Envestnet developing fractional shares for advisers: CEO

Envestnet is working to introduce fractional shares, which allow investors to buy and sell fractions of equities, CEO Bill Crager said during the firm’s earnings call on Thursday.

After posting a 5% increase in revenue during the second quarter — due in large part to double-digit percentage growth in advisers' use of Envestnet’s direct-indexing solution — the turnkey asset management platform is eyeing ways to ramp up adviser usage even further, Crager said.

“The trick will be how do we bring those solutions more down-market so that more investors can take advantage of it — which would include fractional shares and other capabilities that we're working to introduce over time,” he said.

Celent wealth management analyst Neil Sheehan said it's not surprising to see Envestnet offer fractions of shares.

"I see it more as a strategical step toward supporting direct indexing than adviser requests to have the option to buy $100 of Amazon," he said. "Direct indexing has received a lot of hype. It seems Envestnet is pouring the foundation to ensure it can support it, regardless of how and where it will be successful."

During the earnings call, one analyst questioned why direct-indexing solutions are less attractive to smaller investors. According to Crager, “it's harder to execute and provide the diversification that we'd want as you get too far down-market,” he said during the call. “But for a typical $150,000 portfolio that we can achieve, it’s far more effective as we continue to develop things like fractional shares.”

An Envestnet spokesperson declined to comment beyond what was said on the call.

Fractional shares allow investors to purchase stocks based on the dollar amount they want to invest, so they may end up with a fraction of a share, a whole share, or more than one share.

The move would be a first by the industry’s largest TAMP, following Charles Schwab Corp., which began offering stock “slices” to its customers in June. For Schwab, fractional shares further expand access to investing, especially for younger people. Investors could diversify portfolios with pieces of expensive stocks like Amazon or Berkshire Hathaway that they otherwise couldn’t afford.

Companies like M1 Finance and Social Finance already offer fractional shares on their platforms. Custody and clearing firms like Apex Clearing and Folio Institutional also support fractional shares for human and digital financial advisers, and robo-advisers use fractional shares to offer portfolios with small minimums.

While not the first to offer fractions of shares, Envestnet would provide the capability to more than 100,000 advisers on its platform.

For advisers, fractional shares open up the next generation of investors and can help advisers expand their books of business, said Greg O'Gara, Aite Group’s head wealth management analyst.

“If they were to make their platforms more friendly to fractional share investing, it would help RIAs cater to a mass affluent book of business," he said. "That being said, most RIAs are gunning for investors with higher net worths.”

Still, if Envestnet were to acquire custody and clearing capabilities, it would be competing directly with the likes of LPL Financial, O'Gara said.

"Given Envestnet's track record with innovation, they’d become an extremely formidable competitor in the wealth management industry," he said.