Headwinds across the wealth management industry and specific challenges in Envestnet’s data and analytics business contributed to another slide in quarterly earnings for the largest provider of financial advisor technology and outsourced investment management.
Envestnet brought in $312.4 million in total revenue during the three months that ended June 30, a 2% drop from the same period in 2022. The company’s second-quarter revenue came in just short of Wall Street’s expectations of $315.1 million, according to analysts surveyed by Zacks Investment Research. Over the first half of 2023, Envestnet’s total revenue has fallen 5% year over year.
The company did meet Wall Street’s expectations for earnings per share at $0.46. However, this fell 6% from the $0.49 EPS recorded in Q2 of last year.
Asset flows into investments remain low as advisors remain cautious about the market and look for higher yields in fixed income and cash, said Envestnet CEO Bill Crager. Until Envestnet formally enters the custodian business, which it plans on doing through a partnership with FNZ, it cannot capitalize on that trend.
“We’re a wealth management, investment-oriented business,” Crager told InvestmentNews.
The company has also been challenged by a slowdown in its non-wealth management business. Revenue from Envestnet Data & Analytics has slowed, particularly in its research division, due to increased competition and a decline in the quality in the data set, Crager said. He expects the business to stabilize in the second half of the year.
However, the company is growing in several key areas despite low net asset flows across the wealth management industry, Crager added. During the second quarter, net flows represented an annualized growth rate of 5%, which outperforms the average growth of other publicly traded wealth management firms.
“For example, long-term mutual fund and ETF flows across the industry were essentially flat once again in Q2, and multiple wealth firms reported seeing low investor buying activity given the debt ceiling overhang and other factors, a trend that seemed most pronounced among high-net-worth investors,” Crager said Thursday during a call to discuss Envestnet’s quarterly earnings.
Envestnet’s total platform assets increased 8.66% percent YOY to $5.4 trillion, with assets under management increasing 18% to $363 billion. Total accounts also increased 4.5% to 18.7 million during the same time period.
This is the result of the progress Envestnet has made in bringing together the various parts of the financial wellness ecosystem it has acquired, Crager said.
“We have intentionally invested and today we are seeing the benefit of the integrated ecosystem,” he said. “This is the future of our business, it has deepened our competitive advantage, deepened our relationships with our clients and partners and the investments are scaling our bottom line.”
Envestnet also likely won’t be making the kind of blockbuster acquisitions it was known for making in the previous decade as it exits the investment cycle, he added. The company is well-positioned to make a deal if a good one presented itself, but the market isn’t favorable to M&A, Crager told InvestmentNews.
“Borrowing rates are super high. Anyone that’s going to go do a deal is going to pay a lot,” Crager said.
Envestnet instead is focused on managing expenses as its investments take root. On-shore head count is 5% less than last year after a corporate restructuring, while the amount it spends on real estate is down 27% after closing offices in several large cities. Envestnet shuttered its Chicago office in 2022 after relocating its headquarters to Berwyn, Pennsylvania, and closed the Tamarac office in Chicago.
Envestnet also cut marketing expenses by 33% by using data and analytics to more effectively target efforts, Crager said. Total adjusted expenses are down 3% in the first half of 2023, with 7% YOY reductions targeted in the second half. The company expects full-year expenses, excluding the cost of revenue, will be down 5% YOY.
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