What’s behind BlackRock’s $123M stake in Envestnet?

The world’s largest asset manager is investing in the world’s largest TAMP — a move that would corner a sizable chunk of the financial advisor marketplace.

BlackRock announced a strategic partnership with Envestnet which includes acquiring a $123 million equity stake and taking control of 4.9% of the company’s common stock, according to a statement. Envestnet also issued a warrant for BlackRock to purchase an additional 470,000 shares for up to four years.

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BlackRock’s newly minted Digital Wealth business, a conglomerate of the firm’s advisor tech business operations, entered into the partnership. Formed last year, Digital Wealth includes BlackRock’s robo offering FutureAdvisor, its risk analysis tool Aladdin and the retirement planning tool iRetire.

The partnership gives BlackRock access to a “growing but fragmented” set of independent and RIA firms and makes it easier for advisors to move to model portfolio based practices, according to a BlackRock executive. The investment comes from BlackRock Inc. not from client funds, according to the firm.

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“As wealth managers shift to fee-based advisory relationships, they are asking for new technologies to help them scale their business and build better portfolios,” says Venu Krishnamurthy, head of digital wealth for BlackRock, in a statement. The partnership exposed BlackRock solutions to a broad swath of new advisor clients, he says.

The investment does not grant BlackRock a seat on Envestnet’s board and the asset manager will not be involved in Envestnet’s future strategic decision making, says Envestnet president Bill Crager.

Envestnet works with more than 92,000 advisors and 3,500 companies, according to the firm, including some of the largest U.S. banks, wealth management and brokerage firms and hundreds of RIAs.

“At the end of the day, the Envestnet profile has a big position in the RIA market, a big position in broker dealers, a big position in banks,” Crager says. “That segment of the advisor space is sometimes hard to access.”

At well over $400 billon, Envestnet has more than six times the assets of its nearest competitor in its core asset management platform business. Tamarac, the firm’s rebalancing, reporting and practice management software powerhouse, has seen revenue grow approximately eight-fold since Envestnet bought the company six years ago.

Because of the commoditization of asset management, BlackRock was willing to pay for that sort of a distribution network, say Joel Bruckenstein, founder of the Technology Tools for Today conference.

“They’re not the first asset manager we’ve seen take a close look at these fintech companies as investment or partnership opportunities,” Bruckenstein says. “BlackRock has been developing their advisor technology for a number of years and now they’re looking for ways to monetize those investments.”

Partnerships give large asset managers access to an advisor network and the ability to offer their products in a fully integrated package, a big selling point for RIAs, he adds. The wholesale model doesn’t work anymore for asset managers to get their products in front of RIAs. “The mutual fund marketplace worked for a long time with asset managers essentially paying basis points for shelf space,” Bruckenstein says. “The distribution model is not what it used to be.”

On paper, the partnership allows Envestnet to promote either the new Digital Wealth tools or its own Tamarac platform that offers similar financial planning software and already has an established beachhead among RIAs, says Bill Winterberg, founder of the consulting firm FPPad. Tamarac has some $1 trillion in client assets under administration in its RIA channel, he adds.

“At first, I was surprised,” says Winterberg, who has worked as a consultant to Envestnet. However, the partnership may help reassure the firm’s institutional investor clients, who are likely more comfortable using a traditional BlackRock digital solution.

“If Envestnet is to promote BlackRock Digital Wealth to such customers over their Tamarac platform, Envestnet should feel less concerned about the asset manager ending their relationship with Envestnet for a relationship with BlackRock.”

Another competitive advantage for Envestnet is the new influx of “helpful capital,” Crager says. The cash will likely be used to continue building out and supporting the massive Envestnet ecosystem, he added.

Envestnet acquired the Silicon Valley firm Yodlee three years ago and grabbed a huge chunk of the high-end wealth management platform market by buying FolioDynamix late last year, two very expensive acquisitions.

“Yodlee and Tamarac already have aggressive technology roadmaps, so this cash should help them meet their development milestones,” Winterberg says.

The world’s largest asset manager will gain access to Envestnet’s advisor network, which will be a huge boost to the newly minted Digital Wealth platform. “I don't encounter BlackRock's Digital Wealth solutions very much among RIAs,” Winterberg says, “so this partnership strikes me as a way to gain distribution.”

BlackRock has partnered with other large institutions to offer its Aladdin risk analysis tool to wealth management firms. This month, Morgan Stanley rolled out a new dashboard for its 15,000-plus advisor force to better integrate its digital tools with the Aladdin software. UBS, was the first to partner with BlackRock, inking an agreement last year.

BlackRock led a similar investment round in May — this time a $50 million funding round in the micro-saving startup Acorns to build out the startup’s portfolio stack with new investment options. It also gave BlackRock a potential inside look into the behavior of next generation investors, which it says will help fine-tune future releases.