Last month Envestnet announced the purchase of MoneyGuide for half a billion dollars. A few days later, Apple announced the launch of Apple TV Plus. These two seemingly unrelated events show how established businesses are evolving in this new economy.
When Envestnet acquired Yodlee in August 2015, the market reacted by pummeling Envestnet's stock. The consensus at the time was that Envestnet's core business had peaked. Analysts hesitated to support the shift in strategy. Conventional wisdom among analysts and investors holds that big, transformative acquisitions rarely pan out.
A year ago, Apple announced that it would no longer break out unit sales for its products and would focus more on revenue streams by business area, specifically highlighting its growing service revenues. The stock was subsequently punished as analysts surmised that Apple wanted to hide the fact that it had passed peak phone sales and the company's historic growth period was behind it.
Over the past few weeks, both companies appear to have converted their doubters and are being rewarded with stocks surging toward new highs. Envestnet announced its mega purchase of MoneyGuidePro, and this time around its stock price climbed. Concurrently, Apple shareholders reaped the rewards of the much-anticipated release of the revamped Apple TV.
These two companies couldn't be more different, but they share an interesting strategy evolution that we can all learn from.
All hail the business pivot
Apple rightly recognized years ago that it would reach a saturation point at which most consumers already had smart phones sophisticated enough to slow the need for constant upgrades. The company needed to evolve its business to provide services and content for all the users to whom it had sold hardware. It had to pivot its business model.
Envestnet had a similar challenge a few years ago. It was stuck in the low-margin, unglamorous world of investment operations and trading software. It needed to expand the market and find higher-margin sources of revenue. I have known Jud Bergman, Envestnet's CEO, for a long time, and we have been a client of his since our founding. He is a worldly and humble renaissance man, but he is also a brilliant visionary. His 2015 purchase of Yodlee followed the acquisition of Upside and FinanceLogix earlier that year — actions telling the market that he had a plan to move Envestnet beyond being an investment operations firm. His plan: Make Envestnet the essential repository and fintech bundle for investment and wealth management firms. This time around, even though the purchase price for MoneyGuide was lofty, the market applauded the expansion of his platform.
Drivers of value in the new economy
Both Apple and Envestnet have shifted their business strategy in a direction that leads them closer to the business models of Amazon and Salesforce. There are lessons for every entrepreneur on what drives business value in the new world.
• Become an indispensable provider. The first rule for all these businesses is to become the de facto standard platform for their segment. To do that, they need to have the scale and reach and breadth of services that allow them to be deeply intertwined with their clients. Once a client of Salesforce, Apple or Amazon is in their ecosystem, leaving comes with very high switching costs and very few viable alternatives. By making its platform so diverse, Envestnet is making itself indispensable to its clients' businesses.
• Expand the pipe. Once these new platform companies have distribution and users in place, they capture more wallet share by offering expanded services at higher margin. Salesforce has all kinds of add-ons, as do Amazon and Apple. That is increasingly true of Envestnet, too.
• Own the data. Once clients are on a platform, the vendor has access to all their data, informing it of every client's buying patterns and decisions. This gives the platform providers the information they need to expand services even further and serve their clients better than any competitor. Data is the new gold of business.
What you can take from this
Any wealth management firm should think about this model for its own business. How do you build a firm that is indispensable to your clients? How do you ensure you are a part of your clients' everyday lives in a repeatable and scalable way so you can grow your reach? How do you offer services that make you even more intertwined in your clients' lives and capture data that helps you to serve them in a better way?
These are weighty questions, but every visionary firm in wealth management should be asking them. Even the smallest of firms can take steps to expand their service, become more intertwined in their clients' entire financial life, and capture and maintain manageable data to understand their clients better. These successful public companies are laying the blueprint for how to build a really valuable service business in today's economy.
Congratulations to Jud and his team at Envestnet for pivoting the business in a direction that helps them compete and grow well into the future. Let's hope the advisers they serve follow their example!