whose clients, as buyers, must be aware that their best interests are not being served. This places non-compliant brokers and brokerage firms at a significant disadvantage. Top brokers with the most assets will not continue to pay 60% of their gross revenue for an inferior competitive market position.

Thus the brokerage industry will be pressed to develop (a) the prudent processes (asset/liability study, investment policy, portfolio construction and management) tied to statutory documentation necessary to assure fiduciary standing, (b) enabling technology that facilitates accountability, transparency and the continuous, comprehensive counsel necessary for fiduciary standing (the suitability standard entailed no ongoing responsibilities after a product sale), (c) practice/work flow management support entailing a functional division of labor (Advisor, CAO, CIO) that simplifies the execution of an extremely high level of counsel, (d) conflicts of interest management (not just disclosure), and (e) expert advisory services support for each of the ten major market segmements (Mass, Retail, HNW, Ultra HNW, DC, DB, Public Funds, Profit Sharing, Foundations and Endowmwents, Taft-Hartley) advisors serve.

Envestnet/PMC is not there yet but is working to help the independent broker/dealer which do not have the resources to execute, to support the fiduciary standing of their brokers. There is a much innovation required, but Envestnet/PMC has scale B/Ds do not and if successful, Envestnet can extend its services to RIAs.

Thus, Envestnet can play an important role in simplifing advice, streamlining advisory services around prudent processes and advanced technology which is the large scale institutionalized support for fiduciary standing that presently does not exist in the brokerage industry. Again Envestnet is not there yet, but they are closer than our major wirehouses because they do not have to manage commission brokerage cultural push back. However, Envestnet must negotiate with their B/D client base on the level of counsel those B/Ds will support essentially, over time transforming brokerage firms to advisory services support firms principally outsourced to PMC. If under resourced IBDs decide not to manage conflicts of interest there is nothing Envestnet can do but abide by the wishes of their IBD clients. Under resourced independent broker/dealers have no option, unless they try to replicate Envestnet which is not cost effective. In this process Envestnet’s value proposition enables the entire IBD market to literally act in the consumer’s best interest—a most welcome outcome.

Wirehouses have no such option and must reconcile their transition from caveat emptor brokerage support to advisory services support in the consumer’s best interest, which by necessity must be disruptive in nature in order to be effective.


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