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In Wealth Management, Big Data Means Big Deals

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It's Big Data's big moment in the wealth management industry.

The surprise multimillion-dollar acquisition of a firm providing a data hub for a wide swath of financial institutions sparked an industry awareness of the importance -- and value -- of the transactional information that it generates on a daily basis.

For financial advisory firms in particular, there's a realization that tapping a client's real-time financial data for review, an ability long relegated to personal finance management software providers, is going to change the way that advisors are going to do business.

At least that's the opinion of Jud Bergman, CEO of Envestnet, which splashed $660 million in cash and stock for Redwood City, Calif.-based financial data aggregator Yodlee, whose client roster is a cross-section of payment services, digital wealth advisors and major banks such as Bank of America.

Combining Envestnet and Yodlee’s cloud-based networks, Bergman said in a statement, will create what he described as "an unprecedented level of engagement" between financial advisors and investors. As a result, he argues, advisors will be able to deliver more informed recommendations.

The merger enables Envestnet to offer advisors its suite of investment products and services, portfolio analytics, account services and reporting capabilities with Yodlee's massive data stores of bank accounts, investments and payments from over 14,000 sources.

The deal is an inflection point for the advisor industry, says David Lyon, CEO of advisor software startup Oranj.

"This deal brings more attention to the fact that the [digital] evolution of this business is really important for advisors," says Lyon, whose firm relies on Yodlee support.

"It also signals to the industry that a lot of companies are getting into the Big Data game. They're looking at business opportunities outside of just serving advisors."


Up until this point, much of the customer data -- such as credit card usage and electronic payments -- culled by Yodlee has largely been utilized in PFM tools by banks to offer clients budgeting insights, and not wealth management firms. Putting that same information in the hands of advisors will change the profession, says A.T. Kearney analyst Uday Singh.

"Advisors will have a much better idea of a client's behavior in how they use their bank accounts, credit cards and their spending. They can be a lot more thoughtful about how their client is managing their financial life," says Singh, co-author of A.T. Kearney's recent report on the future of robo advisors.

"It's certainly a positive when planners are faced with concerns about their own revenue stream. Big data access allows them of have a more holistic offering, where they can really work on enhancing the client experience."

Early developers of PFM tools like Intuit never capitalized on the opportunity to bring that power to professional advisors, opting instead to chase the direct-to-consumer product market, says Michael Kitces, partner and director of research at Pinnacle Advisory Group.

"Envestnet understands that entirely," Kitces says. "PFM is an incredible relationship management tool. It is an actual treasure trove of data for who knows what insights you can draw out.

"Clearly that was the story when Fidelity bought eMoney," Kitces says, referring to the financial institution's February deal for the wealth planning software popular among RIAs. "It wasn’t about owning the software. It was about having that PFM solution."

That sort of potential is why Yodlee could command such a premium -- though Envestnet's stock has suffered under withering analyst scrutiny since the deal was announced Aug. 10.

"It's like putting a flag on Antarctica," Singh says. "At some point, someone is going to have the technology to drill for oil there. At some point, we may be able to find minerals there. What revenue streams are there now is unclear. So you put a flag there and wait. Likewise, having all this rich client data is a smart thing to have for the future. And the future I'm talking about is just six or eight months away, starting now."


Envestnet's acquisition puts pressure on its competitors, as the industry shifts toward serving a much wider clientele group with the advent of robos, says Alois Pirker, research director for Aite Group's wealth management practice. With its deep banking reach, Yodlee was one of the best tools for the task, he says, and opens up even more markets for Envestnet.

"I don’t think anybody out there has the solid capability set under one roof as they have," Pirker says. "Envestnet increasingly is becoming like an industry utility."

Earlier this year, the Chicago-based firm spent $32 million on financial software firm Finance Logix and RIA online platform provider Upside, boosting its robo advisor profile. In 2013 it acquired Prudential's Wealth Management Solutions for $10 million, and in 2012 it acquired RIA platform provider Tamarac for $52 million.

"So far, Envestnet has taken out competitors," Pirker says. "It's basically getting market share by acquiring firms and then functions. Here with Yodlee, I didn't think Envestnet would go that big. With Tamarac, it positioned them well in the RIA space. Yodlee positions them to enter the banking space."

Pirker adds the Yodlee acquisition demonstrates just how fluid the industry will become in the near future.

"There is a reshuffling in the market," he says. "Asset management firms are going into distribution. Custodians are getting into investment management. A platform like Envestnet has broadened. There are a lot of pieces moving now."

The deal demonstrates a divide forming in the industry among firms, says Dan Raju, CEO and co-founder of Tradier, a cloud-based brokerage and digital advisory services provider.

"The market is splitting into two layers," Raju says. "There are firms providing that last mile customer value, like a robo platform or a savings account, and companies that provide the fabric that enables that customer experience [such as a financial account aggregator].

"Five years ago, the only companies that provided those experiences were the companies that owned that fabric, which were largely legacy firms. But the last three years have proven that new companies can be created and become large, popular offerings. The time of a few large legacy products is over."


For firms on the underlying fabric side -- Raju's Charlotte, N.C.-based online brokerage offers some data aggregation capability like Yodlee -- Envestnet's deal was of great interest just for the price that it paid, Raju admits, before adding his firm is solely focused on growing and making its own acquisitions.

A similar refrain is heard from Quovo CEO Lowell Putnam.

"We're very excited, because it shines a spotlight on our little niche in the industry," Putnam says. "Every new product starts with better data and aggregation [and] being basically one of the last independent aggregators is a great position to be in the industry. We're beholden to nobody but ourselves and our investors."

Putnam views the recent acquisitions of peers like eMoney and Yodlee as recognition from wealth management firms that they paid little heed to data in the past.

"The industry worked very well with crummy data for a long time," Putnam says. "The factors pushing onto the industry -- huge money going into fintech, the rise of robo advisor, the reorientation toward a fiduciary role -- are necessitating better tech. The tail is wagging the dog. Technology is required for an industry evolution, and going back to the foundation its seeing the data is not very good."

He shies away from questions about valuation, and insists Quovo is neither looking for new investors nor is it for sale. "[The Yodlee deal] shows the industry cares about fundamental data. It just shows that commodity services can be extremely valuable."

Though there is speculation about what Envestnet's ownership will mean for competing firms that have relied on Yodlee's services, Chris Costello, the CEO of robo advisor Blooom, isn't concerned. The Overland Park, Kan.-based firm uses Yodlee for its front-end applications.

"If you're worried about someone swooping in and stealing your clients, then you're not doing enough to keep clients," Costello says. "Somebody doesn’t know the client but might access the data and steal them away? I argue you should step up you game and improve your offering."

Oranj's Lyon notes that the Yodlee deal has firms shopping for companies like his and likely putting a high premium on it. "But it's not really part of our business strategy. We're not looking for an exit any time soon."

When he first heard about Envestnet's deal for Yodlee, Lyon wondered whether his peers were right about its impact on wealth management.

"I don't know if it changes the space, because the space itself is changing," Lyon says. "There was similar question when ETFs became in vogue -- how would they change the investment space? Advising is moving to a holistic approach as opposed to just buying and selling stocks. It's just evolving."


The increased importance of Big Data in the wealth management industry might mean a PFM software provider could be persuaded to sell their software, Pinnacle's Kitces suggests.

"I can't imagine that any PFM providers out there aren't getting constant inbound calls," Kitces says. "The Yodlee deal will only speed things up, only because companies that were fine licensing Yodlee now are thinking about buying a company. But the list is getting short. Yodlee set a new high-water mark for how these things get priced. Anyone is certainly going to be asking a higher price."

If there is any reason for pause, it will be firms watching Envestnet over the next six months to see how it cashes in on its Big Data stash, says A.T. Kearney's Singh.

Yodlee has already reaped profits from reselling aggregated transactional data to hedge funds tracking trends and seeking unfiltered insight into corporate revenue streams, though its practice received unflattering media coverage. 

The big challenge will be using Big Data in a wealth management framework, Singh says. "A planner can broaden their viewpoint with respect to their client as opposed to just focusing on wealth creation," Singh says, but adding that offering that to clients across levels of wealth "means asking the right questions, and getting that intelligence is an intellectual exercise."

"How well do these companies understand customers? What value proposition do they have for them? How should they create customer segments and what segments should they go after? All these questions are data dependent."

There are also the changes in customer experience, Singh says, from walking into a branch and meeting an advisor, to making a phone call, that data can make smoother, shorter and more valuable.

But for firms unfamiliar with Big Data, there's a learning curve, he adds.

"How do you use all the data coming in? It's easy to talk about Big Data. But it's difficult to monetize it and commercialize it."

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