Envestnet turns its guns on the 401(k) business

Brooke’s Note: Envestnet became a $1.7-billion market-cap public company because it saw a fiduciary gap and filled it with a straightforward solution. That gap was a world of IBD reps that wanted to go fee-only but needed a way to do it without the complications of forming their own RIA and leaving their broker-dealers. It also needed to tap into a world of investment managers that covered them for “open architecture.” Envestnet was able to create a great big central repository of separate account managers for these IBD reps and, in a sense, they became instant fiduciaries by availing themselves of Envestnet. Now it appears that Envestnet is going to use a very similar blueprint for assisting financial advisors in jumping into the 401(k) business — or simply doing defined contribution business in a simpler way. But, of course, second acts are always easier said than done. Right now, two 401(k) “TAMPs” are Loring Ward and Buckingham Asset Management.

Envestnet is jumping into the 401(k) business.

The Chicago-based TAMP is entering the $5-trillion realm with a startup RIA called Envestnet Retirement Solutions, and HighTower Advisors LLC is an early signer.

ERS was formed in February and is 57% owned by Envestnet Inc. and it will sell a bundle of software, research, due diligence, data aggregation and compliance tools on one platform. The firm’s tools can personalize information for an advisor so that it can get pertinent information from plan participants to employers and for advisors to pass on information to home offices and recordkeepers.

In November, Alerus Retirement Solutions signed on with ERS, which is based in Chicago and has about 23 accounts and, as of October 2012, $265 million in assets, according to the company’s most recent ADV. Gib Watson III, vice chairman at Envestnet, says the ERS’s administered assets are now at about $400 million.

Envestnet has been successful creating back-office products for RIAs and its president, Bill Crager, announced more than a year ago that his firm has its sights set on the 401(k) assets. See: How Envestnet is taking its stranglehold on money-managers-to-IBD reps distribution to a much wider channel base of financial advisors.

Envestnet pays a portion of ERS’s operating expenses. See: HighTower shifts into high gear with a three-team, $1.2 billion AUM in-three-weeks spree.

Repurposed TAMP

Envestnet is largely repurposing its standard turnkey asset management program for the ERS platform. For instance, the technology from the standard offering will go into the retirement platform helping to synchronize data of an advisor with plan participants and sponsors.

Chip Roame­, managing partner of Tiburon Strategic Advisors, describes the blueprint that Envestnet is attempting to apply to a second but similar set of circumstances to its standard offerings of non-retirement assets.

“In my mind, technology is the key to many of these business transformations,” he says. “Regulations pushed FAs towards managed accounts instead of commissions and Envestnet [addressed it] with technology. Regulations are now opening the 401(k) business up to financial advisors. Envestnet will [again address it] with technology.”

“The observation is there are certain challenges in the retirement industry for advisors in making it a scalable business. A lot of these challenges revolve around fragmented data,” says Watson.

Startup retirement platform

Envestnet Retirement Solutions acquired Klein Decisions Inc., wrapping up that deal July 15 in an attempt to bolster the Chicago-outsourcer’s platform with participant advice as well as fund research, compliance assistance and practice management tools. Envestnet owns 57% of ERS.

“It’s basically a startup wealth management platform for retirement,” says Mike Alfred, co-founder of BrightScope Inc.. “It will be interesting to see if Envestnet’s expertise can easily translate to the retirement market. All client wins are good wins at this point and while HighTower does not have a significant presence in retirement today, it has clear ambitions and significant cache in the financial services industry.”

In sync

Chip Roame: Regulations pushed FAs towards
managed accounts instead of commissions and
Envestnet [addressed it] with technology.

Retirement advisors typically juggle a few dozen recordkeepers and numerous filing deadlines for regulators. Envestnet is pulling the aggregated data from 40 bundled recordkeepers and 150 independent recordkeepers in an effort to sync all of that data for advisors.

The tool includes a CRM and updates forms and information from the Department of Labor. It will keep tabs on investment reporting policies as well as provide quarterly performance reports, but it will also ensure the advisor and the plan comply with regulatory documents such as form 408(b)2 and form 5500.

ISO retirement platform

HighTower is demonstrating its determination to become a major player in the retirement arena by joining forces with ERS, says Matthias Kuhlmey, partner and head of global investment solutions at the New York-based firm. See: HighTower wins its first-ever existing RIA after offering the breakaway a new way to do business — and a chat with David Pottruck.

“This tool is not for advisors who are dabbling in retirement. This is a very serious complex platform. This makes it very clear that we’re committed to the retirement space and it’s one of the fastest growing areas,” he says.

HighTower has been looking for this type of platform since 2012, Kuhlmey says. In that time, it’s bulked up its 401(k) arm, particularly by bringing over Jania Stout in August. Her Baltimore-based HighTower Fiduciary Plan Advisors manages $1.2. billion in assets and works with 30 mid-sized 401(k) plans. See: HighTower adds two battle-hardened T. Rowe generals to the 401(k) field.

Stout’s practice uses more than a dozen recordkeepers and she says that the ERS system will provide direct feeds of data from the recordkeepers to her system.

“This helps us from an efficiency standpoint and accuracy standpoint,” she writes in an e-mail. “ERS provides us to build our entire service model into the software and helps us stay proactive to key dates and deliverables.”

Compliance dates flagged

Jania Stout: Investment monitoring is also
in the ERS system but there
is so much more on this
platform that I get excited about.

Stout is particularly excited about the customization options that come with ERS. In the past, she had to build custom fields into the CRM to alert advisors when important dates are approaching for clients. ERS has already built this into the system.

“For instance, let’s say a client has been thinking about going to a safe harbor plan design. You can only do this at the beginning of a plan year. We need to make sure that we make final decisions about this in the third quarter. This would be built into the ERS system to prompt discussion. This way we would not have to rely on a spreadsheet or previous notes and we wouldn’t miss key dates,” Stout says.

ERS will also help with required notices for plan sponsors — an enormous burden for them and their advisors.

“As plan advisor specialists we do more than investment reviews these days. We assist our clients by becoming an extension of their team. We double check or assist our clients by making sure they are in compliance. Having these key dates built into a system ensures we are being proactive and key dates aren’t missed.” See: How much should RIAs shake in their boots after the SEC punished three firms then put out a detailed press release?.

Stout adds that she can take the analysis from ERS and run reports about her group’s consultants. “I can view the workload of each of our consultants and see that important compliance deadlines are being addressed. If the box is not checked as completed. I can view this in a quick snapshot. I could step in and inquire about workload and if a consultant needs help. Overall it helps us manage the complex world of compliance that our clients rely heavily on us for. Investment monitoring is also in the ERS system but there is so much more on this platform that I get excited about.”

Fiduciary aid and managed portfolios

ERS eases the taking on of greater fiduciary responsibility more than the conventional TAMP platform. In fact, ERS can serve as a fiduciary for companies who don’t want to be fiduciaries to plan sponsors.

For instance, the firm can act as a 3(38) program as an investment managers at a cost of 6 basis points per quarter up to $50 million and a non-discretionary 3(21) program of 6 basis points up to $50 million on plan assets, according to the ADV filed with the SEC. See: The great 401(k)-or-not debate: RIABiz webinar lays out the perils and rewards for RIAs thinking of wading into the fast-moving 401(k) stream.

Mike Alfred: HighTower does not have
a significant presence in retirement today,
it has clear ambitions and significant
cache in the financial services industry.

ERS offers more specialized managed portfolios at a cost of 15 basis points each quarter up to $25 million. The cost goes down to 12 basis points for assets of more than $25 million.

There also appear to be some target-date-like funds, which ERS calls qualified individual life target solutions, at a cost of 20 basis points for assets ranging from $25 million to $100 million.

In addition, ERS offers personalized individual managed accounts at a cost of 40 basis points.

Although it sounds like Envestnet is going to be duplicating some of what Financial Engines provides to the market in terms of managed accounts, Watson says one key difference is his firm will cater to the small-end. Financial Engines has always focused on the Fortune 500 companies. See: Financial Engines more than doubles its share price by defining a niche in the 401(k) market between target date funds and RIAs.

Choice of recordkeepers

HighTower executives realized that they needed an aggressive tool to stay on track with the various regulations changes from the Department of Labor, Kuhlmey says.

“The regulations changed in 2012 and looked at fee disclosures and this is reflective of a higher level of fiduciary standard and we’re all about open architecture and we’re fiduciary minded in everything we do. This platform — ERS — combines the aspirations that we have.”

HighTower’s advisors still have choice of recordkeepers. he says that the new platform makes systems more seamless for advisors.

“We formed this relationship with ERS after careful consideration and we took a very hard look at the marketplace,” Kuhlmey says. “We’re ready and we’ve found the right provider that suits us. ERS solves for many things. It’s a visually attractive front-end system that caters to advisors. But it let’s us see what is going on in all of the retirement accounts. and we can be absolutely certain at any given time that we’re in compliance with the changes that came out of the legislation. But it’s not just compliance.”