Until a decade ago, technology for the independent RIA sector was primarily a cottage industry. While there were a few notable exceptions, Advent and Morningstar are two that come to mind, much of the technology supplied to independents came from small firms. In the early 2000s, firms that are well-known today, such as eMoney, MoneyGuidePro, Redtail and Orion, were still essentially start-ups. Few firms had scale.

Before the Great Recession of 2007-2009, there was little interest from outside the industry in financial technology. There were few firms outside the industry interested in developing technology for advisors, and there was little interest from outsiders in financing FinTech firms.

As a result, technology change within the industry was a slow, evolutionary process. Firms, be they custodians, broker-dealers, third-party software providers or individual RIA firms were not heavily penalized for being late adopters of new technologies because their competitors were, for the most part, following similar strategies. Of course there are exceptions to the rule. Innovative firms like eMoney, MoneyGuidePro, Redtail and Black Diamond are a few examples of firms that embraced new technologies early and prospered as a result.

The point is that things have changed as the advisory business has boomed. The next generation of clients have different expectations than the current generation. Outside forces such as Wealthfront and Betterment have exposed weaknesses in what was at the time the standard RIA technology offering. Private equity money is ready to finance new financial technology ventures. In summary, competition is heating up.

While many firms have been caught off guard by the transformation taking place in FinTech, a number of industry participants have been making moves of their own to stay ahead of the curve. Let’s briefly examine what a few well-known names within our industry have been up to.

Envestnet
Perhaps the most acquisitive firm of the ones I follow closely has been Envestnet. By my count, it has made almost a dozen acquisitions since 2001. At least four should be of particular interest to readers. In 2012, Envestnet purchased Tamarac. Tamarac’s Advisor Xi suite provides RIAs with an integrated platform that includes client relationship management; portfolio rebalancing (with intelligent tax-loss harvesting capabilities) and trade order management; portfolio accounting and billing; performance reporting; and a client portal. Tamarac’s clients are primarily midsize to larger independent RIA firms.

From our perspective, the Tamarac acquisition made sense strategically. Envestnet had always been a strong competitor in the enterprise side of the business, but was less so in the independent RIA space. With the RIA side of the business growing more rapidly at the time than some of the other markets Envestnet participated in, gaining a strong foothold in the independent channel was a strategic imperative. Tamarac made the company an immediate player in the RIA space.

This year, Envestnet has made two significant technology acquisitions, and a third is currently pending. First, it purchased Upside, a small robo-advisor platform provider. Next, it acquired Finance Logix, a financial planning software firm. Although the latter is best known to advisors for its comprehensive financial planning application, it has also developed a retirement income application for advisors, an award-winning mobile retirement app for consumers, as well as a financial health app for consumers. Envestnet has also announced an agreement to purchase Yodlee, an account aggregation and data analytics platform. Envestnet’s NYSE-traded shares took a big hit on the day the deal was announced, indicating that institutional shareholders didn’t like the deal, but the jury is still out.

According to Bill Crager, president of Envestnet, all of the above-mentioned acquisitions fit in with Envestnet’s long-term strategic vision: to be the firm that can offer all of its clients a holistic, end-to-end wealth management platform. To Crager, that means a platform where investors, either working with an advisor or through a self-service platform, can set their goals, create an investment strategy, execute the strategy and then receive reports to let them know how they are doing—particularly to help them understand whether they are on track to meet their goals.

From Crager’s perspective, all of the latest acquisitions are strategic in nature. He says that “data is the gasoline that fuels the (platform’s) engine,” and Yodlee provides that data. The platform currently contains personal finance information on 20 million investor accounts, and that’s just the beginning. The goal is clearly to encourage all of the end clients of the firms that Envestnet supports to aggregate their data on Yodlee as well. Connecting the data component with the planning and investment strategy tools on the Envestnet platform allows the firm to create a complete financial picture for investors.

Crager says that Yodlee is about more than account aggregation. It is also about data analytics. Third parties have created a “few thousand” apps that are powered by Yodlee data. With the Yodlee API, developers can build personal balance sheets, lending tools and financial wellness tools, to name just a few items.

There is also a tremendous opportunity to learn more about client behavior so advisors can better tailor their offerings to the needs of clients and prospects. In addition, Yodlee data will help Envestnet better understand the markets it serves and better tailor its technology to meet those needs. There are also opportunities to benchmark advisors against their peers to promote better business results.

The Upside acquisition gave Envestnet an inexpensive entrée into the modern digital platform (robo-advisor) space. These capabilities will appeal to RIA firms that want to segment their business, but it will also appeal to, for example, broker-dealers with smaller orphaned accounts.

Many accounts may not be big enough to be attractive to a successful rep, but if they can operate on a low-cost, self-service model, they could be profitable for the broker-dealer. The robo-advisor platform could also prove attractive to banks. Traditionally, banks have focused on their higher-net-worth clients for wealth management services because the cost of servicing smaller accounts can be prohibitive. If these clients can be enticed onto a self-service platform, however, the economics become much more favorable.

Finance Logix filled a critical hole in the Envestnet offering. With its expertise in financial planning on both the advisor and consumer side, Finance Logix can provide the software to satisfy the needs of Envestnet’s broad client base. Crager concedes, however, that Finance Logix may not meet the need of all Envestnet’s clients, so Envestnet continues to integrate with MoneyGuidePro and eMoney. The Envestnet platform also integrates with a number of leading CRM providers.

Looking forward, Crager says Envestnet now has all the strategic pieces necessary to compete effectively in the future. That’s not to say that Envestnet is out of the acquisition game. “We won’t rule out opportunistic acquisitions in the future,” he says.

Fidelity
Fidelity’s acquisition of eMoney earlier this year makes strategic sense as well as financial sense. EMX—eMoney’s recently released next-generation platform—is receiving excellent reviews. With a lot of private equity money chasing too few targets in this space, the time was right for eMoney shareholders to cash in. Furthermore, the technological know-how and the financial might of Fidelity should allow eMoney to innovate, scale and release enhancements even faster in the future.

For Fidelity, eMoney offers a number of much-needed attributes. The user experience for both advisors and their clients is simple and elegant, yet powerful. Collaboration tools, industry-leading client and advisor portals, well-documented account aggregation capabilities and more make EMX a platform that can be combined with Fidelity’s existing technology assets such as Streetscape and WealthCentral to form the basis of Fidelity’s next-generation advisor and consumer platforms.

The eMoney purchase should greatly accelerate the building of Fidelity’s next-generation advisor platform. It should also be an asset should Fidelity choose to release some type of robo-advisor platform, or include robo-type attributes in its next-generation platform.

If there was one negative, it was the rapid exit of Edmond Walters from his role as CEO of eMoney. Walters is a visionary and an innovator. His passion and energy for eMoney will be sorely missed. The good news for Fidelity and eMoney is that Michael Durbin, who has taken the helm at eMoney, is a well-respected, highly capable executive who has been successful in all of his past endeavors. We’re optimistic that he will be equally successful at eMoney.

We expect that as EMX morphs into a Fidelity platform, it will follow many of the policies that WealthCentral, for example, currently follows. That means Fidelity will integrate selectively with those third-party vendors it sees as industry leaders. There is litttle reason to believe that it will welcome anywhere near the number of vendors that TD Ameritrade’s VEO platform does, nor is it likely that Fidelity will become more restrictive than it currently is. Ultimately, advisors should expect it will judiciously add select vendors to strengthen its competitive position.

In my opinion, this acquisition is primarily about the account aggregation and the portals initially, and in the longer term it is about the platform and other enterprise software endeavors. It enables Fidelity, on both the advisor side of the business and the retail side (should it so choose) to rapidly bring to market a platform capable of competing with the B2C robo-platforms. That should be good news for Fidelity and eMoney and for each one’s clients. It is also probably good news for the advisor community because it will keep the pressure on all custodians and third-party technology firms to continue innovating in order to stay competitive.

In the longer term, we suspect that Fidelity will find additional ways to wring value out of eMoney in other segments of its operations.

BlackRock
BlackRock’s recent acquisition of robo-advisor FutureAdvisor is an interesting one. It raises the question of whether this is a strategic decision or more of a hedging of BlackRock’s bets on the current distribution model. If it is strategic, will other firms similar to BlackRock attempt to follow suit, further increasing demand for digital platform technology?

We think the jury is still out on this one, but it has potential. To date, most of the digital offerings have used passive ETFs as their investment of choice, and BlackRock is a leading ETF firm. If digital platforms can potentially increase the demand for ETFs, and if BlackRock has a digital platform that it can make available at little or no cost to banks, insurers, RIAs and other financial intermediaries, might not that be an attractive potential growth area for BlackRock? We think so.

If digital platforms can be a profitable, low-cost distribution channel for BlackRock, can other product manufacturers be far behind? It is not difficult to envision a scenario where other product manufacturers of mutual funds, ETFs and the like create digital technology that features their products available to the general public through both direct and intermediary channels.
 
What’s Next?
With new development in the FinTech space happening almost daily, it is difficult to predict what the future holds in store, but a few things seem evident. First, the robo-advisor technologies, which most industry veterans dismissed initially, are having a much greater impact in the marketplace than almost anyone could have initially predicted.

Second, to date, most of the significant acquisitions we’ve witnessed to date appear to be rational and strategic in nature. This trend is likely to continue.
Third, the acquisition trend is likely to continue. There are still millions of retail clients out there, representing billions of dollars, who are still underserved through a direct channel or an advisor. They are still receiving paper statements through the mail, and they do not have access to a digital experience. With consumer expectations rising, the status quo is not sustainable. Financial services firms operating under a traditional model will have to adapt, by building or buying, or their survival will be threatened. It will be interesting to see how fast the industry can adapt to the new realities of the marketplace.