Envestnet deal driven by commission-based IBD accounts

Combo with FolioDynamix platform creates $2 trillion tech enterprise

Sep 26, 2017 @ 2:27 pm

By Jeff Benjamin

Despite years of steady pressure to move the financial advice industry away from commissions, Envestnet's planned acquisition of competitor technology platform FolioDynamix shows support for more of the same.

Speaking to analysts Monday evening after the company announced the $195 million deal, Envestnet chairman and chief executive Jud Bergman repeatedly alluded to the strength of FolioDynamix' brokerage and commission-trading platform capabilities.

Citing the "brokerage and commission-trading and options capabilities" that FolioDynamix has developed, Mr. Bergman said those kinds of brokerage services will now be available to advisers working with Envestnet.

"There are certain things that the Folio platform does well," he added.

(More: Joel Bruckenstein discusses how technology will disrupt the status quo in financial advice)

The deal, which is expected to close early next year, will fold in FolioDynamix' more than 3.2 million accounts with about $800 billion in assets to create an operation overseeing nearly $2 trillion and roughly 10 million investor accounts.

Sean Mullen, national sales ambassador at AdvicePeriod, has worked at both Envestnet and FolioDynamix, and he views the deal as a major market-share move in the independent broker-dealer space, where Envestnet already has relationships with 45 of the top 50 IBDs.

At Envestnet, where the primary focus has been on fee-based accounts, Mr. Mullen said Envestnet has been limited to "pitching to the fee-based portion of IBD business."

The combination of the two technology platforms, he added, will give Envestnet access to a much larger portion of IBD accounts and assets.

This means IBD reps, as well as independent registered investment advisers, will now be able to utilize Envestnet for both their commission- and fee-based accounts.

"RIAs are constantly trying to plug vendors together and Envestnet now has the full suite," Mr. Mullen said. "They've sort of pieced it all together, and that means more wallet share."

(More: Envestnet's Jud Bergman on helping advisers across the digital divide)

Aaron Klein, chief executive of Riskalyze, defended the move to leverage the industry's stubbornly-present commission business, saying Envestnet isn't necessarily promoting commissions, it's just servicing commission-based accounts.

"There's a lot of clients for whom those commission-based accounts are still the right thing to do and they still need the technology to manage them," Mr. Klein said. "We believe that fee-based is the future, but what about the clients already in brokerage products? Is it the right thing for them to be switched to fee-based accounts now that they've already paid a commission? It's definitely not one-size-fits-all out there."

Mr. Mullen echoed those sentiments, as one of the likely drivers behind the deal.

"I think Jud realizes that commissions are not going away fast enough," he said.

Joel Bruckenstein, president of Technology Tools for Today, also saw the deal as a move by Envestnet to get a larger share of the IBD business.

"Clearly, Envestnet has strength in the space, and in some sense, they are buying a competitor," he said. "They may be buying some technology that they could develop themselves, but it could be that they would rather buy it than build it."

Envestnet currently serves more than 57,000 advisers, but only 6,000 of those are 100% fee-based, according to Mr. Bergman.

"We've been focused on the fee-based side, and that will continue to be the focus of the firm, however, over time, a number of enterprises, including brokerages, insurance companies and bank broker-dealer subsidiaries have asked for a broader solution," he said. "They want front end and client on-boarding, and they like to support trading and portfolio management under both fee-based and commission accounts. And we have not been able to support both sides."

The acquisition is the sixth significant deal by Envestnet since the company went public in 2010.

Mr. Bergman described it as "expanding our footprint, allowing us to further leverage our operating scale and data analytics capabilities as we continue to build the financial wellness network."

He also acknowledged that Envestnet had been watching FolioDynamix for a couple of years, waiting for the right opportunity, which apparently came along with the help of an eager seller in Actua Corp.

Actua, a private equity firm that paid $199 million for FolioDynamix in 2014, also announced the sale of two other majority ownership stakes on Monday for an aggregate $549 million in cash.

Mr. Mullen said the publicly-traded PE firm needed a liquidity event, and Envestnet was in a good position to make that happen.

"I thought the price Actua paid three years ago was too high," Mr. Mullen said. "Jud is a good deal maker."


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