Envestnet: Leader In Wealth Management SaaS

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Thesis

Envestnet’s leadership position puts it in the best position to capitalize on its sizable customer base at scale. As the leader in Turnkey Asset Management Platform provider to wealth managers, there is ample opportunity to upsell additional tools and services they need to better-advise and improve efficiency. The company’s more recent investments into Fintech, particularly Open Banking, are helping to broaden out what Envestnet can offer customers as it continues to build out an ecosystem of services to consolidate banking, wealth management, credit, loans and mortgages. We see upside potential for Envestnet given Pandemic-related tailwinds and good progress being made with Open Banking. We are long-term bullish on Envestnet.

Company Overview

Envestnet was founded after Jud Bergman left Nuveen where he was head of mutual funds as firm was not interested in backing the venture, so he set out to create software tools that would help financial advisers break away from big institutions and set up their own shops. Envestnet grew into a major Chicago fintech firm, acquiring other companies along the way as it built extensive performance-tracking, portfolio rebalancing, administrative and other software services for adviser clients and large institutions such as Fidelity.

Source: 2019 Investor Presentation

Acquisitions have allowed Envestnet to take greater share of the advisory market and put data at the center of its growth strategy. Notable ones include: Finance Logix (2015) put Envestnet’s data into containers and made it more nimble. Yodlee (2015) data extraction platform with existing data they could use. Wheelhouse Analytics (2016), Yodlee is the extractor for the data, Wheelhouse is the refinery. FolioDynamix (2017), took out their largest competitor, effectively locking down the entire market and acquired another 3.2m accounts with data. Portfolio Center (2019), Tamarac is built on top of Portfolio Center and bought data on thousands more firms. MoneyGuide Pro (2019), 34 years of financial planning data and access to insurance sales tools.

The company has successfully disrupted the wealth management sector and is ready to disrupt the broader financial services industry by using data to drive additional value-added services to their customers like insurance and credit.

Business Segments

The business is comprised of 2 segments:

Wealth Solutions: software and services to empower financial advisors at banks, broker-dealers and RIAs to deliver holistic wealth management to their clients. The tools and services cover: financial planning, risk assessment, investment strategies and solutions, asset allocation models, research, portfolio construction, proposal generation, paperwork preparation, model management, account rebalancing, monitoring, customized fee billing, overlay services (asset allocation, tax management and socially responsible investing), aggregated multi‑custodian performance reporting and communication tools, plus data analytics.

Screenshots of Envestnet Taramac, source: Company Website

Data & Analytics: Gathers, refines and aggregates a massive set of end-user permissioned transaction level data, and combines these with financial applications, reports, market research analysis, and APIs for customers. Includes the provision of data analytics, mobile sales solutions, and online educational tools to financial advisors, asset managers and enterprises.

Business Model

Envestnet runs an Enterprise SaaS, as it provides assetbased, subscriptionbased and professional services on a B2B2C basis to financial services clients, whereby customers offer solutions based on the platform to their end users. Asset-based recurring revenues consist of fees for providing customers access to platform services. The fee percentage varies based on the level and type of services the provided, as well as the asset values of customer accounts and is therefore sensitive to market fluctuations. Subscription based recurring revenues primarily consist of fees for providing customers access to the company’s platform for wealth management and financial wellness. Subscription based fees include fixed fees and or usage-based fees and vary according to the scope of technology solutions and services used. Professional services revenue is generated from client onboarding, technology development and other project related work, which tends to be more variable than the rest of the business.

Competitive Landscape and Market

Envestnet’s Wealth Business is exposed to a $39bn TAM of which 25% is Turn-Key Asset Management Platform or ‘TAMP’ and the remainder spread across specific use-cases of their technology.

Source: 2019 Investor Presentation

TAM growth is driven by rising number of financial advisors adopting technology, more accounts per advisor and the relevance of the technology in more verticals e.g. not just RIAs, but banks, insurance companies, private banking and credit unions. Advised assets in the USA are expected to increase from $8.4 trillion in 2017 to $12.1 trillion in 2022 Cerulli Associates an 8% CAGR.

The main competitors in the TAMP space are SEI (SEIC) and AssetMark (AMK), although there are many smaller tech firms offering some of their capabilities:Source: IBISWorld 2020 Financial Planning & Advice Industry in the US – Market Research Report

European competitors include Bravura, FNZ, Novia, Nucleaus, Aviva, Fidelity, Standard Life, Tilney, St James Place among others.

Envestnet is the largest US TAMP by assets under management, with 42% of the US advisory market’s assets on its platform at $182bn. About one-third of US advisors use Envestnet’s technology:

Source: The WealthAdvisor American’s Best TAMPS report

Competitive Advantages

We believe Envestnet has 3 distinct competitive advantages vs peers:

  1. Scale: Envestnet can leverage its leadership position in TAMP to sell additional tools and services to customers in addition to offering more competitive pricing as Capex is spread over a larger customer base i.e. lower fixed cost per unit.
  2. Breadth of offering: related to scale, Envestnet offers the broadest set of capabilities to its customers going beyond basic financial planning and accounting e.g. account aggregation and expense tracking (Yodlee), credit, insurance and investment product marketplace.
  3. Leadership position can be leveraged to close more deals with larger customers given Envestnet’s strong track record of delivery with 16 of the top 20 US banks and 43 of the 50 largest wealth managers as clients.

Valuation

We ran a 2-stage DCF model using the following base-case assumptions:

Expected revenue growth for the next 2 years using consensus and trailed thereafter to achieve 10% p.a. over 10 years, 2% above 8% expected TAM growth of US advised assets, reflecting Envestnet taking additional market share and expanding internationally. We expect wealth managers to continue to turn to technology providers like Envestnet to generate efficiencies, comply with regulations and compete with Robo advisors. Terminal rate of 2.0% – above current 10-year yield which is depressed given extraordinary market conditions.

We expect current Operating Margins of to reach 25% over 10 years, which is in line with more established SEI (28%). This reflects the business maintaining its market position as the leading TAMP for advisors and achieving scale benefits. We also assume some light take-up of vertical services via the platform including insurance, credit and advisory marketplaces.

Source: Author’s calculations

Our DCF indicates that a fair price for the stock is $87, although we can certainly see an upside case towards 15% revenue CAGR and 27% Operating Margins, which would see a fair value of $131. This Bullish scenario assumes Envestnet maintains its leadership position and takes half the US advisory market which would double its revenue, but also manages to scale its credit, insurance and advisor marketplace offerings which could add another $1.5bn in revenue, or compounding at 15% each year for the next 10 years.

The company is due to report next on 5 November 2020, and we believe management will surprise to the upside given Pandemic-related tailwinds and good progress being made with Open Banking, where Envestnet has agreements with 5 of the top 10 US banks and is progressing with 25 in total – we’re likely to get an announcement on additional progress. On their last earnings call management talked about the strong fintech momentum they were seeing with Yodlee – we expect a continuation of this given accelerated digital adoption.

Summary

Envestnet is the largest provider of wealth management technology to financial advisors with over 103k financial advisors who oversee 12.3m accounts and $3.3t in assets administered via its technology. The company is focused on growing its market share and scaling its business to offer additional products and services to further enhance its market position and deliver profitability. As the largest TAMP by far (70% of the market by assets), Envestnet has a significant lead over peers in the space, and can work from this position of strength to build out additional capabilities and functionality into its platform, in addition to taking advantage of the large volumes of data it has visibility over. We believe the stock currently trades at a slight discount to fair value, and do not think a more optimistic upside scenario is unlikely given its position of strength, it is well-placed to execute. The Pandemic should serve to accelerate the adoption of digital wealth management technologies as advisors seek to become more efficient and do more with less.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.