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Edited Transcript of ENV.N earnings conference call or presentation 6-Aug-20 9:00pm GMT

·40 min read

Q2 2020 Envestnet Inc Earnings Call CHICAGO Sep 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Envestnet Inc earnings conference call or presentation Thursday, August 6, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher Curtis Envestnet, Inc. - Division CFO & Head of IR * Peter H. D'Arrigo Envestnet, Inc. - CFO * William C. Crager Envestnet, Inc. - Co-Founder, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Christopher Charles Shutler William Blair & Company L.L.C., Research Division - Research Analyst * Christopher Roy Donat Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Devin Patrick Ryan JMP Securities LLC, Research Division - MD and Equity Research Analyst * Patrick Joseph O'Shaughnessy Raymond James & Associates, Inc., Research Division - Research Analyst * William V. Cuddy JPMorgan Chase & Co, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Envestnet Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Chris Curtis, Division CFO and Head of Investor Relations. Please go ahead, sir. -------------------------------------------------------------------------------- Christopher Curtis, Envestnet, Inc. - Division CFO & Head of IR [2] -------------------------------------------------------------------------------- Thank you. Good afternoon. I'm joined today by our CEO, Bill Crager; and CFO, Pete D'Arrigo. Our earnings press release, supplemental information and associated Form 8-K can be found at envestnet.com under the Investor Relations section. During the call, we will be discussing certain forward-looking information. Such comments are not guarantees of future performance, and therefore, you should not put undue reliance on them. We also will be discussing certain non-GAAP information. Please refer to our press release and SEC filings for more information on forward-looking statements, risk factors associated with our business and required disclosures related to non-GAAP financial information. With that, I will turn the call over to Bill. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Christopher. It is good to speak with everybody this afternoon. Thank you so much for joining us. I know these continue to be challenging days with uncertainty all around us regarding our economy, our society, so many families concerned about the health of their loved ones and millions of families worried about their financial well-being. At Envestnet, we have been incredibly busy as our clients have depended on us more than ever to help them navigate this period of time. Somehow, after months of working in a new way, it feels like business as usual despite these very unusual circumstances, we've been able to deliver and adapt to the demands of this extraordinary time on behalf of our clients. We've also been able and been successful in securing new and expanded relationships, delivering solid financial performance and executing on our strategic road map. I'm incredibly proud of our team for their amazing resilience and commitment to our long-term vision. Envestnet vision is clear: to be the leading provider of financial wellness solutions and services in North America. Given the accelerated reliance on cloud-based solutions such as what we offer and the number of firms, advisers, partners and consumers that interact with our network today, the stage is set for where we have been headed. A new standard for personal financial advice is emerging, and we are driving it. Through our data initiative and platform modernization efforts, we are working to create a fully configurable platform that works effectively both in an end-to-end ecosystem and in smaller app sized pieces. By leveraging Envestnet's digital environment, deploying what we do will become increasingly friction-free and enable our clients to deliver essential advice in ways that they've traditionally engaged their clients and importantly, also an evolving digital model that meets the expanding expectations of consumers. And with the use of APIs, we can take advantage of emerging distribution opportunities through which they can deploy our digital solutions. Demand for these solutions is accelerating. What we are doing here is important. It will recreate how the infrastructure for financial wellness will be delivered in the future. The addressable market opportunity we see ahead of us is substantial, and we are investing to capitalize on it. We will build, partner and when it makes sense to, we will acquire as we integrate the best capabilities that enable our customers' success. Our second quarter financial results exceeded our expectations, and our outlook for the remainder of the year has improved. Pete will provide all the details on that in a little bit. But first, let me provide some examples of the progress we're making across our business as we execute against our road map. In our wealth solutions business, we continue to demonstrate the many levers we have for growth. With our land and expand strategy that has worked for the better part of 15 years, our focus has mainly been on the first part of that, adding advisers and accounts to the platform in ways they want to be served by us by investment. We've been very successful in doing that. Today, we have more than 103,000 financial use -- advisers using the Envestnet wealth technology. Those advisers oversee more than 12 million accounts with $3.8 trillion assets supported by our platform. But we're beginning to see how our expanded integrated solutions and services create more value for our existing relationships. Ultimately, data-driven digital engagement is the foundation of everything we do and everything we provide to our clients. Data informs the financial plan. A recommendation engine prescribes tangible next steps an adviser and their clients can take. These steps are all integrated with a variety of financial wellness solutions. This includes investments, insurance credit and other elements, which advisers and clients can act on immediately, all in one-scale and tested platform. Highlighting the value of advice is even more important in this virtual world. Our next to actions, data insights, elevate the adviser's value proposition by handing the adviser's relevant points of contact with their clients. This is how we expand the value we provide to our clients and deliver on our financial wellness vision. Our MoneyGuide financial planning business is an excellent example of how this is working. Financial planning is the cornerstone for financial wellness. MoneyGuide, which we acquired just last year, had its best quarter in its history. Revenue and profitability are at its highest levels yet. We continue to innovate, making financial planning more accessible and easier to leverage for millions of consumers through the tens of thousands of advisers that are using our planning software each and every day. We now have over 200 integrations, and we continue to see success in renewing, expanding and cross-selling existing enterprise relationships, while we're also establishing new ones. Recently, a client of ours, Citizens Bank, signed an additional schedule for unlimited retirement block use for approximately 4,000 personal bankers and on their public website for consumers to access directly. This is an example of how we are deploying these upsized planning components. We're also seeing a large uptick in the number of RIAs leveraging MoneyGuide solutions. Sales to independent advisers, those who are not associated with a large broker-dealer or enterprise, were up 23% in the second quarter over last year. We're implementing our app size MyBlocks to integrate tightly into our solutions. This changes the ballgame from the app to answers, to the ability to click and execute, these easy deploy blocks illustrate the powerful, disruptive advancement that integration drives for us. Related to this is how we are paving the way to unlock additional opportunities within our installed base. Both our insurance and credit exchanges continue to add product providers, shelf space at Envestnet clients and access to thousands of advisers. Both are integrated within the Envestnet platform and volume is beginning to ramp-up. In June, we officially launched the Advisor Services Exchange, which enables critical services, including access to capital to RIAs, which is incredibly timely given the backdrop of this current environment. Another area where data and technology has differentiated us is how we are growing high-value fiduciary solutions that are increasingly being adopted by our clients. A few data points to highlight. The number of advisers who are using our tax and impact overlay solutions grew 16% since just this past December, and overlay accounts grew 19%. And our impact portfolios are also growing as investors seek to align their social and moral priorities with their investments. Advisers using these solutions are up 12% and impact portfolio accounts are up 18% since the end of just last year. Quantitative portfolios, our first direct indexing solution, also experienced higher usage, with 23% more advisers using these solutions in 33% more accounts also since the end of 2019. We're also making progress selling managed account solutions to our Tamarac installed base of RIAs. Several large firms, including a top 20 RIA, according to Barron's, are transitioning a meaningful amount of their managed account assets to our platform as they seek an operationally efficient way to migrate to model-traded UMAs. In our Envestnet | Yodlee business, revenue also outperformed in the second quarter. This period of time highlights why Yodlee is the industry-leading provider of high-quality, secure data aggregation and analytics solutions. While COVID has been disruptive for many industries, financial institutions, specifically retail banks and wealth management firms, are increasingly embracing digital solutions, which their depositors and investors are accessing more frequently check in on their financial information. We're also seeing an acceleration of data access agreements being executed between banks and our Yodlee business. To date, we've secured open banking agreements with half of the top 10 U.S. banks. We're actively engaged with 25 banks at the moment and expect to have 10 more agreements executed by the end of the year. Over the past year, we've also significantly enhanced our aggregation platform, modernizing our core architecture so that FinTech developers could easily utilize our comprehensive yet streamlined API platform. We're seeing results. So far this year, Envestnet | Yodlee has more than doubled the FinTech signings compared to last year as some customers have moved from incumbent aggregators. The momentum here is definitely encouraging. As we have updated in prior quarters, our investment manager analytics offering continues to face challenges in the market due to the proliferation of alternative data sources and resulting pricing pressure for new and renewal business. But we're bullish on the value embedded within consumer spending trends that can be gleaned from the data coming into our aggregation platform. Just this week, we launched something called Insights Solutions. This is a hyper-personalization capability for financial institutions. Through APIs, the new solution enables financial service providers to provide experiences that engage customers proactively across their financial wellness and financial planning channels. They also empower firms to unlock the value of data to support more informed decision-making, accurate customer segmentation and actionable guidance that they're providing to their clients. Additionally, this quarter, the Federal Reserve Bank of Chicago is now a customer of Envestnet | Yodlee. They'll be leveraging our spending insights, along with data from other providers to inform their economic research and policymaking. Last quarter, I shared our thoughts on the future, key themes that are driving the industry as we get through this COVID period. The perspective guides us as we think about Envestnet's role in shaping the future and supporting our clients. A few weeks ago, we launched the adviser's playbook for leading clients forward, a guide in supporting website covering these key themes. We also launched our virtual Advisor Summit in place of our in-person annual client conference. Through both of these, thousands of advisers and home office participants engage with us in our content, and we've had great feedback. The feedback has been tremendous, setting our industry thought leadership and how valuable it is, particularly during these times. These are excellent resources to understand how we're helping lead the industry forward. Uncertainty presents the opportunity for innovation. And today, there is a future that is emerging. Envestnet is helping our clients and millions of households navigate the current environment as they seek answers to these critical emotional questions that they're asking. Like, what should I do? And will my family be okay? A role on answering these questions is to enable a new advice model for the industry that embraces the future, and we are well on our way. Everything we do is driven by our technology and data capabilities. They are the conduit to every service and every solution that we offer, our opportunity to expand relationships with our current customers, our installed base, if you will, has never been greater. We believe that opportunity will grow as we firmly establish this ecosystem for financial wellness. I'll be back with some closing comments, but first, let me turn it over to Pete. -------------------------------------------------------------------------------- Peter H. D'Arrigo, Envestnet, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Bill, and good afternoon, everyone. Today, I'm going to review the second quarter and update our outlook for the rest of the year. Our second quarter results were quite strong, meaningfully exceeding our expectations. Adjusted revenue for the quarter was $235 million, well above the guidance we provided. Asset-based revenue was better despite the impact of the market sell-off in March. Favorability was primarily driven by product mix, including the increased use of our overlay and direct indexing solutions that Bill mentioned earlier. We also saw modest favorability in subscription and professional services revenue across our business, again, relative to our expectations. Cost of revenue was modestly above our guidance, driven by the outperformance in asset-based revenue. However, most of the revenue favorability flowed through to adjusted net revenue as our overlay and direct indexing solutions, there are no direct cost of revenue. Our operating expenses overall were in line with expectations, which had assumed lower levels of activity such as reduced near-term hiring and travel expenses, as examples. As a result, our adjusted EBITDA of $55.8 million was up 29% compared to last year. This translated to similarly strong performance and adjusted earnings per share of $0.59, 28% above last year. So what does this mean for margins and our longer-term outlook? The current environment has created larger swings in our asset-based revenue than normal due to the sizable market fluctuations in the first half of the year. The effect of the market, while negative a quarter ago, was meaningfully positive during the second quarter, leading to an increased outlook for asset-based revenue in the back half of the year compared to our expectations set out in our last earnings call. However, the market at June 30 was still not back to beginning of the year levels, and our AUMA was down around $22 billion from the beginning of the year. Specifically, second quarter market action was a positive $60 billion in AUMA, offsetting a good portion of the negative $82 billion in the first quarter. Today's guidance assumes a market-neutral outlook based on market levels as of June 30. Additionally, with stay-at-home orders and travel restrictions in place in all states where we have offices and with all of our employees working remotely and not traveling, our operating expenses have been lower. We've assumed that pandemic-related circumstances will continue to impact our expenses in the near term, particularly in the third quarter. We're assuming a modest increase in business activity as we head into the fourth quarter. However, we recognize that normal will mean something new in the future. With these assumptions, we would see a sequential increase in some operating expenses between the third and fourth quarter. And our guidance reflects these increases, and this assumption is the primary reason behind the relatively flat adjusted EBITDA implicit between the third and fourth quarter in today's updated guidance. At some point in the future, business activity will start to pick up, and our expenses will return to some higher level, likely between where they are now and where they were pre-COVID. We are already considering how our business should be organized and how we will manage expenses in the future. Our goal is to further align the organization with our strategy, and we are taking short-term action while evaluating the longer-term organizational framework. For example, in the second quarter, we closed 9 smaller offices across the U.S. with all of those employees permanently working remotely, and we are assessing our optimal geographic footprint for the long term. Having seen the effectiveness of remote working for certain groups, we are exploring how to operate more in a hub-like fashion. Over the next several years, we still expect to drive our adjusted EBITDA margin into the mid- or upper 20s, but in the current environment, the path to that will have some variability quarter-to-quarter. For the full year 2020, we are raising our top and bottom line expectations. This is driven primarily by the favorable market action during the second quarter, and this quarter's outperformance relative to our guidance. We now expect adjusted revenue for the year to be between $977 million and $980 million, up 7% to 8% year-over-year. Adjusted EBITDA to be between $221 million and $223 million, up 14% to 15% year-over-year. And adjusted earnings per share to be between $2.28 and $2.31. Turning to the balance sheet. We ended June with $92 million in cash and debt of $620 million. Our net leverage ratio at the end of June was 2.3x EBITDA, down from 2.6 at the end of March. With $225 million available on our revolver and positive cash flow generation, we are comfortable that we have the liquidity and flexibility as we balance managing the business in the current environment with continuing to invest in growth opportunities, both organically and through strategic activities. Thank you, again, for your support of Envestnet. And at this point, I will (technical difficulty) Bill for his closing remarks. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [5] -------------------------------------------------------------------------------- Great. Thank you so much for sharing that update, Pete. Recently, I've been thinking a lot about progress. Last week, we celebrated the 10-year anniversary of our IPO. During the 10 years after our founding extraordinary people, many who still work in Envestnet today, transformed an idea into a business, into a company that ultimately was traded on the New York Stock Exchange. That's an incredible journey. We accomplished a lot in our first 10 years. But after we rang the bell, we did not stop. We had more to do. During these past 10 years, we've experienced tremendous growth, both organically and through acquisition as we established investment as an industry leader. Last week, as we reached that milestone, Jud Bergman was very much on my mind. He is every day, but especially last week. There's a great picture of him, Pete and myself as the first trade cross the wire. We traded up one step. And as you can tell by the photograph we've included in the material, it was a big one. I'm grateful for each step that we have the opportunity to take together. We covered amazing ground. But there's so much more for us to do, and that brings us to today. I mentioned earlier that despite these extraordinary and disruptive days, there is a future that is emerging. We are driving hard to push this future. As we outlined in our viewpoint for the industry, data and technology, the idea that all advisers need to become digital is essential and the comprehensive integrated advice that households will receive in the future will come from the experts, and that's the network of financial advisers and firms that we're incredibly fortunate to work with. But they will be more and more supported by technology that helps them provide insights that powers and engages consumers as they achieve their financial goals. This is where we live. We are on our way to establishing the ecosystem that can make financial wellness a reality for everyone. A cloud-based model where advisers and their clients can tackle the financial questions that are big and small, make the decision and execute it in the platform. We're fulfilling a vision that positively impacts millions and millions of families. We have work to do, but I am incredibly excited about what these next 10 years will bring for us. Thank you again for your time this afternoon. Thank you for your support of Envestnet. With that, Pete and I are happy to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Devin Ryan with JMP Securities. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [2] -------------------------------------------------------------------------------- First question here, I just want to talk a little bit about new client engagement. And what I'm trying to think about is how the team is really evolving or adapting to what remains a very difficult environment in the U.S. in terms of ability to, obviously, meet in person and engage in person? And I'm curious kind of what you guys have learned about the organization through the last couple of quarters here? And where I'm going with this is to the extent we do have a second wave where people just are not back to interacting in person until some point, and hopefully, the latest next year, what does that imply for new sales or ability to kind of engage with new folks versus executing on business that was maybe already somewhat developed prior to the pandemic? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Great question, Devin. And yes, I'm hopeful as well. It's not beyond next year for sure. I would say, out of the gate, this is one of those areas where there was a lag, right? So the business kind of -- business operated, we engage our clients able to serve, they were opening accounts, we were able to invest those accounts. New logos and new engagements, that there was a lag there, and I would say, 4 to 6 weeks of how to establish the activity. A lot of things went into that. Number one is that the customers, the prospects that we were engaged with were finding their new ground and making sure their businesses were operating effectively. And we were figuring out how to develop and engage in a sales process. I will say that during this period, we are signing new firm, and we're also extending contracts for existing clients. So new logos. We talked about on the Yodlee side of the business. We've doubled the number of FinTechs that we've signed, in 2020 versus to date versus last year. On the wealth side, we've signed new contracts and new clients that are converting onto the platform. Our Tamarac business had a very robust new contract, new adviser contract rate over the last quarter. So the new logos and the new firms, that activity is occurring. I would say that -- and I also talked about how MoneyGuide had a record quarter, and that included new logos. So we're getting there. I wouldn't say the business is usual, but we are closing business. As it goes on, my expectation is that firms may have put off decisions or pushed them out just a little bit because for the reasons of the uncertainty, but the longer the uncertainty goes on, the more certainty there is that this is an environment and you have to move the business forward. So we're sensing that in the prospect of conversations that we're having. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [4] -------------------------------------------------------------------------------- Okay. Terrific color. And then just a follow-up here on the data and analytics and aggregation capabilities of investment. Obviously, just tremendous across the board. And as you think about the future and kind of further harnessing that data and really kind of the next action, if you will, around optimizing advice digitally. What additional capabilities do you think about potentially adding around that? Or what type of investments are you looking at? I'm also curious kind of where machine learning kind of falls into play here? Whether that's kind of a priority or just machine learning or AI in any other parts of the business? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [5] -------------------------------------------------------------------------------- Yes, yes. And thank you, Devin. So yes, data is the fuel and the data and technology fuel engine very powerful. And we're making real progress in servicing actionable intelligence to our clients so that they know where to focus their business. If you if you dig into our Virtual Adviser Summit, you'll see a presentation by a gentleman named Frank Coates, who's part of our business. And in that, you will see how we're beginning to surface recommendations inside an adviser's book of business when they walk into the office the next day, what should I do? We're finding the data that discovers the opportunities and service items that they should get in front of in their book of business in telling the adviser explicitly what they should do. And then the exciting part of that is you click-through and you can execute or you can engage with that client on that opportunity. So that's a first step where I see it going more and more as you get consumer portals or client portals that are delivered to the end client, benchmarking peer comparison, just recommendations based on their demographic, based on their wealth, based on the needs that we see the adviser can serve them best, we can help that adviser engage that end client in the conversation about those needs. So a great first step or illustration of how we put this into the market would be -- with the data analytic solution that is now sitting on -- beginning to sit on advisers' desktops. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question comes from the line of Chris Shutler with William Blair. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [7] -------------------------------------------------------------------------------- So maybe first on the favorable mix in the quarter within the asset-based revenue. How much of the revenue outperformance was attributable to the -- you mentioned overlay and direct index. And can you just give us a sense of how big those are today? And what I guess, the magnitude of the outperformance there? And I'm just trying to think through the, I guess, sustainability of that. And then is there any changes that you've made in terms of how you're going to market with those solutions that drove the increase? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [8] -------------------------------------------------------------------------------- Sure. I think a notable kind of number in our results is the -- just short of $7 billion in net flows and AUM. And a large component of that, Chris, has been these, what I'll call, value-added fiduciary solutions or services. I believe that these direct index product and then the ability to manage that on a very personal basis, is going to be a major theme for the asset management industry going forward. We use technology and our data insights to help us power that. And so it is incredibly scalable for us and we're beginning to make real progress. I don't think it's environmental. I think -- I don't think because we're in a COVID uncertain age, that we're seeing the growth that we saw over the last quarter. I think it's there because the solution is resonating in the marketplace. It makes sense to the adviser to deliver. It is a very cost-effective way to make a very individual portfolio solution. And the consumer is liking it because they're able to own the securities, have the cost basis and manage it on an ongoing basis, whether that's for tax reasons or impact reasons. And so we're beginning to get real traction there, Chris. So it was absolutely a contributor of the overall net flow that we saw in AUM. And there is no cost of revenue in that, right? So it is being delivered directly by the PMC -- Envestnet | PMC team. So that is -- there's a profitable -- those are very profitable revenue-generating assets for us. And Chris, just to answer the second part of that question. As I look forward, I do think it's a theme. I think, again, I don't believe this was environmental, I believe that these are beginning to get traction in the marketplace. And we've got an advantage because we own the technology. We've built the technology to be able to deliver that at scale across a very large body of portfolios and for a lot of different consumers. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Okay. And then secondly, the -- not to nitpick here, but just looking at the asset or the AUA redemptions, look like they were elevated. So just what happened there? And what are you seeing so far in July? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [10] -------------------------------------------------------------------------------- Yes. Absolutely, Chris. So specifically in AUA, a client using Envestnet for held-away assets, took that held-away assets off the platform. So they were reporting assets immaterial from a financial standpoint. Our clients still working with Envestnet utilizes our platform for a bunch of services. So if we were to look at the overall redemption rate and AUA, I think, overall, it'd be more like 1.8% versus the 2.2%. So the materiality of the net flow is insignificant that those assets left the platform. And I would say that we're seeing a lot of consistency. We're not seeing a big spike in activity either on the inflow and/or on the outflow end. It feels fairly consistent to me. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [11] -------------------------------------------------------------------------------- Okay. Great. And lastly, can you just talk about the recent hires? You hired a Head of Strategy and Head of Strategic Development. Just what are those 2 roles focused on? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [12] -------------------------------------------------------------------------------- Yes. So we're -- we've got a road map to kind of create and connect this financial wellness ecosystem. And we're using either organic investments to build and create product that we're delivering in the marketplace. We're partnering with the ecosystem of third-party providers. We're also making smaller investments and things to accelerate their kind of go-to-market, things like our exchanges, and then we're evaluating acquisitions. And what I found -- what Pete, Stuart and I have found is said, those activities were kind of happening in 3 different areas and to get the fulsome picture and to create an integrated strategic road map, we wanted to bring them together and bring perspective into the organization that was just had a broad view of what that ecosystem looks like and how we could take the assets inside Envestnet and look at the outside world and had to push our strategic road map forward in a way that we believe makes a real disruptive on the -- it will be disruptive to the industry and also how we can improve and deliver on this promise of financial wellness. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from the line of Will Cuddy with JPMorgan. -------------------------------------------------------------------------------- William V. Cuddy, JPMorgan Chase & Co, Research Division - Analyst [14] -------------------------------------------------------------------------------- Turning to M&A. So we're seeing consolidation among some of your peers in the space. You've had a little bit of time since your last acquisition. How attractive is the M&A market right now? And is it fair to think about Envestnet more aggressively pursuing opportunities, given that we've had some more time behind us from MoneyGuide in portfolio center? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [15] -------------------------------------------------------------------------------- Yes. Thanks, Will. Great question. I think we will -- we are very much focused on those levers on how we're going to kind of execute on this vision of completing that the financial wellness ecosystem. There are lots of exciting things that are going on internally as far as the technologies we're building and beginning to bring to market. I'm super excited about some of the advancements on the data side. We've got some really powerful capabilities from a client engagement standpoint. And then in our PMC business, we talk about some of the value-added fiduciary solutions. So a lot's happening organically. We've got these exchanges in which we're invested in, and we're partnering to help bring those capabilities to market. And then there are pieces that, "Hey, either we're going to find partners to do those things or we're going to acquire those pieces." And really, it's a matter of prioritization where we see opportunity and where we see our business headed and where we see the industry and the needs of our clients headed. So I would say that we're very inclined to continue to be an acquisitive firm. The opportunity has to be right. The valuation has to be right, but we will be opportunistic in really take advantage of any opportunity that makes sense to help us push this vision that we have forward. -------------------------------------------------------------------------------- William V. Cuddy, JPMorgan Chase & Co, Research Division - Analyst [16] -------------------------------------------------------------------------------- Great. So next, a large broker-dealer recently announced that they were willing to manage to run a bank trust technology infrastructure. And as I think about Envestnet's history, Envestnet seems to have success in that channel and accelerate some of that growth with that acquisition from potential some years ago. Could you talk about focusing on the bank trust channel, like what activity are you seeing? I guess, is that an area of growth for you? And then a little bit higher level, like when we segment the wealth management industry, where are you seeing the greatest opportunity by channel? I guess, is it RIA still with Tamarac? I'm just trying to understand the channel opportunity. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [17] -------------------------------------------------------------------------------- Great. Thanks, Will. Yes. I mean, we've served the bank trust market, and where we've been very successful is kind of unifying the fiduciary strategy for a bank. So you work for a bank, and you have a trust area. You also have a retail area, right, in those infrastructures that support the 2 of them, well, are different back end systems. What Envestnet does is kind of lie on top of them and brings the 2 together. So the top of the house can offer investment thesis and strategy. And then throughout the entire enterprise, you're able to get scale and conformity around the way that portfolios are being managed. At the high end, in the trust group, you may be using different vehicles than in the retail group just because of network that's being served as you get conformity across the enterprise. And that's something we've been successful in doing. We're typically successful in the mid- to smaller-sized bank in which we're able to bring those components together and really help power very consistent kind of scalable investment strategy for banks. So we're -- we can integrate with the third-party trust systems and really enable that enable that process. I think when we look at growth by channel, we are seeing the RIA channel gets enormous attention. We're growing really well there. We've made progress not only in signing new contracts from a technology standpoint, but we're beginning to cross-sell into that marketplace with MoneyGuide with our financial planning and also with some of our fiduciary solutions into the RIA market. So that's a very promising sign in a faster-growing channel. But in the independent broker-dealer channel, we're also finding a lot of growth. They themselves are kind of in a transitionary phase where they're moving from more of a product mindset to more of a fee-based advice mindset. And we're the engine behind it. So as they do that, our growth rate inside the broker-dealer is likely faster than the growth rate of that channel. And we serve predominant market share for the broker-dealer channel, and they're absolutely moving towards a planning-based, advice-based model, and they're doing that with the support of Envestnet. So we're definitely participating in the growth in the RIA market, strong market lead there. But I don't want to diminish the opportunity that we have in the broker-dealer channel and how we're seeing growth there as well. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Chris Donat with Piper Sandler. -------------------------------------------------------------------------------- Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [19] -------------------------------------------------------------------------------- Wanted to ask -- go back to the fee rate and sort of the outperformance in the quarter. I thought earlier in your comments, Bill, you said that the quantitative portfolios and direct indexing were up 23% -- I think it was 23% year-on-year, but correct me if I'm wrong. And I'm just -- and you mentioned in response, I think, Chris Shutler's question, like this is a trend. Has this been building for a while at that sort of double-digit 20-plus percent rate? Or did anything change recently in it? And I'm just wondering then how that feeds through specifically to the fee rate? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [20] -------------------------------------------------------------------------------- Yes. Thanks, Chris. Yes. No, we made a lot of progress in 2019 in finding distribution. We've spent a lot of time with firms and with advisers on the benefits of direct indexing and then all the services that surround it. And then the value proposition, that they should engage clients with and spent a dedicated team that's been out in the market, consultants that have been working with advisers to pave the ground. And you can see the assets begin to tick up in 2019. What we've seen since the beginning of the year, those stats that I articulated were since January 1, 2020. So we're seeing increased adoption in those solutions by advisers across the board. And again, this category that I'd call value-added fiduciary solutions, because, again, there is -- you're able to create very individual, unique portfolio solutions, manage them for that individual, do that at scale. And then from an investment standpoint, there is no cost of revenue there. That is Envestnet service that we're earning a higher basis point for. -------------------------------------------------------------------------------- Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [21] -------------------------------------------------------------------------------- Okay. And then just for my follow-up regarding this. So it's been a bit driven by your marketing and efforts that you put in last year. I'm just wondering if there's any seasonality we would expect in those sort of flows into direct indexing that might be more common say around taxes or because of the shock we had to the market, which affected people's cost bases for the earlier this year? Or if those were really not the sorts of things that actually drive behavior and interest in direct indexing in QP? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [22] -------------------------------------------------------------------------------- Yes. I mean, taxes, it, we -- I wouldn't say that we saw a surge around -- in our taxes, and of course, it was pretty late this year, Chris. So -- but the -- I think there's going to be resilient growth here. I think that we're well positioned to build a pretty good size service and solutions business around these offerings. And we're sitting with a lot of advisers. A lot of advisers are working to differentiate their offering and add more value to their clients, maintaining their fee rate. These tend to be pretty low cost when you -- what we're doing is delivering this without, again, an underlying asset manager as part of the equation. It's an Envestnet solution, able to deliver it and then able to automate the management of that on a scaled basis. So to me, it's got a lot of attractiveness. And when you compare it versus a portfolio that, say, is an allocated portfolio of ETFs, again, that's low cost. And that is easy to manage. But you can go to Vanguard or another third-party and purchase that at a low cost with the direct index portfolio, again, that's a unique differentiated offering that the adviser is able to present to their client. But we're seeing a mix. We're seeing high, high usage of the ETF product in those portfolios, but we're seeing increasing usage of these portfolios. And Chris, I'll just make one more note. I think the trick will be is how do we bring those solutions more down market so that more investors can take advantage of it because that -- which would include fractional shares and other capabilities that we're working to introduce over time. -------------------------------------------------------------------------------- Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [23] -------------------------------------------------------------------------------- Okay. Then I'll try to sneak one more. Is there a minimum on them right now? Or is there some sort of fee structure that makes them less attractive for a down market? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [24] -------------------------------------------------------------------------------- It's harder to execute and provide the diversification that we'd want to as you get too far down market. But for a typical $150,000 portfolio that we can achieve that, it's just be far more effective as we continue to product develop things like fractional shares. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Your next question comes from the line of Patrick O'Shaughnessy with Raymond James. -------------------------------------------------------------------------------- Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [26] -------------------------------------------------------------------------------- So Visa paid a pretty big amount of money for -- to acquire, Plaid, Mastercard, the same for Finicity, pretty attractive purchase multiples for those businesses. So do those acquisition prices and valuations suggest that there's still currently untapped use cases for Yodlee's data? And if so, can that potentially be unlocked with Yodlee as part of Envestnet? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [27] -------------------------------------------------------------------------------- Thanks, Patrick. Yes. I think those 2 data points are incredibly important ones because you see the value of using data to fuel a purpose. And in this -- in those particular purposes, it's around payments, it's around credit. It's about -- these issues of how money will move and how money will be used and how individuals can better manage the way their -- have visibility into their finances. Yodlee is a market leader. We have the largest footprint of data points that we're connected to. We have tended to be very successful with the largest financial institutions. We're a critical provider to them. We've built a lot of infrastructure around privacy and security and all these necessary components as we've built out the Yodlee platform. And we spent the last 1.5 years, really modernizing that platform so that we can compete and really win share back in the FinTech market, and we're seeing a lot of progress there. I think there's incredible value to be unlocked within the Yodlee business. We spent the last 18 months really modernizing the platform, reestablishing Yodlee as a preferred service provide to firms that we're choosing others because of the modernization of those platforms. We're beginning to win back and see real momentum there. Overall, I think the firms they are utilizing our data are across the spectrum of financial services, whether that's a payments company, whether it's a credit, whether that's a wealth business, whether that's banking, we're really fueling a lot of the different channels that are out there from a financial services standpoint. -------------------------------------------------------------------------------- Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [28] -------------------------------------------------------------------------------- Great. And then you guys talk about financial wellness, and it feels like, I hear that phrase being spoken by more and more companies as time goes on. What makes Envestnet uniquely positioned to deliver financial wellness in maybe ways that other companies are not? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [29] -------------------------------------------------------------------------------- Yes. And it is -- it's a little bit like a hallmark card, right? I mean it's a feel good. But in my mind, people have been experiencing, they chopped up financial lives. They -- partly how they engage in their daily financial lives and how you keep track of all those things. And then they've got these aspirations or goals that they want to reach, these long-term goals that they want to reach. How do you connect those parts? And as you connect those parts, the way I live my daily financial life and where I want to head, what do I want to achieve with the money that I'm working hard to earn, how do you connect those things so that they begin to work together? And as you do that, you really begin to create a much more encompassing kind of approach to money too well. And to me, financial wellness is a comprehensive approach. It can be accessed in bits and pieces, but it's most effective when all these pieces are pulled together. And when it's pulled together, that individual has a much better sense, much better balance, much better ability to manage their daily financial lives and then reach their long-term goals. That to me, Patrick, it's a financial plan that's headed you in a direction, then the best way to achieve that plan, investing, protecting income, credit banking, how I balance health care, with health care costs within all of that, how do I pull that picture together to create balance, and balance is where financial wellness lives. And we're really -- yes, and why I believe we're best positioned to do it is only Envestnet has the depth of data. First question you asked was about Yodlee, data, the scope of technology from front-to-start market lead and financial planning. And then the network of solutions, our investment platform. But then remember, we've launched these exchanges, the insurance exchange or credit exchange, others that will be coming, and we're scaled. We can do it at scale for millions -- tens of millions of families. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Bill Crager for closing remarks. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [31] -------------------------------------------------------------------------------- I just want to thank everybody for joining today. I appreciate your time and your kind of attention to Envestnet we really appreciate it very much. I hope everybody is staying safe. I hope everybody stays healthy, and I am looking forward to our next conversation. Thank you so much. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.