AssetMark Widens Offensive on Envestnet by Creating SMA Mini-Market

Brooke's Note: SMAs were always that place where Wall Street managers and fee-based advice could co-exist. Then things changed. Advisors got wise to the fact that fancy manager names in proliferation boosted expenses but did little to bolster returns. The big advantage of SMAs, thus, became tax-loss harvesting. But that was basically too labor intensive and often died on the vine. But now AssetMark (and others) -- knowing all that -- are back in the game after a fizzle in 2017. It's keeping the manager list short, knowing that one well-vetted manager per category beats hundreds of unvetted ones. It has better technology for making the holdings meld with non-SMAs in the same portfolio. And it has the tailwind of lower trading costs in a zero market. That's all on the sell side. Advisors are also buying these managers more hungrily as they move upmarket and compete for high-net-worth accounts. The only bad news about advisors taking the initiative is that they also want to keep that portion of the fee in their control, too, analysts say. But the SMA pie is likely to get bigger, which makes sharing it far more palatable.

AssetMark (NYSE: AMK) is opening up a new battle front with Envestnet, bringing back old-line, separately managed accounts (SMAs) in its bid to stay in the top tier of TAMPs where bundles are king but not always for high-net-worth investors.

The Concord, Calif., TAMP is rebooting an SMA program mothballed in 2017 to go upmarket by meeting the needs of advisors who compete for investors with hyper-portfolio customization. The original Assetmark SMA program was launched in 2007.

They include mostly known brands like The Hartford, J.P. Morgan, William Blair, BlackRock, Capital Group, Franklin Templeton and Neuberger Berman.

Reintroducing SMAs is a less-is-more strategy, says David McNatt, AssetMark executive vice president and head of investment solutions who is overseeing the launch.

'The old program wasn't simple,' he says. 'Advisors asked us to de-mystify. It's not about having a supermarket.'

Advisor market power

'AssetMark's approach of developing a highly curated list of SMAs to fill these needs is the best way to offer SMAs to advisors. This is especially true where it is combined with technology that allows the portfolio to include funds and ETFs.'

The two big AssetMark improvements are in pre-screening a handful of managers then making them mix readily in bundling a portfolio with ETFs and other products, McNatt says. See: Natalie Wolfsen's sudden ascent as AssetMark CEO marks a whole new 'liberated' RIA vibe and could be a catalyst to fill service void left by custodian cutbacks

Yet, AssetMark's approach also represents a yielding to the market power of financial advisors who are bringing investing back in-house after years of increasingly outsourcing, says Alois Pirker, director, wealth management practice, Aite-Novarica Group in Boston.

He adds: 'When wealth management firms are retaining portions of the investment management in-house, they are not only gaining more control over the process, but also retain a greater share of the client fee in-house.

'Higher client demands and increased fee pressures are moving the industry in that direction,' he explains.

AssetMark charges about 70 to 80 basis points on the assets allocated to its 12 SMAs -- an all-in fee that includes platform and investment management. Lesser fees are available for bigger accounts. AssetMark declined to say how much of the revenue it pockets and how much goes to the third-party advisor.

Diversifying

'As the largest player in this market, Envestnet has the bull's-eye on its back, and competitors such as AssetMark are generally aiming to compete against the top dog,' adds Pirker.

'The lion share of AssetMark's business is still linked to the TAMP model. Envestnet has greatly diversified beyond being a classic TAMP and has established itself as an enterprise platform as well as best-of-breed player in business application areas such as financial planning.'

Envestnet dominated the SMA business for independent advisors, but it's growth tailed off, according to Chip Roame, managing principal of Tiburon Strategic Advisors and a former Envestnet board member. See: Envestnet CEO Jud Bergman's FolioDynamix deal suddenly looks prescient as SMA-to-UMA market shift dings revenues, third-party asset managers

'But more recently (last two to three years), the trends towards direct indexing, ESG, tax awareness and lower account minimums (all enabled by technology like Aperio, etc) have renewed the focus on traditional SMAs. Hence, Assetmark enters. Makes sense to me.'

Ramping up

One of Envestnet's claims to fame was the vast inventory of manager choice -- an attribute that carries less weight in 2021.

'The firms can't keep up with the due diligence demands and the advisors are simply baffled by the overwhelming choices they face in sorting through the list.'

'The days when SMAs were sold because they gave investors access to 'institutional quality' managers who were going to outperform the market are dead. Any advisor who falls for that story should be shown to the sidelines,' he adds.

Orion Advisor Solutions is also ramping up its SMA efforts with 165 conventional funds and 15 direct indexing choices, says Eric Clarke, CEO of Orion.

'We're finding success in offering these types of unbundled SMAs,' he says by email.

'The trend of direct and custom indexing is being fueled by growing demand. We're looking at the future of fiduciary advice delivery and we feel well-positioned leveraging both the Brinker investment expertise and Orion technology capabilities.' See: In a deal wired by a 'Tony,' Orion leaps to the top TAMP tier, with Brinker's $42 billion and $1 trillion-plus of RIA portfolios, which may make it more lethal to rivals

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