Sorry, you need to enable JavaScript to visit this website.
Skip to main content

Envestnet shares spike, but fundamentals reassure Wall Street, rather than big future annuity profits, gaining 2,300 Schwab RIAs on the cheap and diminished Yodlee pain

LISA SHIDLER
February 27, 2019

RIABiz

Envestnet shares spike, but fundamentals reassure Wall Street, rather than big future annuity profits, gaining 2,300 Schwab RIAs on the cheap and diminished Yodlee pain

Replicating SMA success on insurance side and tripling Tamarac customers is exciting but analysts may be more attuned to earnings growth and billions in 'conversions' to subscriptions

Brooke's Note: It just so happens that Fidelity Investments published a big new study today that endorses the idea of RIAs using outsourcers. As part of the study, a survey found that 43% of RIAs, IBD reps etc. agreed that outsourcing is essential to achieving scale in firm or practice growth.  “We believe the future’s most successful financial advisors won’t allocate their time and  energy the same way they do today,” said Todd Roadman, senior vice president for Fidelity  Clearing & Custody Solutions. My frustration with the study is that it's hard to measure the significance of the 43%-endorsed-outsourcing figure because this study has never been done before. The study's mere existence says something, however, considering that Fidelity isn't really an outsourcer itself -- with an exception like eMoney. A better indicator of the strength of outsourcing might be the success of the largest RIA outsourcer -- Envestnet. We got a much clearer picture on Friday after its stock soared. Outsiders see emerging fresh green shoots... and profits.

Envestnet (ENV) shares are spiking, yet recent jaw-dropping announcements about a Schwab deal and new annuity platform may have less to do with reassuring Wall Street analysts than more mundane news about cash flow and "conversions."

The Chicago outsourcer's shares -- now almost 700% higher than its $9 IPO price in 2010-- rocketed to $61.88 at Friday's close, up 11% from Thursday. Shares fell off Monday to close at $60.68, but regained some lost ground today (Feb. 26) to close at $60.91, despite a down market. 

Shares are up more than 30% from its 52-week low of $46.57. The stock's 52-week high is $64.80.

Envestnet CEO and chairman Jud Bergman set an optimistic tone about greener pastures during the company's earnings call Friday (Feb. 22).

He dazzled RIAs with the Schwab news and his vast IBD rep constituency with Envestnet's play on annuities. The move should facilitate the notoriously difficult sales process. See: BlackRock is going big into the annuity business with Microsoft to create a 21st century defined benefit pension system

Schwab Advisor Services also announced the sale of PortfolioCenter to Envestnet on Friday. See: Schwab Advisor Services tosses its PortfolioCenter platform to Envestnet, in what amounts to a 'defensive' deal for both, insiders say 

With two jaw-dropping announcements, Envestnet is set to become a profitable annuities platform and will absorb all of the 2,300 RIAs who use Schwab's PortfolioCenter.

 

Strong buy vs. sell

On the quarterly earnings call, Bergman reported that Envestnet's adjusted earnings per share grew 53% over the prior year's fourth quarter ended Dec. 31. Revenue was up 19%, according to the company.

Envestnet ended the quarter with more than $2.7 trillion in more than 10.8 million investor accounts. More than 96,000 advisors are using Envestnet's  wealth management technology -- an amount that surpasses the combined number of brokers at the four major wirehouses.

Bergman is also rosy about his firm’s expectations for this year. 

"We are on track to deliver the expected contributions in both earnings and revenue in 2019 and beyond. Much has been accomplished already as we begin 2019. We began the year with an alignment of our organization into two business units down from four to better position the company to fulfill our vision for financial wellness,” he said. 

Ironically, Schwab rates Envestnet shares a "D," on an A-to-F scale with a "sell" recommendation on the stock. Schwab cuts Envestnet no slack and bases its recommendation on a series of "negatives," including quality of profits and analyst perception. 

But six of seven analysts following the stock call it a "strong buy." One analyst recommends "hold."

A big part of 2018 was converting clients from FolioDynamix's platform to Envestnet. FolioDynamix has been part of the firm for a year now. 

Bergman explained that his firm made more than $23 billion in asset-based conversions and onboarded an additional $72 billion in subscription-based conversions bringing total conversions for the fourth quarter to $95 billion. 

 

Acquisitions boost

"Investor demand and optimism for the company's future financial results,” could also be getting a boost from the potential of recent acquisitions, says Bill Winterberg, of FPad, who also provides consulting and marketing services to Envestnet and Tamarac. 

“Envestnet's recent acquisition spree, including Abe.AI, FolioDynamix, and PortfolioCenter from Schwab Performance Technologies, builds on the company's existing platforms of Tamarac for independent financial advisers and Yodlee for institutions and financial technology startups that have well-established client bases,” he says. See: Envestnet-Tamarac wins four more RIAs with an average of $5 billion of AUM by selling a vision

The insurance exchange the company formed one year ago also has promise, says Winterberg.

Bergman shared that view on the earnings call.  "Today we have six leading insurance carriers under contract. They will be offering annuities and other insurance products through the exchange to Envestnet's adviser base as part of the proposal process,” he said. 

"The insurance exchange, as I understand, facilitates product screening and selection, so advisers no longer need to spend time at each individual carrier's or underwriter's website aggregating product terms, fees, and features. I can see how integrating all this traditionally disparate data into one exchange can help advisers and agents save time and identify appropriate products in a quick and efficient manner."

Yet one competitive annuity platform provider doubts Envestnet’s ability to make headway long-term with annuities -- at least among skeptical RIAs.

"RIAs have to be convinced of the value of the products before the technology matters. Right now, if you’re trying to sell an RIA your technology because it supports annuities, it’s like trying to sell them sushi when they’re allergic to fish — you’ve got to address the allergy first,” says David Lau, founder and CEO of DPL Financial Partners.

Nationwide announced today (Feb. 27)  that it'll join the exchange and says: Nationwide’s collaboration with Envestnet can make annuities and insurance more accessible for advisors who don’t specialize in selling them. Kirt Walker, president and COO of Nationwide Financial, adds: “It’s a tremendous engine for growth going forward.” See: Nationwide buys Jefferson National under purported DOL duress but 'good private equity' and good planning may rule the day

Envestnet’s decision to create the exchange is similar to LPL’s move a decade ago with four to five carriers funding a fee-based annuity platform for its advisors, Lau adds. It wasn’t a success because LPL’s brokers didn’t adopt fee-based products, and Lau says Envestnet is confronted with the same market hurdles. 

But Bergman boasted that the insurance exchange had hit the ground running.  “We expect the insurance exchange will be a solid contributor to our growth in subscription based revenue in 2019,” he said.

 

Faint praise

Yodlee is another potential green pasture for Envestnet. The evolving TAMP, a $600-million purchase, has struggled to break even since it acquisition.

But Envestnet had two bits of good news about Yodlee -- a reminder that the CEO's position was streamlined away, and the company is keeping market share amid headline-grabbing start-ups with modern approaches to technology. See: Jud Bergman remakes Envestnet into two units and Bill Crager and Stuart DePina will head them as Anil Arora exits

Jefferies equity research analyst Surinder Thind brought up Plaid's purchase of Quovo during the earnings call. See: Plaid, valued at $2.65 billion, makes $200-million snack of Quovo -- albeit defensively -- and creates Yodlee super-foe

“Is there a risk to Yodlee living up to its expectations outside of the Envestnet umbrella? And, how [does] that kind of shake up the big picture where you guys are headed down the road?” he questioned. See: Envestnet buys Yodlee and its treasure trove of 'permissioned' data by selling its vision of the future of financial advice

Bergman replied discussing the fintech appetite in the market. But his comment on Yodlee wouldn’t have been perceived as bullish. 

“...We believe that as the market leader we're going to continue to hold our own,” he said. 

The company has also expanded its footprint creating Envestnet Vision, its enterprise data management solution. Dallas-based 1st Global has begun using Envestnet Vision for its client centric portal. 

"The foundation for our delivering on this vision is our industry-leading capability and data aggregation and reporting and our market-leading wealth management operating system which supports firms and advisers ability to implement the elements of financial wellness," Bergman said.

 

Personnel moves

Bill Crager will now lead the firm’s newly created wealth solution business, which includes its enterprise deals as well as Tamarac and its retirement division.

Tamarac provides portfolio management reporting to more than 1,000 RIAs. Stuart DePina, who previously was Tamarac  president, is now leading the data and analytics business, which include Yodlee as well as Envestnet Analytics. 

Bergman also made mention of the departure of Anil Arora, who joined Yodlee in 2000, and was credited for helping to build the company from a startup to one of the largest names in financial account aggregation. Envestnet announced earlier this year that Arora is stepping down at the end of February. 

“I want to thank Anil for his many contributions and for building Yodlee into the leading data aggregation and analytics platform in FinTech.”