Can Envestnet's credit exchange compete with online lenders?
Envestnet is leveraging its tech ecosystem to get on top of what’s been a costly and burdensome process for advisors — securing consumer loans for clients.
The leading turnkey asset management provider is set to debut its credit exchange by the end of the year, opening up access to prequalified loans for clients in need of extra cash and simultaneously offering another avenue for advisors to provide additional services.
Doing so could position advisors to expand their business into lending, a critical tool as digital lenders increasingly bundle investment advice into their own offerings.
The challenge for Envestnet will be a highly competitive marketplace. Digital lenders more than doubled their market share in the past four years, with consumers across the credit spectrum increasingly turning to fintechs like LendingClub and Social Finance, according to a study by Experian.
Fintechs now provide 49.4% of unsecured personal loans as of March, compared with just 22.4% in 2015, according to Experian.
SoFi offers personal and mortgage loans to retail clients on a platform that also serves up digital advice products. The San Francisco-based startup offers two- to seven-year terms with rates between 5.99% and 18.07% APR on loans of up to $100,000, according to its website.
Envestnet will be one of the first major TAMPs to offer credit products on a single platform, lining up clients with consumer loans backed by collateral like securities, real estate, fine art and other assets, according to the firm. It remains to be seen if the Envestnet service will gain traction in a crowded lending landscape.
“It takes managing both sides of the balance sheet to build, manage and protect net worth,” says John Yackel, head of strategic initiatives at Envestnet. “At the end of the day, it’s the net worth that helps meet each client’s goals — buying a home, sending kids to college, enjoying retirement and leaving something for the generations to come.”
Some experts warn advisors will need to tread carefully when adding lending to a menu of services. For example, advisors may need to update disclosures to satisfy regulatory requirements.
However, Envestnet’s edge may prove to be its data. Utilizing its vast caches of financial information about clients, Envestnet could speed up the process of offering pre-qualified loans by eliminating the need for clients to fill out additional forms. Less paperwork means a better client experience.
“There is a huge opportunity for advisors to help clients on the debt side of the balance sheet,” says Joel Bruckenstein, founder of the wealth management technology conference T3. Advisors could gain significant upside by optimizing the use of credit by helping them secure more preferential rates, he adds.
The Chicago-based TAMP rolled out an insurance exchange to help round out its capabilities in June, adding both fee-based and commission insurance products to the advisor arsenal. The Insurance Exchange offers products from six carriers, including Allianz Life, Nationwide and Prudential, and gives advisors on the platform access to variable, structured, fixed and indexed annuities, according to the company.
The move is in line with an industrywide trend away from AUM-based fee models in favor of a more holistic approach that provides additional services to clients. In recent months, a laundry list of financial firms have tacked on additional services, most notably debit cards and savings accounts. The independent advisory firm Carson Wealth added banking services in May, while the leading independent robo advisors Betterment and Wealthfront have been jostling to offer the most competitive rates on savings account products since July.
“What have you done for me lately?” Bruckenstein says, summing up the trend.
The credit and loan exchanges are in direct response to gaps between what the client believes is offered at wealth management firms and what is actually available at the majority of firms. Indeed, 83% of clients expect loan and credit management to be available through an advisor, while only 3% of RIAs offer the service, according to Envestnet research.
Credit and loan options may just be the next step in an evolution toward a one-stop shop for financial services.
“The advisor can say, ‘I negotiated a better loan and this is how much we saved.’” Bruckenstein says. “From a convenience and workflow standpoint, advisors definitely want it.”
What may have changed since the days of simply charging on commission in a strictly AUM-based model may be about advisor incentives, Bruckenstein adds. Paying down debt may not have been as advantageous for advisors charging AUM fees and may have presented conflicted interest.
“There’s a whole paradigm shift,” he says. “Now it’s about maximizing net worth because the debt side of the balance sheet becomes just as important as the asset side. Most of an advisor’s career has been focused on the asset side of the balance sheet. There hasn’t been an incentive to do anything else.”
However, advisors should tread carefully before jumping into lending services, says Shad Besikof, president of TruClarity Management, a consulting firm for breakaway advisors. Many will need to seek legal counsel to disclose how they charge fees within their ADV, since there will likely be no fee-sharing arrangements, he says.
Wirehouse reps typically access loans through a private banking unit, says Besikof. When advisors become independent, they often look for similar features.
While RIAs can access credit products through third parties or partnerships with traditional lenders, some providers struggle to cover all the credit needs of clients, he says.
“For advisors who manage both sides of the balance sheet, providing credit by becoming a one-stop integrated shop could be extremely useful,” Besikof says.