On March 1, 2019, Envestnet, announced that they were partnering with Fiduciary Exchange (a company which integrates “brokerage, insurance, and advisory ecosystems”) to launch their new Envestnet Insurance Exchange, thereby providing a platform for RIAs to purchase fee-based insurance and annuity products directly from carriers on behalf of their clients, instead of through a commission-based insurance agent.
In and of itself, this is good news for the RIA community; as insurance companies are starting to bring no-commission, fee-based insurance and annuity products to market, RIAs will have a marketplace to shop for them, saving clients the cost of the otherwise-applicable commission (since the RIA is already being paid directly by the client in the first place).
Except, given other recent Envestnet acquisitions and initiatives, their Insurance Exchange could end out being a much bigger deal than much of the industry currently appreciates. To the point that someday, Envestnet might even make their other software – including the recently acquired MoneyGuidePro – free to advisors, just to further expand their Envestnet Insurance Exchange (and other investment marketplaces).
In this episode of #OfficeHours with Michael Kitces, we discuss how comprehensive financial planning actually has its roots in product sales, the real opportunity Envestnet likely saw when it purchased MoneyGuidePro, and why integrating it with its Insurance Exchange could eventually make MoneyGuidePro free and become the most disruptive shift to hit Advisor FinTech in years.
Over 30 years ago, comprehensive financial planning originated as a means to an end, where a financial product salesperson would use a plan to help a prospect define their goals, and then show how various products (that the salesperson earned a commission to sell and implement) would allow the client to achieve those goals. And even though the landscape has changed dramatically since then, financial plans are still often a means to an end even for advisors who don’t sell “products,” per se, since they’re still trying to “sell” the need for clients to save and invest… with them.
Yet the strange mystery is why those increasingly popular financial planning tools haven’t actually illustrated what happens, in the planning software itself, when various different products are added into the plan. The software illustrates a need, but then it’s necessary to provide a separate product illustration, which is completely independent of the plan that was supposed to validate the need!
The gap between financial planning software projections and product-specific illustrations began to close a couple of years ago, though, when MoneyGuidePro rolled out a partnership with Covr that gave them the ability to illustrate life insurance products (and even apply for those products) all within the confines of MoneyGuidePro itself.
It’s not a big leap, then, to understand why Envestnet decided to pay a half-billion dollars last year for MoneyGuidePro… not because they were merely champing at the bit to get into the financial planning software business, but because Envestnet wanted a platform that was primed for deeper insurance and annuity integrations. And if that’s the case, and Envestnet can effectively leverage MoneyGuidePro to support its Insurance Exchange, the next question becomes… could Envestnet turn around and make the software that it paid a half-billion dollars for, free?
Which isn’t such a crazy proposition when we consider that, given the dollar volume of just variable annuities alone, Envestnet will only need to capture a minuscule slice of that market share in order generate the same revenue that all the RIAs and broker-dealers are paying annually in MoneyGuidePro subscription fees… even if Envestnet is “only” paid 25 basis points from the annuity companies on their platform. And if MoneyGuidePro is free, then it won’t take much convincing for advisors to make the switch away from other financial planning software providers, and potentially save themselves thousands of dollars a year… while further growing Envestnet’s Insurance Exchange opportunities.
Ultimately, the key point is to realize that the free-to-use software model has become the standard in recent years (think Facebook, Google, etc.), and is even gaining traction even within the financial services industry (think RIA custodian technology from Schwab, Fidelity, and TD Ameritrade). And in a world where most advisors are still writing checks each year for their various software tools, Envestnet’s acquisition of MoneyGuidePro and introduction of its Insurance Exchange could be enormously disruptive to the current FinTech landscape. Of course, it remains to be seen whether Envestnet’s Insurance Exchange really gains acceptance in the advisor community… but FinTech competitors, in particular, should be figuring out now how they’re going to respond if it does!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when a new broadcast is starting! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Well, welcome, everyone. Welcome to Office Hours with Michael Kitces.
For today's Office Hours, I want to talk about something in the recent industry news that I actually referred to in a keynote speech as one of the most disruptive things that may happen to advisor technology in the next few years that I think has been grossly underappreciated and its significance. And it's Envestnet's launch of their Envestnet Insurance Exchange with Fiduciary Exchange, or FIDx for short, as their partner.
So in essence, Envestnet's Insurance Exchange is a technology platform that will allow primarily RIAs to buy fee-based insurance and annuity products directly from carriers rather than needing a brokerage or insurance license to sell them as commission-based products. So in other words, insurance annuity companies are now starting to roll out some no-commission, fee-based alternatives for their products, because RIAs can't use traditional commission-based products since they can't take the commissions, and then Envestnet is creating an insurance exchange as a centralized platform or basically a marketplace where advisors will be able to shop and select and even apply directly for insurance and annuity products that their clients may need.
Now, in and of itself, that's an interesting bit of news. Okay, annuity companies are making no-commission annuities for RIAs and Envestnet is making a marketplace to shop for them. But I think that's really only the tip of the iceberg for what's coming next. And the what's next part is the part that I think the industry hasn't gotten yet. So let me explain.
MoneyGuidePro Financial Planning Software As An Annuity Illustration Tool?
For the better part of 30 years now, financial planning has grown well, in part because a pioneering group of financial planners figured out how to create financial plans so valuable consumers would pay for them. They can literally charge fees for their financial planning services and deliverables.
But primarily over the past 30 years, at least, financial planning has grown because once you take a client through a comprehensive financial planning process and then show them how certain recommendations, i.e. products and solutions will improve their ability to achieve their long-term goals, it's really likely that they follow through and implement those recommendations with the financial planner who gave them the plan. Which means, in other words, financial plans and financial planning software has in practice been really good at supporting product sales and product distribution. That's why some of the largest firms that were early pioneers in creating financial plans for consumers back in the '70s and '80s, from Ameriprise when it was still IDS to Cigna Life, were insurance and annuity companies. Because a financial plan was a great way to validate the client's need, for which the advisor could then sell the product that solved the need.
And in fact, I'd argue that financial planning software today is actually still incredibly product-centric even for advisors that aren't selling products. That's why we have really good tools for retirement planning, because it convinces clients to save and invest more with us. It's why we have insurance and estate planning tools, because it helps sell life insurance for family protection and estate liquidity. That's why we have college planning tools, because it sells 529 plans. But then we have almost nothing for credit cards, mortgages, student loans, cash flow planning, tax planning, because most advisory platforms don't have products that match credit cards, mortgages, cash flow planning, tax planning, so the financial planning software doesn't do much to cover them.
Now, the irony to me, though, is that now we're saying the fact that financial planning software has been historically used as a way to support the sales of insurance and investment products, I'd argue that it's actually a really crappy way to sell those kinds of products, because the software doesn't actually illustrate the product itself. You can't show a particular company's variable or indexed annuity with a guaranteed lifetime rider in planning software to show, "Here's how your plan gets better with this product." You can't show cash value life insurance with a premium finance loan strategy in planning software. Instead, you can generally show there's a need and then separately provide a product illustration for that particular product solution.
Now, in the past, I think this probably wasn't that surprising because so many insurance companies and broker-dealers years ago were so restricted either to proprietary products or had limited product venues that they couldn't show the range of products in the software because the advisor couldn't have sold most of them anyways. And if there was only one company's product to illustrate, you may as well just use the existing product illustration tools. But as broker-dealers have become more open architecture and product shelves have widened, this has begun to change. So we saw back two years ago, MoneyGuidePro announced a partnership with a company called Covr, where advisors were going to be able to illustrate life insurance products and then even proceed straight to the application process directly from within MoneyGuidePro.
So in other words, you could show the client's financial plan and then show how they were underinsured for their family protection, then show specific quotes for life insurance that the client could see on the spot. And then if they wanted to proceed, they can go directly to the application process right there from the financial planning software all at once. And that ultimately is why I think Envestnet decided to pay half a billion dollars to acquire MoneyGuidePro earlier this year. Not just to compete in the financial planning software marketplace, but because Envestnet is building their insurance and annuity exchange while MoneyGuidePro is already working on integrations that would facilitate insurance and eventually annuity quotes illustrations directly within the planning software, which has the potential to be a really powerful tool to facilitate proper use of insurance and annuity products directly from within planning software.
Could Envestnet’s Insurance Exchange Make MoneyGuidePro Free?
And here's why that's such a big deal. So annuities last year did about $230 billion (with a B) dollars in new product sales, of which about $100 billion was variable annuities and $130 billion was fixed and indexed annuities. So let's just focus for a moment on the variable annuity portion, most akin to what a lot of advisors would do with portfolios today. Last year, variable annuities was a $100 billion marketplace of new sales, new flows. And let's pretend that Envestnet rolls out its Insurance Exchange to the RIA community and RIAs decide to do just one-fifth of that amount, or $20 billion in variable annuity purchases. Maybe it's high-net-worth clients who need a low-cost tax deferral wrapper. Maybe it's for a segment of nervous clients who after an 11-year bull market want a guaranteed living withdrawal benefit associated with the retirement assets in case there's a market pullback.
In a world where RIA assets are measured at more than $4 trillion, aiming for $20 billion in annuity assets is not a high hurdle. That means the average RIA would put just 0.5% of its client assets into annuities in select situations. Like, 1 out of 200 clients using an annuity across the RIA space would get you to $20 billion. Recognize that we're talking about a new crop of lower-costs, no-commission, fee-based annuities that should be more appealing to the RIA community.
Now, even though RIAs themselves can't get paid commissions, annuity companies still have a budget for their own marketing and distribution: for wholesalers, for platforms to help service their annuities, and for other, we'll call it new types of marketing strategies. So let's say since Envestnet is creating the platform, that it receives a 25 basis point fee from the annuity company to support distribution and servicing. Not dissimilar to mutual funds that pay 25 basis point 12b-1 fees. So since Envestnet is facilitating access to this huge new RIA marketplace: building technology in the Insurance Exchange, integrating these illustrations into MoneyGuidePro to really show the annuities benefit, so we do the math. Earning 25 basis points on just $20 billion of variable annuity flows is $50 million to Envestnet, which not coincidentally is the amount of revenue that MoneyGuidePro generates across all of the tens of thousands of advisors who pay for software.
So in other words, if Envestnet capture just 0.5% of RIA assets by tying its Insurance Exchange into MoneyGuidePro, it would generate as much revenue for Envestnet as all RIAs and all broker-dealers all combined, all paying for MoneyGuidePro software today. And that's just in the first year. If Envestnet generates another $20 billion of flows the next year, now it's getting $100 million of revenue, 25 basis point trail in the first year plus 25 basis points on the second year. And the math just compounds from there.
Within a couple of years, Envestnet could quickly generate so much revenue from using MoneyGuidePro to support the sale of fiduciary no-commission annuities into RIAs that want to use them in select situations anyways that it could double or quadruple or more the entire revenue of MoneyGuidePro without generating a single dime of additional software license sales from MoneyGuidePro itself to the point that it might quickly make sense for Envestnet to make MoneyGuidePro free and just give it away to every RIA or hybrid broker-dealer they can. Just get them to use the software, knowing that the more advisors use the software, the more there will be who may find an annuity solution to be appropriate for even just a tiny subset of their clients and generate many multiples more of additional revenue.
Again, variable annuities today generate $100 billion per year in new flows, so what if someday RIAs were generating a comparable amount of annuity flows with a new generation of low-cost, high-quality fiduciary annuity products? Then Envestnet is generating $250 million of revenue per year, recurring, growing and compounding by using MoneyGuidePro as a distribution channel for fiduciary insurance and annuity products and taking a small cut for itself instead of just selling MoneyGuidePro as a piece of software. Or stated more simply, Envestnet is expanding its reach as a true platform business.
Is Envestnet Building The Fiduciary Product Platform Of The Future?
Now, I know a lot of advisor technology companies these days like to talk about themselves as platforms. Which basically seems right now to be a euphemism for, "We don't just do one thing. We do lots of things." Or better yet, "We do all the things that advisors need, therefore, we're a platform." But from a pure business model perspective, providing all the technology tools that advisor needs to run a business doesn't make you a platform business model. It just makes you a big all-in-one piece of software that does a lot of stuff. And that's how you sell the software, and that's what you get paid for.
By contrast, a pure platform model doesn't actually get paid for their software. Platform models get paid by participating in the underlying economics of transactions that occur on their platform. So for instance, you don't pay for software from eBay. You don't pay for the Uber app, or to log into Airbnb, or to use Gmail or a search engine or Facebook. The software is free because the platform makes its money by taking a slice of the transactions that occur on the platform from each completed auction on eBay, from each ride on Uber, from each rental on Airbnb, from each ad that reaches a consumer for Google and Facebook.
And the virtual platform models is that you can reach such a huge network of people in the marketplace. It's so much more profitable to participate in the underlying economics of each transaction on the platform that you don't even want to charge for the software. You want to make it free because you want to get in the hands of as many people as possible to get more people on your platform so more transactions happen on your platform because that's how you get paid. Right? That's why Uber is bigger than any individual taxi company, but they have no taxis. Airbnb is bigger than any hotel chain, but they have no hotels. And Google and Facebook have been slowly but steadily demolishing the entire traditional media advertising business because they don't make their money charging for the Uber app or the Airbnb website or using Google Search or Facebook to friend people, they give the software away for free, get out to as many as they can and then make more money by getting more people to do stuff on their platform. That's a true platform business.
And that, again, is what I think we're seeing from Envestnet, which in truth was already largely a platform business. Their bread and butter for years has been serving as a marketplace for various third-party managers, TAMPs, SMEs, where Envestnet participates in all the dollars that flow across the platform to those various strategies. And their only goal is to match more advisors to more managers in order to get more dollar flows across the platform, because Envestnet gets a small slice.
And now I think we're just seeing the next generation of this. And as technology becomes more and more central to both how advisors run their businesses and how advisors find products for clients, so too is Envestnet becoming a more tech-centric platform to facilitate that distribution in annuities. It's the same reason that BlackRock put $123 million into Envestnet last fall, because BlackRock has similarly discovered that when they distribute their iRetire software to advisors, which has defaults that illustrate BlackRock's iShares, advisors end out putting more money into iShares. So they took a stake in Envestnet and deepened the partnership that put iRetire and FutureAdvisor and BlackRock's other Advisor Center tools more directly into the Envestnet platform, because good technology that shows your products tends to generate more flows for your products.
Except with Envestnet's Insurance Exchange, they may not even care which annuity company's products went on the platform. That's the beauty of the platform model. It doesn't matter. The only goal is to build a great technology experience for both sides of the market and then let the marketplace decide which particular products are the best. All that matters is they occur on your platform. And just as companies like Uber and Airbnb became the largest, not by driving the most taxis or renting the most hotels but by being the platforms that more directly connect consumers with the drivers, the landlords looking to rent, so too does Envestnet have the potential to be far larger by running a true platform model with an ever-widening marketplace of investment in annuity insurance products to the point that, again, I can imagine that with just a few years of success, Envestnet will make MoneyGuidePro free and maybe even Tamarac as well just to get in the hands of more advisors to do more business on their platform.
Will Advisors (Continue To) Trust A “Free” Envestnet Fiduciary Product Platform?
Now, I know that our audience here at Nerd's Eye View skews heavily towards independence, who like their independence, and I'm sure a few people are saying or thinking like, "I'm not going to use Envestnet and MoneyGuidePro for free if they're just trying to sell products to my clients, I'm a fiduciary." But there are a few things that are important to note here. The first is that I'm not necessarily talking about the insurance and annuity products of today that aren't popular with RIAs and even a lot of broker-dealers because of their costs, I'm talking about a new, next-generation of annuity and insurance products coming down the pike that are built for RIA fiduciaries and are substantially lower costs because they don't have all of those commissions built in, aside from perhaps a small slice for Envestnet's future platform fee.
Second, it's important to recognize that it may be totally fine that not all clients are going to use the products, and that's okay. If you look at it from a business model perspective, Schwab makes over half of its entire revenue from that tiny 1% or 2% cash position that we have in our clients' accounts, and less than half of Schwab's revenue comes from the other 98% of everything else that we do with our clients' assets. In other words, when your platform is big enough and widely adopted enough, you actually only need a minuscule percentage of participants to do business on your platform and the math still works.
And third, well, I know a lot of advisors may say, "Well, I don't know. I'm wary of anyone offering something for free." That's all well and good to say now, but will you still be saying it if MoneyGuidePro is literally free and you're writing a check for thousands of dollars to eMoney or RightCapital or NaviPlan or some other competitor, or you're a multi-advisor firm where that could be tens of thousands of dollars in software fees for something that's now free with MoneyGuidePro? Recognize that if you do enough business, inevitably, some of it is going to fit into the Envestnet platform.
In fact, the irony is that last year when I raised the question of whether we should be paying a basis point custody fee to RIAs instead of the current model, there were a lot of advisors who said, "Heck no, I'm not paying or custodian for what they do. That's totally commoditized and not valuable." Except the reality is we pay for it now. Right? RIA custodians aren't charities. In fact, most of them are publicly traded companies. Which means you can look up their revenue and profits. You can look at their assets. You can look at their revenue. You can do the math.
And the reality is that most RIA custodians already make somewhere between about 15 to 25 basis points of revenue yield on the client assets that we put on their platforms. The difference is just that we don't pay as advisors, clients pay it directly. They pay it out of the spreads in their money market sweeps and the trading transaction fees and the 12b-1 fees and the sub-TA fees and the backend payments from the asset managers to get on those no-transaction fee NTF EDF [SP] platforms, all of which gets packaged in the expense ratios of the solutions that clients buy. So they do pay for it, but we're actually so used to having clients pay for on the back end, it's hard as an advisor to get used to paying for it upfront and then charging clients more to make up for it, even if the total cost all in is the same.
And my gut is that we'll see a similar phenomenon here. If Envestnet eventually makes MoneyGuidePro free, in a perfect market economy, the end result would be MoneyGuidePro will be free, but the products you get through Envestnet's exchange will be slightly more expensive than when you would have paid directly because that's how Envestnet makes their money with those back-end payments like RIA custodians. And the net cost to the client might be the same. You can pay a little more for the software and a little less for the products or a little bit less for the software, a little bit more for the products, but candidly, it's still a lot easier in practice to let clients pay for it directly sometimes in the underlying product expense ratios than to pay upfront as advisors and raise our fees to clients to make up for it.
Which bring us back to the beginning is why I think Envestnet's Insurance Exchange is the most disruptive thing to hit the advisor technology space in years. Because MoneyGuidePro going cheaper or totally free and potentially having Tamarac someday go free as well would be a huge disruption to the other financial planning and portfolio performance reporting tools that are out there. Now, it's not unheard of. TD Ameritrade makes iRebal for free. Schwab announced they're going to make the whole Portfolio Connect free. The Fidelity Wealthscape platform, we don't pay separately for that. This may even [inaudible 00:17:38] pressure on Fidelity to make eMoney Advisor free someday to get more assets onto the Fidelity platform.
And it's actually not a coincidence that most of the free software we get today is from RIA custodians. There's a reason why they give away so much for free. Because RIA custodians actually are true platform business models today. They just want to get us on their platform because they make money on the underlying transactions. The cash sweeps, the purchases, the ETFs and mutual funds. They actually do it in a lot of different ways off their platform. They just want to be certain the assets are there and stuff happens on their platform. And if technology is how they get the assets in, custodians are giving away more technology. But in a world where most advisors still pay outright for their various software tools, again, I think Envestnet's Insurance Exchange is an incredibly disruptive thing in the advisor technology space. It represents, I think, the shift of Envestnet even further into the platform model, and they've found a way to do it without even needing to become a custodian, because they're just participating in everything from third-party managers to ETF model portfolios to insurance and annuity products anyways.
So we'll see what happens. At this point, it's really still a question mark of just whether Envestnet will get any traction with its Insurance Exchange, to begin with. It still has to deliver on the technology, insurance annuity carriers still have to deliver actually could products that fiduciary advisors want to use. But watching the roll-out of the Envestnet Insurance Exchange, if it gets any traction at all, I'm betting we see MoneyGuidePro heavily discounted or entirely free in just a couple of years, conceivably Tamarac as well, which will be really disruptive to the current advisor landscape for technology.
And will present a lot of new questions. For us advisors, do you want the packaged solution where everything is included or do you want to maintain your independence to the point that you pay out of pocket for software and have to charge clients differently to make up for it? And if you're an advisor software company that competes in the space, the question to you is, what's your plan if Envestnet, or for that matter Schwab or Fidelity or another custodian start giving away more portfolio performance reporting or financial planning software for free because it supports their underlying platform models? Hope that's a little food for thought.
This is Office Hours with Michael Kitces. Thanks for joining us, everyone, and have a great day.
MGP should be free because it’s not that good
Elliott Weir - III Financial says
On one hand, it would be nice to be able to facilitate my clients getting the life insurance coverage they need without them having to pay commissions and bringing in another professional. Lower cost and easier for the client.
On the other, I do NOT miss the workload that insurance creates – applications, medical records, following up with underwriting, and many other tasks that I left behind 7 years ago. If the RIA has to handle those tasks, our workload and/or staffing needs increase. The question becomes – do I have to charge my clients more for that work (and is it better for the client than just paying the commission), or do I have to “eat” the additional costs it brings?
Michael Kitces says
Bear in mind there’s a whole world of “InsurTech” trying to make those processes easier, too.
Paperless straight-thru applications, live processing, algorithm-driven instant approval (with no need for APS and medical records) for low-risk insured.
It may not be as time-consuming as you fear in just a few more years of technology improvements in the insurance world?
Elliott Weir - III Financial says
If that were the case, it would definitely tilt the scales toward cutting out the middleman (and their commission). I wonder if we are talking term insurance only, or could incorporate more sophisticated permanent products when the situation calls for it?
Leo O'Connor says
I would love to see a Nonprofit created by the profession for the profession where advisors pay a subscription for product development they vote for (and get any end results for free) so we can have more than just an annuity exchange, we could put all financial products on an exchange, level the playing field, and tied into good financial planning software that covers everything. It could create banks where you can create rules where if you have an impulse purchase it penalizes you (something you set and agree to) by saving money for you into a pool you can’t touch for a while. Or start building APIs that piece together all these good standalone softwares into one cohesive unit. Possibly keeping all creations open source. This would be a way to create software that isn’t alone profitable for any current company to make.