Our US correspondent gets deep into the details of changes taking place at the firm that has been one of the most prominent organizations in North American wealth management. A difficult period is likely to cause big changes. We talk to industry experts about what the future could hold for Envestnet.

Envestnet is going to be a very different company next year.

Shareholders have approved a deal that will make the troubled back-office behemoth, still the industry’s largest turnkey asset management program (TAMP) and software service provider, a private company controlled by Bain Capital, the notoriously cold-blooded – and successful – private equity firm.

So what will Bain do?

The Boston-based firm has already begun looking for a new CEO and is widely expected to sell off some of Envestnet’s business units. To get a sense of how exactly Bain will restructure Envestnet, how the company is currently positioned and what lies ahead, Family Wealth Report surveyed a cross section of industry executives and consultants.

Who will be the next CEO?
Insider candidates include executive vice president Tom Sipp, co-CIO Dana D’Auria and Wealthtech group president Tony Leal. But it’s more likely, say industry insiders, that Bain will bring in an outsider to lead a turnaround. 

Obvious candidates include Eric Clarke, founding CEO of Orion Advisor Tech who retired last year and Clarke’s successor, Natalie Wolfsen, who was previously CEO of AssetMark, another major Envestnet competitor, and Eric Poirier, CEO of Addepar.

“Envestnet is well advised to think much wider in their CEO search than just classic TAMP executives,” said industry consultant Alois Pirker, CEO of Pirker Partners. “I could see a seasoned IBD network executive being a great hire, especially as Envestnet’s competition is increasingly firms like LPL or Cetera.”

Many believe that Bain will look outside the wealth management industry altogether.

"They likely need a strong leader from totally outside the industry,” said Brent Brodeski, CEO of Savant Wealth Management. “It should be someone with strong technology and leadership experience who also has worked with private equity and can transform the business in three to five years."

“What Envestnet needs is change, and it won’t come from within the industry,” agreed industry consultant Timothy Welsh, president of Nexus Strategy. “The board should look to an outsider, who has a strong history of turning around stagnant technology companies.”

“A CEO with experience reorganizing business units and with M&A will be quite helpful,” according to Jason Wenk, CEO of Altruist. “It's a different profile than a growth oriented CEO. This is more about optimizing the current assets than compounding them as they are.”

Which business lines will – or should – Bain sell?
Yodlee, the data aggregation business that Envestnet bought in 2015, has already been shopped around, and is the most likely to go.

Other units that aren’t part of Envestnet’s core asset and investment-based business, including Tamarac, the managed account platform, financial planning software MoneyGuidePro and billing software Redi2 Technologies, may also be considered expendable.

Expect Bain to subject Envestnet’s software products to a merciless review, said John O’Connell, CEO of The Oasis Group, a technology consulting firm. The new owner will then “make strategic decisions to sell the highest performing assets to capture their appreciation,” O’Connell said. “They will also sell or close their lowest performing products to reduce expenses.”

“Unless a lesser business line is the most desirable asset, it should likely be sold,” Wenk said. “Tamarac and MoneyGuide are excellent products, but I’m not certain of their growth and operating metrics.”

Bain may keep Tamarac, according to Mike Wunderli, managing director at ECHELON Partners: “Tamarac continues to be one of the industry’s top integrated technology solutions and an anchoring asset for the company.”

What is Envestnet’s greatest strength – and weakness?
“Envestnet's distribution network is their greatest strength,” said veteran tech guru Joel Bruckenstein, president of T3 Technology. “The lack of a unified tech stack is probably their biggest weakness. They have made some progress over the years, but there is still work to be done."

Envestnet’s ENV2 platform “has achieved industry utility status right now,” Pirker asserted. “They are the Microsoft of the investment platform space.”

The numbers are overwhelming, said Welsh. “Envestnet’s greatest strength by far is the number of advisors on the platform, around 110,000, which gives them the biggest distribution capability across the industry. But they also have a lack of focus, dispersed business lines and lack of integration.”

Envestnet’s asset based recurring revenue is its lodestar, according to O’Connell. “It is not clear if that revenue increased year-over-year due to market appreciation or net new sales. However, asset based revenue represents the majority of Envestnet’s revenue.”

The downside of Envestnet’s buying spree over the past decade was “a focus on size and not necessarily scale nor perfection of the offering,” said Mark Tibergien, the former CEO of Pershing Advisor Solutions who is now an industry consultant. “It appeared they had a challenge linking their disparate businesses into a compelling offer. That doesn’t make them bad – just overdiversified.”

Who is Envestnet competing against?
Envestnet may be an industry Goliath, but it’s being attacked by many Davids, in addition to traditional legacy rivals such as Orion, SEI and AssetMark.

Among the Davids: SmartX, GeoWealth, Axxcess, FusionIQ, Brookstone and other niche-based TAMPs with outsourced CIO capabilities. 

Also nipping at Envestnet’s heels: up and coming wealth management platforms AdvisorEngine, Summit Wealth Systems, and family office solutions such as PCS and Eaton.

While traditional TAMP players and RIA platforms may have been core competitors in the past, “today it is firms like LPL that can offer advisors a much broader platform, including brokerage services,” Pirker asserted. “They are redefining the ‘one-stop-shop’ proposition that TAMPs used to be known for.”

Is being a TAMP a good bet for the future?
“I think TAMPs will end up much like mutual funds,” Altruist’s Wenk maintained. “They clearly lost to ETFs but because the revenue was recurring and the assets tied to capital markets, they are still producing massive cash flow and that will continue for decades. Eventually, though, most mutual funds will become insignificant.

“For TAMPS, net flows will go direct to custodians, at both the RIA and independent broker/dealer levels. But the existing asset base at TAMPs is likely to still grow at some modest level for decades. If run well, they will continue to be cash flow generating machines. This isn't necessarily good for the industry, advisors, or consumers; but it's not a bad investment for a PE investor.”

“The TAMP space is changing fast,” Pirker agreed. “The direction of travel depends on the strategy of each firm. Some will play in the enterprise space serving mid-sized firms, others will turn into competitors of Dynasty Financial Partners, and others again will get bought and be used for launching outsourcing services to RIAs.”

TAMPs are shape shifting, Welsh asserted. “TAMPS are becoming cool again, just not the big behemoths like SEI, Asset Mark, and Envestnet,” he said. “Advisors want to have personalized portfolios at scale, and that can only come from nimble, digital players with outsourced CIO services.”

TAMPs won’t become obsolete, according to Wunderli. “Advisors will always have a need for outsourcing certain aspects of their business,” he explained. “The meaning of the word ‘TAMP’ has already evolved from simply being an investment solutions provider to being more of a full-service back- and middle-office provider for advisors.

“Bain will need to keep Envestnet out in front of this curve, focusing on its biggest current strengths and building out in the areas where they already have strategic advantages. I fully expect that Bain has some other tricks up its sleeve as well.”