Software Provider or Fiduciary? Envestnet's founder wants his company to be both. His timeline for making it work isn't infinite. (Source: Financial Planning - Author: Robert Hertzberg)

Jud Bergman is feeling a twinge of professional envy. He is talking about a college buddy who sells shopping-cart systems to big retail stores. The friend has figured out a way to use remote control technology to retrieve oversized carts from parking lots, connect them automatically and guide them back to stores such as Target. It's goodbye to the need for 6' 2", 220-pound employees. And goodbye to an OSHA headache.

"It's a great business," says Bergman, correcting a visitor whose characterization has lacked the proper enthusiasm. "The best business is you sell one thing to everybody. The worst business is you sell everything to one person."

By that definition, Bergman's company, Envestnet Asset Management, isn't in an enviable position. The six-year-old firm sells both technology and investment management services, mostly in complex deals to big independent broker-dealers. In other words, it tries to get one buyer to take everything off the truck. But his admiration for a peer's business says less about the challenges Envestnet faces than about Bergman's propensity, at age 48, to be analytical, forthright and appreciative of things outside himself.

In fact, 2005 has been very good to Envestnet. The Chicagobased company has gotten business from some big new broker-dealers and providers, including the mutual fund giant Fidelity. "We're seven for seven," Bergman said in an interview in late August, referring to the contracts Envestnet has bid on. "That can't last," he added with a smile and a shake of his head.

Its success this year has pushed Envestnet's assets under administration and management past $20 billion and has probably propelled annual revenue to around $40 million. (Envestnet's revenue was estimated by Financial Planning magazine and neither Bergman nor his investors would confirm it.)

Bergman, a one-time English major and lifelong technophile, is an accidental entrepreneur. He was working at Nuveen, having started its separate account business, when he decided that advisers would jump at a Web-based system with investment products from many providers. Nuveen's management wasn't interested, believing the product would be a threat to the company's wirehouse customers. So Bergman left and started Envestnet in early 2000.

The timing was terrible-the dot-com bubble was about to burst-but Bergman managed to secure the first of a set of outside capital infusions. Then he proceeded to make some mistakes typical of a first-time entrepreneur, including hiring people who were not quite right. "The first generation of people you attract are the largely disaffected of corporate life," he now says. "There's a high percentage of misfits." He got through some sleepless nights, built a stable management team and secured his first customers, including National Financial Partners, the roll-up firm run by Jessica Bibliowicz.

Envestnet's offering is simple. A registered investment adviser or independent broker-dealer that wants to build its fee-based business signs a contract to use Envestnet's technology, including its back office and adviser front-end tools that can be customized. The price is 1520 basis points for each dollar under administration. About a quarter of Envestnet's customers also elect to get access to the company's investment services, which include the selection of separate account managers and mutual fund wrap programs and periodic portfolio rebalancing. That can add another 10 basis points to Envestnet's bill. Other services-such as paperwork and field support-can push the "all-in" fee as high as 40 basis points.

"It's been a really good relationship," says James Poer, senior vice president at National Financial, which recently tapped Envestnet to create a customized platform for its 1,800 representatives. "They empower us to take all the technological advances that have happened in this business and put them at the fingertips of our advisers." NFP's reps have almost $1 billion under management at Envestnet; the new deal will cause that number to "grow tremendously," Poer says.

If Envestnet's value is easy to understand-a Web-based platform that lets an adviser pitch clients, pick investments and execute trades-it is not so easy to create. Bergman is essentially running a company that has to be competent in two distinct areas-software development and investment management. His developers and engineers love the process of discovery; his investment people care only about results. "It would be easier to be purely a platform provider," Bergman concedes. "In some sense it would be easier to be just an investment manager. But that's not what the market wants right now."

To get the two constituencies to understand what they have in common-a need to take what Bergman calls "prudent risks"-Bergman is outfitting one of Envestnet's Chicago conference rooms with images of famous innovators. There are black-and-white photos of Martin Luther King, Mark Twain, Madame Curie, Albert Einstein and Bob Dylan (like Bergman, a native of Minnesota) and a daguerreotype of Abraham Lincoln.

It isn't only the investors who've plowed more than $40 million into Envestnet who are intrigued by the bet Bergman is making; some rivals are too. "I think he's done a good job of assembling a company that's built to last," says Art Lutschaunig, who runs Morningstar Investment Services and says Envestnet is a competitor he thinks about regularly. "Long term, there's a possibility that if you're not controlling the environment that an investor wakes up to in the morning-if you're not on that program-you're not even considered in the queue."

"Jud sees himself as controlling the food court," Lutschaunig says.

Profitability is certainly a question, especially in a market where Bergman is bidding against rivals such as Advisor Software and FundQuest, which was recently bought by the European bank BNP Paribas. "We are talking razor-thin margins," Lutschaunig says. "It's tough to make a lot of money on only 12 to 17 basis points."

A similar concern is articulated by Ross Chapin of Orca Bay Partners, an Envestnet board member with a $7 million stake in the company. "The risk comes in the form of pricing pressure-margin compression," says Chapin. "Can we stay ahead of that?" But Chapin says that as Envestnet grows, profitability shouldn't be an issue. "It's got a great model," he says. "The incremental dollar of margin once you've gotten to scale is very, very positive."

Bergman is aware of the need to keep Envestnet's costs down. For instance, he concedes that the company doesn't make money on separate accounts with less than $100,000 in them. To address that and the decline he expects in Envestnet's fees in coming years, Bergman has begun outsourcing the company's back-office work-data-scrubbing, reconciliations, custodial downloads-to 135 technical workers Envestnet employs full-time in Trivandrum, India. Engineering salaries there are a fraction of what they are in the U.S.

While Bergman declines to discuss in detail any sort of exit strategy for Envestnet, he doesn't think a public stock offering is out of the question. That would certainly suit his financial backers, including Orca Bay's Chapin, who made his initial investment four years ago and says his partners "don't have an infinite timeline."

"It's taken longer than we hoped, but really it is just hitting its stride," Chapin says. Envestnet's "in a great position to take advantage of everything that's going on in the industry."

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