Raising an eyebrow but no alarms, BlackRock again presses 'vertical integration' with RIA distribution, something GeoWealth seized upon in latest $18-million round

When BlackRock talks capital backing in “commercial" chats, TAMPs tend to listen, even when they don't need the money.

GeoWealth, a financial technology and turnkey asset management platform (TAMP), accepted BlackRock funding after a “commercial dialogue” led to equity negotiations and $18-million "growth round.”

“GeoWealth wasn’t formally raising an equity round, however, through the commercial dialogue with BlackRock, it made sense to align strategically,” says GeoWealth CEO Colin Falls, via email.

BlackRock's lead investment comes almost a month to the day after the two firms reported an agreement to sell GeoWealth RIA clients access to BlackRock investment models that bake in alternative investments.

BlackRock’s custom models business is its fastest growing segment, generating $31 billion in new assets over the past four years.

BlackRock has recently – and repeatedly – stated that the TAMP industry -- RIAs using TAMPs, in particular -- can help it turn-around flagging ETF inflows. See: BlackRock invokes Envestnet's fresh promise in pushing iShares by model portfolios.

For BlackRock, seating itself at the TAMP table accomplishes its primary sales objective, says Greg O'Gara, lead analyst for wealth management at Javellin Strategy & Research. See: GeoWealth raises $19 Million to out-tech Orion, SEI, AssetMark and Envestnet.

“It's about reach, product distribution and increased assets under management (AUM),” he explains, via email.

Leveraging capabilities

BlackRock declined to respond to a request for comment, but the company recently made a statement about how it sees its alliance with TAMPs.

“Our partnership with Envestnet is one channel powering flows to model portfolios,” said BlackRock chief financial officer, Martin Small, in the firm's April 12 earnings call. See: Small draws BlackRock bead on Envestnet SMAs.

BlackRock likely sees its investment in GeoWealth in a similar light – even if the $5 trillion Envestnet administers on behalf of 105,000 advisors dwarfs the $30 billion the start-up manages on behalf of 2,000, according to O'Gara.

"Large firms like Blackrock benefit from TAMP investment and acquisition [through] asset acquisition, increased distribution, and application of their own proprietary technology," he explains.

“Blackrock is [also] uniquely positioned to leverage the capabilities of Aperio and Aladdin [software] for TAMPs that are pressured to upgrade their technology, integrate data, deliver greater platform flexibility … and, of course, a larger, more diversified product shelf,” O'Gara adds.

Despite all that technology collaboration, “GeoWealth is not concerned about its intellectual property being improperly shared,” says a company's spokeswoman, via email.

Vertically integrated

The presence of an alpha fund manager like BlackRock in the TAMP mix means an advisor needs to stay on its toes, but “ultimately” such a vertical partnership does not “tarnish” turnkey asset management providers, says Alan Moore, CEO of XY Planning Network.

“The amount of revenue being generated today from the fund companies for the shelf space they already get is astonishing, but it's up to the advisor to navigate that issue for their clients,” he added. 

“An investment into GeoWealth by BlackRock makes a lot of sense, especially if your goal is to become more vertically integrated and to capture more of the economics of the entire life-cycle of your products. 

“I don't see this as tarnishing a category, as GeoWealth is an investment platform that advisors can opt into using,” said Moore. 

Skirting conflicts

Tim Welsh, president of Nexus Strategy in Larkspur, Calif., offers a similar assessment.

"This is a fairly common arrangement to economically capture more of the investment value chain, such as Schwab investing in Dynasty, independent broker-dealers owning RIAs, grocery stores putting their house brands on shelves, etc.

"As long as the underlying distribution platform is open architecture, and there are no self-dealing discounts or incentivized advisor payouts to favor proprietary products, then it all works swimmingly. 

RIAs by definition are fiduciaries, and they are paid by the client, not the product, so those conflicts can be minimized, if not eliminated.

“The only challenges occur with manufacturers owning distribution is when advisors are employees, such as in the wirehouse model, where they are technically not fiduciaries, creating significant conflicts of interest for the sponsoring platform to incent advisors to sell the house-brand.  

"But of course, as long as those investments are ‘suitable’ they can get away with it via disclosure,” he said. 

Compromising morality

As long as RIAs don't get lazy and accept “deals with the devil,” morality will prevail – even with product manufacturer capital in the mix at the distribution level, says Mark Tibergien, former CEO of Pershing Advisor Solutions.

“Money has a way of compromising morality even when we think we are operating at a higher level.

“The ultimate deal with the devil in these cases depends on whether advisors themselves compromise price, value and access in return for some gain," he adds. 

"Considering that all advisors – especially those of the independent kind – have multiple choices from which to pick, I don’t know that these transactions will compromise their fiduciary role. The pressure custodians and b/ds are experiencing with proprietary cash sweeps is a good example of how a heavy hand creates blow-back.”

$18 million hole

Now, with an extra $18 million burning a hole in its pocket, GeoWealth intends to spend heavily on upgrading its software.

“The raise will be allocated toward product enhancements, particularly around the development of UMA capabilities and functionalities that support alternative investments reporting and tax management," a company spokeswoman explains. 

"The funding will also be used to supply dry powder for future growth opportunities,” she adds.

Such opportunities will likely include M&A, given GeoWealth is no stranger to inorganic growth, acquiring Scott MacKillop's flat-fee TAMP, First Ascent Asset Management in early 2023. See: Scott MacKillop got his flat-fee startup to $1.4 billion in eight years, then sold it.

Short-term focus

Tibergien says all is well enough, technically, but that RIAs should keep one eye on the macro-forces exerted by big third-party capital into mission-driven firms that serve fiduciaries.

“Of course, private equity or major corporate acquisitions run the risk of fundamentally challenging the moral compass of leaders driven by a different mission. 

Once one introduces passive investors into an actively managed business, there will be a more intense focus on growth and earnings in the short-term.  

“This is one reason when looking for partners, vendors or platforms it’s important to understand their whole story and what drives them,” he says. 

Doubling market

Both GeoWealth and BlackRock also expect the market for the model portfolios they sell, both separately – 700 models on behalf of 70 asset managers in GeoWealth’s case – and together, to boom.

Cerulli Associates in Boston reports that the value of assets managed through SMAs and UMAs grew 7.9% and 8.1%, respectively, in the first quarter of the year, reaching a combined $12.3 trillion.

BlackRock expects the model portfolio submarket will more than double, from $4 trillion to $10 trillion, by 2029.

“Anecdotally … virtually every RIA is using models at this point, although many still manage them internally. GeoWealth works with many RIAs that do exactly that, essentially making their proprietary models turnkey,” the company spokeswoman says. 

Growing … Growing … Growing

Founded in 2010, GeoWealth has also successfully tapped a rich vein of growth in recent years.

In 2018, it managed just $4 billion of assets on behalf of its clients. By Jan. 2022, the figure quadrupled to $16.7 billion. Today, GeoWealth manages $30 billion, up from $21 billion in April 2023.

The number of advisors using GeoWealth – both to manage assets and for its software – has shot-up, too, from 1,000 in late 2021, to over 2,000 today, according to the  company. 

Its RIA count has also recently topped 200, according to the firm, which declined to provide an exact count.

*In another major TAMP deal, Bain Capital bought out Envestnet in July with participation from BlackRock and Fidelity. See: Envestnet lands $4.5-billion deal to go private.

*Already Envestnet's largest minority shareholder prior to its sale. BlackRock first took a minority stake in Envestnet in November, 2018, purchasing 4.9% of the firm for $122.8 million. See: BlackRock buys Envestnet's love.

* GeoWealth has also raised through an ‘A’ round, though it declines to reveal how much. It also declined to reveal its valuation, following its latest raise.

* Kayne Anderson Growth Capital, which led GeoWealth’s $19 million 2021 Series B raise also re-upped its investment in GeoWealth's latest raise, as did JP Morgan Asset Management, which has taken part in three separate raises for the firm.