Do we work in an industry that defies physics?
Where is Envestnet’s saturation point?
By: Joseph Yoon, EVP of AdvisorSharesADV
We have all sat in chemistry class and participated in the exercise where you test for the saturation point of sugar or salt into water to build a solution. It is nothing amazing, but it is always an interesting exercise to watch as you wait for the point in which the water can no longer absorb any more particulate. Instead, it just floats along, part of the solution, but does not get incorporated.
Watching the growth of Envestnet provides a similar feeling. It is hard to believe that this is a firm that is only 15 years old but as you look at its path of acquisition, the growth trajectory makes sense:
2001- Acquires PMC (portfolio manager)
2004- Acquires Oberon Financial (financial software)
2004- Acquires NetAssetManagement (financial software)
2011- Acquires FundQuest (fee-based managed services)
2012- Acquires Prima Capital (investment manager due diligence)
2012- Acquires Tamarac (portfolio management technology)
2013- Acquires WMS division from Prudential (wealth managed products)
2014- Acquires Placemark (SMA/UMA platform provider)
The question that comes out of this is: Where is Envestnet’s saturation point? More pressing: What does this mean for the model consuming public?
The one thing for certain is that interesting times are ahead for the model investment space. Post 2008, advisors are looking for the new constructs for how to deal with the investment management portion of their practice. Some still rely on modern portfolio theory (MPT), but the stranglehold of the past half-century is weakening and other theories and concepts are coming to the forefront. It is hard to say which one of these theories is the best. What is easy to say is that Envestnet is going to be one of the major, if not the major proving ground for shaping the next evolution of investment theory and philosophy.
Getting back to the question of what is good for the model investment consuming public, is the loss of diversity in the model platform space a positive or negative? The benefit to a monolithic perspective is that it can clearly drive in a particular direction. Yet, it can be at the expense of incorporating additional viewpoints and perspectives which will be beneficial to the next generation of investment philosophy. The obvious fear is that having a singular voice with a skewed perspective has the potential to put us on the wrong track for a post-MPT investment world.
One needs to consider that a potential outcome in the growth and dominance of Envestnet is the same thing that happens in the saturation experiment. Although one can change some variables in the experiment and in turn, seek supersaturation to create something that could not exist otherwise.
Without supersaturation, ales and stouts would not be able to obtain their head.
Without supersaturation, skiers would not have those chemical hand warmers on the slopes.
Without supersaturation, little kids would not have rock candy!
Clearly, the world would be missing some great things without supersaturation.
Thus, the question is does Envestnet reach a point of natural saturation, or do they change a few variables (and in turn, the environment) so that they can reach supersaturation and create something truly special in the world of investment models and strategists? It is too soon to tell, but it should be fascinating to watch. With the inertia they have towards dominating the strategists’ space, we should all be rooting for Envestnet to be the next truly special supersaturated substance.