$195 million acquisition sets the terms of engagement for future consolidation. Scale is everything and the focus of value shifts from traditional AUM-linked revenue.
Envestnet raised eyebrows throughout the industry this afternoon by announcing that it’s buying end-to-end wealth management solutions provider FolioDynamix.
Both companies are familiar to Wealth Advisor readers. Their combination reveals that the universe of players angling for a piece of the outsourced portfolio has gotten crowded, maybe unsustainably so.
After all, with a swarm of robot platforms chasing scraps of AUM on one end and giants like Envestnet absorbing rivals on the other, you need a differentiated offering to make a viable go on your own.
If you’re in this business, it’s no longer easy to succeed by simply showing up and grabbing your basis points. You’ve got to tell advisors why they need to be on your platform and not one of the others.
In broad terms, the companies do similar things, functioning as true “turnkey” asset management platforms for the advisors who pick them to run client portfolios.
They both do it all. Where FolioDynamix has distinguished itself is in its affiliate base — weighted toward commission-based advisors instead of the fee-driven fiduciaries that Envestnet has captured so far — and its ability to work with the asset classes those advisors prefer.
Envestnet is looking forward to incorporating FolioDynamix expertise with bonds and options into the larger platform, for example. If those instruments make sense for the RIA crowd, they’ll be getting the ability to work with them.
Likewise, FolioDynamix affiliates will get a seamless path toward converting some or all of their commission book to a fee-for-management model. Maybe they’ll want to do it due to client demand or their own strategic objectives. Maybe the regulatory tides will make it inevitable. Either way, the tools are on the table.
And it goes without saying that the new parent company won’t mind if those incoming advisors sign up for any of the solutions Envestnet supports. FolioDynamix boasts around 90,000 relationships. Envestnet has around 57,000 on its platform now.
Combine the platforms and in theory each of those relationships will buy more, boosting the overall revenue opportunity per advisor. That’s the real win here.
Not a bolt-on transaction
Simply bolting on AUM isn’t really on the menu. Envestnet already has vast scale and FolioDynamix really isn’t in the AUM game — out of the $800 billion on the platform, maybe 3% of it is in the company’s managed accounts.
The business model is really more about subscriptions and ancillary services. Those revenue streams don’t live or die on AUM. It’s more of a conventional software-as-a-service approach.
What that means is that Envestnet isn’t simply grabbing a rival TAMP and adding its asset-based business to its own. There are elements of a lateral move here, combining capabilities as well as brute capacity.
I suspect we’ll see a lot of those brute AUM-to-AUM deals over the next few years as competitors who hit a wall chase combinations of scale in order to remain relevant.
And the numbers here aren’t rosy for “me too” players looking to grab their slice of the market and hoping that technology will make the math work out.
FolioDynamix is chugging along at maybe $40 million a year in revenue. On an EBITDA basis, they’re narrowly profitable. But if they were a conventional fee-for-AUM platform, that run rate would translate to well under 0.1% per year.
Vanguard and Fidelity can get away with a comparable fee structure because they’re already trillion-dollar giants with scale. People who try to go head-to-head are going to have a bad time.
Think about pure deep-discount robot platforms like Betterment that couldn’t sustain 0.15% pricing and have only gathered $10 billion so far. The race for scale wasn’t working there.
It takes a lot more assets to make a big inflection on the bottom line. Envestnet thinks FolioDynamix can save about $20 million a year sharing costs with the parent company. On that basis, the acquisition should be earnings-accretive relatively soon.
But unlocking that level of synergy means combining two independent entities with redundant support systems and streamlining the resulting operation. You don’t get there on your own unless you assume massive organic growth.
As it is, the deal values FolioDynamix at about 6-7X EBITDA once costs are conserved. That’s not a unicorn multiple. It’s sound business.
And it’s roughly what FolioDynamix’ previous parent paid back in 2013. That company did its best to grow the business but it’s selling off subsidiaries and winding down all operations now.
I think this is the shape of things to come. We’ll talk more about the outlook for the industry next week, talking to the principals and neutral observers about where they see the winds of consolidation blowing.
But for now, the lesson is clear. If you’ve got a differentiated asset management platform, let the world know now. Otherwise, it’s going to be hard going it alone.