Envestnet's Clift On How Firm's Platform Connects Advisors & Portfolios

Firm’s chief investment officer talks about how advisors use his company’s portfolio platform, and offers his market thoughts.

Reviewed by: Drew Voros
Edited by: Drew Voros

Tim Clift is a chief investment strategist at Envestnet, a leading provider of integrated portfolio, practice management and reporting solutions to financial advisors and institutions. The company—among other services—provides the open architecture that allows more than 100 fund strategists to market their ETF and mutual fund model portfolios to investors everywhere using tools such as unified management accounts. Envestnet’s technology is changing the way investors invest, the way traders trade and even the way advisors help clients.

ETF.com: Envestnet, at the most basic level, provides a platform for various portfolios that use ETFs, mutual funds and single securities. These portfolios are built by advisors, and then sold to other advisors who use them for clients. Can you expand on the company’s footprint?

Tim Clift: Envestnet is both a technology platform and a wealth management platform, and advisors use us in lots of different capacities. From a technology standpoint, we give them the tools to be very efficient in their practices so that they can go from profiling their client, to creating an investment profile for them, all the way to investing the client, and then to reporting on it.

But the wealth management piece is that middle piece. Portfolio Management Consultants, the wealth management part of the company, provides research on thousands of third-party managers. We provide tools, guidance and recommended lists and ideas for advisors. They can either build models themselves or they can hire any of the thousands of third-party strategies on the platform. PMC also manufactures some strategies so they can also use those within their practices.

ETF.com: You're not managing money for a client. Is that right?

Clift: There are three ways that a client's money would be invested. First, the advisor creates a portfolio for the client. Generally they're doing that by using the tools on our platform—asset allocation guidelines, recommended lists and those types of things—to build a portfolio.

Or they're using a third-party money manager who’s using mutual funds or ETFs or individual securities in a product, and they can attach the client to that product. The third one is, they're using a PMC-branded product, which we—via our portfolio managers here in-house—have developed. Again, it may be a mutual fund or ETFs or individual securities.

ETF.com: And how does a portfolio get on your platform? 

Clift: We have a business acceptance committee that meets weekly. The ideas or strategies get pitched to the committee. There are some initial steps, from a compliance and operational standpoint, that firms have to validate. They have to submit a minimum track record and minimum assets. A three-year track record on products, or $200 million in AUM, or $50 million in a specific product are the general minimums that they're looking for.

We need to make sure that they can work both operationally through the platform and that there's no operational or compliance issues that make it difficult to work well on our platform.

ETF.com: And then you would take some kind of percentage from the client who's putting money into a portfolio on your platform. Is that sort of the basic business model?

Clift: Exactly. We have a platform fee for onboarding. And then an ongoing fee, because in most cases we're going to have trade discretion. They're going to be uploading new models to us, and we're actually implementing them across the hundreds of thousands, or even millions of accounts that we facilitate.

From an asset management standpoint, it's great that they really just have to provide their intellectual capital to us and not have to worry about any operational scaling issues. We handle all of that.

ETF.com: How many portfolios do you have now on your platform?

Clift: If you look at our third-party strategists—that’s what we call them—there's about 150 firms and close to 1,600 models that they're providing to us. Those are broken down between ETF strategists, mutual fund strategists, and hybrid ones using both ETFs and mutual funds.

ETF.com: Is there any kind of ranking you do; like, this is a four-star, three-star?

lift: Yes. Everything that makes it onto our platform is available. But our research team then does additional vetting on the strategies to come up with what we consider the next level up. And then there is “PMC Select,” which is the research team's highest-conviction or best ideas. Those are all provided to clients, along with detailed research supporting those ideas.

ETF.com: What’s Envestnet's role when it comes to the new fiduciary rule? Do you help advisors navigate that?

Clift: One is a support role where we can help them make sure that the product allotments that they have are the most suitable for their distribution channel. And it's not necessarily just the lowest-cost products that are appropriate. Clients' needs are different across the spectrum. We make sure that the lineup is not only appropriate for them, but that it's also been heavily vetted through the research that we've done on these strategists. There's very little research done on third-party money managers. We're one of the only firms in the industry that has comprehensive and a dedicated research team just for these third-party strategies.

Let me say that we’re seeing a shift to lower cost driven by the new Department of Labor fiduciary rule. These trends have shown up dramatically on our platform—where advisors are now choosing to put their assets. And it's not necessarily just the ETFs, but it's lower-cost products. Some of the lower-cost mutual funds are also benefiting from that trend. I don't see that slowing down. The firms that have seen the biggest outflows are either the ones that haven't performed well or have higher fees.

ETF.com: What are you seeing in the markets?

Clift: We've definitely seen volatility pick up in September and into October. The summer was one of the quietest periods we've ever seen on record. From mid-July to mid-September—for m two months—we didn't have a single trading day where markets even moved more than a percent. But I think as we get back into earnings season, there are a number of things that can influence the markets to move more. And we're starting to see that.

ETF.com: What kind of impact will higher interest rates have?

Clift: Interest rates have an enormous impact on where the markets go. They've been a major influence up to this point, and I think it basically overshadows everything else that's going on—geopolitical or politics or earnings. We saw that in February, where there was a market adjustment based on Fed comments.

As soon as there's fear of credit drying up or rates rising so that credit tightens a bit, that certainly will have an impact on the markets—and more likely in a negative way. A lot of it has to do with how well they broadcast the increase and whether it's 25 basis points in December, or if it's 50. Any change in what their current policy is could be disruptive.

ETF.com: Why does such a seemingly small move have such an impact?

Clift: If the market is already counting on a 25-basis-point increase, it really shouldn't have much impact on the markets. But if it's 50 basis points—which again doesn't seem like a big difference, but it is 100% larger than expected—then the markets start annualizing that and saying, “well, if they did 50 basis points here, that means we've got 50 or more, or 75 next year.”

You start compounding or annualizing out what the path is for interest rates. What are the ramifications for credit in the future, and what does that mean for banks and lending and interest rates? Even the basic risk-free rate of return that's used in all capital asset pricing models is impacted by where short-term interest rates are. The impact's much bigger than people think.

ETF.com: What impact do you expect to see in the bond market? If interest rates start to go up, will we see high yield bond ETFs start to lose value? Or does the market still have a hand in that in terms of where the real interest rates lie?

Clift: Yes, it's not as direct of a correlation for high yield as it is for Treasurys, for example. Treasurys tend to be very, very highly correlated to interest rates. But junk bonds in general also have a pretty high correlation to the equity markets. So generally when rates go higher, you're going to get a better yield out of the high yield, too.

I don't necessarily think a raise in interest rates is going to be detrimental to junk bonds. The bigger concern is: Are valuations reasonable and are people just chasing yield? It's not just junk bonds—it's in high dividend-paying equities, too, where we've seen a big run-up in valuations. Are they reasonable?

ETF.com: Are we in a different environment or is this sort of the same environment we were in a year ago? Stocks have remained at all-time highs, and we've seen, again, high yield continue to perform.

Clift: Honestly, not a whole lot has changed from a macro standpoint. Valuations are a little bit higher than they were at the beginning of the year. But if you look at where the U.S. is relative to other countries, maybe that's justified—that they're higher just because there aren't better opportunities elsewhere.

But I would caution that any time you get six or seven or eight years into a bull market, it’s always ripe for some sort of correction. How big that is or how long that lasts is really difficult to guess. But it shouldn't surprise anybody to see some sort of correction once you get this far out into a bull market.

Contact Drew Voros at [email protected]


Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.