How to Grow? We analyzed the top decile advisors versus the overall advisor peer universe on their ability to outperform in five key growth areas:

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1 July 2015 In May, Envestnet launched an initiative called ENVESTAT to provide an industry analytics platform delivering insights, trends, and predictions about investor behavior and advisory practices. We ve released five short reports since May. At the end of each quarter we will publish a more detailed quarterly report, combining the quarter s key statistical findings and relevant industry insights from our Strategic, Enterprise, RIA, and Portfolio Management consulting organizations. We intend to offer industry leading insights through the intersection of our data and human capital. This is part of our deep commitment to empower advisors with better information to grow their business and better serve their clients. 1

2 How to Grow? We analyzed the top decile advisors versus the overall advisor peer universe on their ability to outperform in five key growth areas: 1. Creating new client relationships 2. Deepening current client relationships 3. Retaining existing clients 4. Generating returns in excess of relevant benchmarks 5. Maximizing product mix around efficient practice patterns and client needs Graph 1: All contributing factors of AUM growth Peer advisors Year 6 22 Top decile advisors Year % % Change in AUM peer advisors % 4% 23% 24% 9% 4% % Change in AUM top decile advisors % 9% 78% 2 119% 27% 16% 8% 104% % - -8% % % - -19% -6% Contribution Conversions market change Redemption Existing Redemption Lost Redemption New Sales Existing Sales New Withdrawal Product Mix s Impact on the Organization How an advisor chooses to manage client money has a direct ripple effect on an advisor s ability to grow. The money management thesis affects how the advisor spends his or her time, articulates a value proposition to their end client, and dictates the staffing/resources needed to deliver a stronger client experience. The data shows that the top growth advisors are more likely to outsource investment management to professional money managers than to create and manage portfolios themselves. The top decile had an 8% increase in their allocation to Separate Accounts and Unified Managed Accounts (see graph 2.) 2

3 Graph 2: 2014-Product Type Allocation % % Allocation Overall % Allocation Top * The top decile had an 8% increase in their allocation to Separate Accounts and Unified Managed Accounts % Allocation % 38% 28% 18% 1 1 2% 1% Sample Size: Sample Size: 1147 Advisor Model Fund Strategist Portfolio Separate Accounts Unified Managed Accounts Others *based on % growth in AUM of Advisors who have $1 million or more The top growth advisors are redirecting this additional capacity towards more client-facing activities, expanding their service menu, and increasing their client touches. Although there are differing opinions on the role of digital advice on an advisor s overall money management focus, clients needs in varying range categories cannot be dismissed. The top growth advisors allocate almost twice as much money to Separately Managed Accounts for clients under the age of 30 than the next tier. Many clients in this age range have smaller average account sizes, so top growth advisors using the full service product can serve these smaller clients more efficiently. Graph 3: Advisor Product Usage Across Client Age Top growth advisors allocate almost twice as much money to Separately Managed Accounts for clients under the age of 30 and older than 60 Product Type. Next Gen (<30) Senior (>60) Advisor Model MF/ETF Wrap Unified Managed Account 34% 1 17% 42% 32% 3 28% 46% Separate Account 2 Others 2% 2% The outer bar shows % allocation of peer universe The inner bar shows % allocation of top decile advisors (based on % growth in AUM) who have $1 million or more in assets Sample size: 322,800 clients of peer advisors Sample size: 27,237 clients of top decile advisors 3

4 Graph 4: Sales and Redemptions: Their Impact on Advisor Growth % Between , top growth advisors outpaced their peers by over four times the amount of new client assets % 133% % %AUM decline - Redemptions %AUM growth - Sales %AUM decline from redemptions: Top advisors %AUM decline from redemptions: Peer advisors %AUM growth from sales: Top advisors %AUM growth from sales: Peer advisors The outer bar shows % change in AUM due to sales and redemptions of peer universe The inner bar shows % change in AUM due to sales and redemptions of top decile advisors after applying asset threshold limits This trend also plays out for clients older than 60 (see graph 3.) As the digital advice providers push the overall market towards passive strategies, sophisticated investors will be looking to their advisors for something more than passive strategies with systematic rebalancing. One reason top advisors allocate more assets to the SMA/UMA space is to take advantage of SMA tax management. As we noted in our recent white paper titled, Capital Sigma: the Sources of Advisor- Created Value, financial advisors may generate as much as 100 basis points in value through active tax management. It is the most significant single opportunity in the investment planning process to affect clients positively. As advisors look to differentiate themselves from digital providers, tax management s inherent value will continue to fuel increased usage of SMA and UMA vehicles. Financial advisors who serve younger clients also are more likely to use mutual fund and ETF wraps compared with their peers. The combination of relatively low minimums for access to a portfolio strategist and the opportunity to refocus time on the critical financial planning needs of younger clients makes outsourced asset management particularly attractive for these advisors. Capacity Driving Growth Top growth advisors use their money management thesis and technology to create capacity so they can spend their time on growing their business. This is supported by the numbers: the top growth advisors generate three times the amount of new assets from existing relationships than that of peers. Between , they also outpaced their peers by over four times the amount of new client assets (see graph 4.) The Thin Line Spend Time Wisely As advisors free up their capacity to spend more time on client-facing activities, the question arises: what s the right balance between time spent on existing clients and prospecting? There s certainly a balance between under-serving and overserving existing clients. We originally assumed that top growth advisors would have fewer redemptions than their peers. However, that was not the case. Actually, more assets left the top decile than the peer group: from , the top decile had redemption rates that were 1% per year higher than the peer group. 4

5 As we reviewed the three key growth areas between the top decile and the overall population, the distribution of the components is almost identical: Growth Category Top Overall Difference Sales - New Client 83% 82% 1% Sales - Exisiting Client Market Performance 6% 7% When assessing the thin line of service versus sales (and investment performance), the overall distribution shows the importance of a robust new client development process. Although far outpacing the overall universe in gathering new assets from existing clients or outperforming the market are both positive growth strategies, they will not drive revenue growth substantially compared to generating assets from new clients. Onboarding costs for a new client slightly negate this benefit, but the firm s profit advantage far outweighs these costs. Noteworthy Statistics for 2014 The following highlights some key statistics for the growth theme: % in Advisor Models % Increase in Cur. Client Assets % Redemptions % Market Performance Top Decile 38% 8% Overall 46% 6% Difference 8% -9% -2% Key Takeaways Organic growth is a multi-faceted challenge. No single strategy or element completely explains what drives some advisors to grow revenue faster than others, but evidence supports the thesis that reducing time allocated to investment management can accelerate growth. Although many financial advisors have a strong attachment to asset management, this function, critical as it is, does not often pass the test of the Hedgehog Concept, outlined in Jim Collins Good to Great, which describes the intersection of an advisor s ultimate passion, greatest talent, and highest financial rewards. About Envestnet For more information on Envestnet, please visit and Envestnet, Inc. (NYSE: ENV) is a leading provider of unified wealth management technology and services to investment advisors. Our open architecture platforms unify and fortify the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet solutions enable the transformation of wealth management into a transparent, independent, objective, and fully aligned standard of care, and empower advisors to deliver better outcomes. Envestnet Institute is your portal to timely and thought provoking content in partnership with finance s top thought leaders. Register to learn more about the markets, to discover new investment tools, and to assess new ways to serve your clients needs. If you are a registered investment professional, you can take courses for continuing education credit as well as read documents and watch videos on the Envestnet Institute platform. A passion for investment management, even when combined with a strong acumen, does not typically drive revenue growth in a financial advisor s practice. That comes through time spent with clients. As financial advisors seek to increase time spent with clients and doing holistic planning, Envestnet expects to see continued growth in solutions that give the advisor more time to spend with clients and offer them valuable investment planning benefits such as active tax management. What s Up for Next Quarter In the coming quarter, Envestat will move beyond product mix, wallet share, and client acquisition to explore the underlying factors that influence advisor growth. Topics to be examined include the impacts of advisor capacity, geography, and client demographics, with a continued emphasis on examining what sets top-growth practices apart from their peers. The data provided is derived from Envestnet user data composite. Data has not been independently verified. The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this report is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All content posted to the Envestnet Institute is subject to the Terms and Conditions as outlined. Envestnet is not responsible for third-party advisor content posted on this website; however, Envestnet does retain the right to edit or remove such postings. Envestnet Institute is not a regulated entity and is intended for investment professional use/financial institutional use only Envestnet, Inc. All rights reserved. EN-ESI