Is Envestnet’s market dominance also its weakness?
Is Envestnet’s greatest strength also its greatest weakness?
At first glance, the market dominance of the 19-year-old company, as it kicks off its annual conference in New Orleans, appears unassailable.
At well over $400 billion, Envestnet has more than six times the assets of its nearest competitor in its core asset management platform business. Tamarac, the firm’s rebalancing, reporting and practice management software powerhouse, has seen revenue grow approximately eightfold since Envestnet bought the company six years ago.
The always-opportunistic Envestnet insured itself a pole position in data aggregation and analytics by acquiring the innovative Silicon Valley firm Yodlee three years ago. Competitors have followed suit — IBM's purchase of the fintech firm Armanta earlier this month was aimed at bolstering Watson's data aggregation and analytics abiltiies to predict risk.
It is now leading an effort that includes fellow aggregators Quovo and Morningstar's ByAllAccounts to create a data-sharing framework that banks can agree on.
And late last year, Evestnet struck again, grabbing a huge chunk of the high-end wealth management platform market by buying FolioDynamix, giving it around $2 trillion in assets and 10 million accounts.
As a result, said analyst Douglas Fritz, head of the industry consultancy F2 Strategy, “Envestnet is nearly the only game in town.”
Envestnet sees the integration of all its disparate parts — research, portfolio management, data, platforms, rebalancing, reporting and outsourcing — as its greatest strength.
“Enabling a very connected advice process [through integration] is our core business,” said Envestnet president Bill Crager. “No one else has attained our scope. We’re a little bit unique in the marketplace — being able to put all the pieces together is what differentiates us.”
That positioning, however, is exactly where others sense opportunity.
David Benskin, CEO of the wealth management platform Wealth Access, said his phone began ringing soon after Envestnet bought a competitor, FolioDynamix.
“Advisers are definitely gravitating toward open architecture and independent software, so the more the big players merge with each other, the more opportunity there is for us to gain share at their closed architecture, big company expense,” he told Financial Planning last fall.
Market observers agree.
“The reality is that more nimble, entrepreneurial and focused competitors are going to start taking market share,” says consultant Douglas Fritz.
Envestnet’s gigantic size is also its greatest vulnerability, said Fritz.
“When you become the primary vendor in the marketplace, it becomes excruciatingly hard to satisfy everyone,” Fritz said. “The reality is that more nimble, entrepreneurial and focused competitors are going to start taking market share.”
As veteran technology analyst Joel Bruckenstein puts it, Envestnet’s “breadth of offerings” may be its greatest strength, but “keeping up with the rapid pace of change in the industry” is its greatest challenge.
According to one former Envestnet executive, the company faces a classic predicament: How does a legacy firm stay a step ahead of new, state-of-the-art competitors?
“Their strategy is end-to-end aggregation,” the executive said. “But what happens if there is disaggregation and people don’t want to commit to one company end-to-end?”
Envestnet’s response? Bigger is better.
The company’s fintech competitors may have “bits and pieces” of leading technology, but in fact they “want to look like us,” Crager said.
While there are “really great solutions in the marketplace, none is as integrated as Envestnet,” Crager said. “The challenge everybody faces is how does everything work together? The level of integration is the real value for the adviser.”
But one drawback of such a comprehensive offering, said technology consultant Bill Winterberg, founder of FPPad.com, “is that it can come with a steep learning curve. So Envestnet will always need to place an emphasis on customer support, training and comprehensive onboarding resources to increase the utilization and adoption off all it has to offer.”
As for the small disruptors, Daniel Hamer, Envestnet's vice president for product engagement, said claims that they are “smaller, more nimble and faster than big Envestnet is really the only pitch they have right now, which I think is a dangerous pitch for them.”
In fact, Hamer said, Envestnet’s ability to develop new features “is far outpacing our client growth.” What’s more, he said, “by coming to a big firm like us, you’re getting the wisdom of the crowd, and we’ve got the biggest crowd right now.”
Envestnet’s director of product strategy, Blake Wood, made another case for size and scale: Envestnet is here to stay, but its entrepreneurial competitors may not be.
“There is some counterparty risk" with smaller firms, Wood said. “I hope our users find some comfort in the fact that we’re publicly traded. We’re not going anywhere.”
A number of Envestnet’s smaller competitors, he said, will eventually be acquired. “Margins for fintech companies, especially in our little area of the world, are razor thin. It’s hard to sustain something.”