With Bill Crager of Envestnet Asset Management

Many stockbrokers want to make their practices look and feel more like those of financial planners who offer open-architecture, non-proprietary products, and a unified performance and fee schedule.
With this in mind, Bill Crager, 43, eight years ago helped found Chicago-based Envestnet Asset Management, whose platform helps brokers to sell a fee-based account with multiple asset classes.
Now Envestnet’s presence is ubiquitous: More than 400 broker-dealers use it on a private-label basis.
But Envestnet’s platform still doesn’t cross the chasm of helping brokers to offer the kind of fiduciary care provided by good registered investment advisers, according to Stephen Winks, principal with SrConsultant.com in Richmond, Va.
“In the broker-dealer world, he’s taken it as far as it can go [in terms of putting the client first], which is commendable, but it’s still a product,” he said. “It embraces product over process.”
Yet there are good reasons to use Envestnet that go beyond gathering and managing assets, according to James Poer, senior vice president of advisory and investment services for NFP Securities Inc. in Austin, Texas.
“It’s not just helpful from a product perspective,” he said; “It’s: How do we help entrepreneurs run the business” by easing administration of working across multiple platforms?
Q. Separately managed accounts have been on fire for years. What can fuel continued growth?
A. We’re seeing growth in the independent-broker-dealer marketplace and the RIA marketplace, and that’s where most of the assets have been driven from.
Ultimately, what I’m beginning to see more of is in the bank channel, whether it’s the securities or trust group. They’re overcoming some organizational issues, and they’re beginning to understand the power of open architecture and not proprietary product, and they’re reaching out to platforms like ours to deliver that.
Q. We have heard this before. Can banks really emerge as a new threat?
A. It’s growing. I believe the bank channel is just beginning to adapt to these open-architecture asset management platforms, but there are always internal challenges that banks face, especially if they’ve been managing assets for clients on their own.
More and more of our conversations are with regional banks that are looking to diversify away from proprietary solutions.
Q. Can you quantify the future pace of growth in your industry?
A. I think you’ll see steady growth, whether that’s 25% to 30% year over year, in the traditional SMA business in the next 24 to 36 months. We see more advisers are turning to traditional separate accounts.
Q. What are they turning away from?
A. I believe they are turning away from mutual fund solutions, and what I know they’re turning away from is managing those assets on their own. They’re realizing there isn’t tremendous value in offering their own basket of securities, versus what institutional managers bring to the table.
But you’ll see tremendous year-to-year growth from these model portfolios, which are growing off a small asset base. I think they will catch on.
Q. Merrill Lynch & Co. Inc. of New York said last year that it will embrace model portfolios. How much does this affect the SMA industry?
A. It accelerates an evolution in the industry, and I think it flattens the competitive landscape quite a bit for the money managers. Today there are 25 managers that control roughly 50% of the market. Another large number of investment managers are producing excellent results, and they have not had the opportunities for distribution. I see the shift as a landmark moment to allow these managers to enter the market on an even footing.
Q. What financial advisers tend to choose model portfolios over SMAs?
A. It’s interesting to see why certain advisers choose one over the other. It’s typically, as you get to the high-net-worth individuals, you’re more likely to select a traditional separate account, versus a model-based account.
Model portfolios tend to be used by smaller advisers using a packaged-product-type solution. It’s early, so I do think it can grow upmarket.
Q. Are there separate-account managers that could be harmed by the emergence of model portfolios?
A. For the managers with significant assets in the legacy-managed-accounts world, they’re left with a lot of infrastructure — trading teams, account openers, etc., and a lot of questions about how to make profits in the long run. With model portfolios, you’re only delivering your intellectual capital for portfolio management and security selection.
Q. How does this affect your company’s future as a platform provider?
A. We have 200 traditional separate-account managers, but also we have a history of model-based portfolios, and we’ve always offered choice.
Q. Will competitors follow Merrill so that these model-based portfolios will be commonplace industrywide?
A. I think that the idea of a model-based account will be a component of the wealth management offering. It was happening regardless. It makes sense that trading happens at the portfolio level rather than at the account level. All this talk toward the unified managed accounts drives this shift to model-based accounts. It becomes reality now.
Q. Will the model platform help wirehouse advisers regain some of the SMA ground they have lost to independent advisers?
A. I don’t see the advantage it offers them, versus
independents.
Q. Isn’t there some downside for investors that margins will be slashed for some of these legacy money managers? Is there a potential backlash?
A. Yeah, there will be some fallout. It’s very costly to manage separate accounts. I believe this will accelerate the trend of money managers’ themselves outsourcing their back offices.
Q. You were founded in 1999. How have you grown so fast?
A. The differentiator is that we have a unified platform.
In the past, Lockwood [a Malvern, Pa.-based affiliate of Pershing LLC of Jersey City, N.J.] has been focused on separate accounts. Another firm may be focused on mutual fund portfolios. Another firm may enable advisers to manage their own portfolios.
What we’ve done is unified that onto a single platform.
We’re like a cable TV company; we’re bringing the cable into your house, and you can watch any channel that you want.
You can work with a mutual fund strategist like Russell Investment Group [of Tacoma, Wash.,] or leverage [exchange traded fund] strategies or manage [your] own strategies. You can risk-profile the client. You have one performance report. You have one billing cycle, and it really eases the administration, versus going from one platform to another platform to pull all those things together.