Delivering a Family Office Experience at Scale with Michael Featherman

[00:00:15] Doug Heikkinen: How's the conference been for you so far?

[00:00:17] Michael Featherman: It's been exhausting and incredibly energizing at the same time. It's so great to be here with all the RIAs and the home office broker dealers, and most importantly, our advisors.

[00:00:28] Doug Heikkinen: That's fantastic. So we're going to talk a little bit about the private wealth consulting program. So please share the vision behind it and how it addresses the unique needs of high net worth clients.

[00:00:40] Michael Featherman: Yeah, the vision was really about taking the platform up into high net worth and offering a fully outsourced customizable solution. The easy button for high net worth. And Envestnet as it grew up was doing a lot of really good things for the mass affluence investors.

And we needed to push up into that space. So to have something that could be bought through the core engine of the platform as an advisor, but then give you 150 to 200 points of customization, pull out of the weeds. What it really is? It is the high net worth easy button. It's about service customization.

And creating time for the advisors so they can go do things like find more clients, maybe make a connection with the trust attorney referrals. So that's what we've created. That was the vision.

[00:01:32] Doug Heikkinen: So you've been doing this a while. How has the landscape of wealth management evolved for high net worth clients?

And what role does technology now play?

[00:01:40] Michael Featherman: Yeah, the landscape has evolved dramatically just by the nature of that very long bull market we had up until very recently. It was a long secular bull market. So you had investors that were do it yourselfers that bought SPY, a mutual fund, an ETF and then suddenly became millionaires.

So that became this thing that, so by our estimates, six, six and a half million high net worth individuals, just say that's at least a million dollar household. That's growing to, this year, by the end of this year, that was back in, I guess 2021, that's going to grow to the end of this year, almost 9 million.

That's a conservative estimate of about $40 trillion. So there's just many more high net worth investors. How has it evolved? So you have different tranches that I, like to tranche it by one to 5 million is someone that kind of did it themselves and now we need to help them evolve from say, mutual funds and ETFs and get them into things like separate accounts, maybe individual bond securities, and think about tax alpha.

Then you have another segment where it's this $5-$30 million segment we call a mid-tier millionaire, and that's a much different thing and that's the most underserved segment. And we're trying to keep pushing the platform into, and the platform is getting there. We need to get better at the alternatives and those things. But it also, the advisors themselves need to push out.

It's not investment management that's holding them back. It's building, really, a family office experience for someone that may not have enough money to be a true family office. But if you're a $20 million household net worth individual, then they want to be treated with a family office experience.

So you can get there. Outsource investment management. Let us do that and then go find a trust capability, an asset backed lending capability. Make sure you understand private equity and hedge funds. Make sure you have long-term care. Make sure you have access to tax advice, financial planning, because that's, if you have all those things and then you start to service it, now you can go after a $20 million household that probably sold a business and is expecting those things, not just investment management. That's where things have changed and it's different by those tranches.

[00:04:02] Doug Heikkinen: So those are some of the strategies that can be recommended to advisors to deliver those kind of services.

But how do they make them hyper-personalized?

[00:04:11] Michael Featherman: The hyper-personalization then comes back to the investment management. You could certainly hyper-personalize, I mean a trust is clearly, it's for you. It's a trust. An asset backed loan's going to be for you. Let's get back to investment management.

As technology has accelerated everything we, it started basic. It's separate account equity, fixed income. That becomes more high net worth because you can customize at the security level. Then we have a thing called tax optimization. So now we can do an individualized gain budget for a high net worth individual.

Try to eliminate that short-term gain. That's real value. That's a personal budget you're going to set for a long-term gain each year. Or you could pivot and say, Hey, maybe, I live in Denver, Colorado. It's a gas town, oil and gas Cowboy town. Go up to Boulder. It's a much different place.

And it's an academic university town and if you're going to interact there, you might want to have an impact or an ESG capability. So we can customize across 23 different social screens. I could build you like a global low, a low climate impact portfolio, or a portfolio that's going to have a low impact on the climate, is what I was trying to say, as an example.

And that becomes incredibly personalized to that individual. And then it becomes, just what we're doing in terms of outcomes. If you're getting close to retirement, then you need more income. Or if you're getting close to being retired, maybe you need less volatility. So it becomes, we're personalizing across asset allocation techniques.

Think long-term strategic versus dynamic. Dynamics, kind of a good thing right now, given the tariffs and the volatility. If I'm closer to retirement, maybe I want something that could cut some tail risk off and then when I get into retirement, maybe I'm going to pivot to income focus. So it's personalizations are tax, it's values, it's going to be what type of style do I need, what type of outcome, and we've really figured that out in incredibly well on the investment management side.

[00:06:18] Doug Heikkinen: Let's talk portfolio customization. How does Envestnet use tools like direct indexing and tax overlay services to enhance portfolio construction?

[00:06:28] Michael Featherman: We touched on the tax overlay and like we talked about, like the long-term gain budget. So you could build a high net worth model that you could use across a hundred different, you know, in a UMA chassis, you could use it across a hundred different accounts. But you can make it personalized to each client.

That scale one model, a hundred accounts. You personalize it by the overlay and that personalized long-term gain, annual budget. That's just the beginning. Think of a client that's selling a business. If you sell a business for a hundred million dollars Jan 1, and basically whatever, 16 months, you're going to have a tax bill, maybe it's $40 million.

We can build a portfolio, put the tax or overlay on it, put it to recognize an external gain and do hyper loss, a realization to literally reduce the tax bill while making money on the underlying investments. And then direct indexing. It just really marries into the tax optimization. Our approach and our premier partners approach to direct indexing, BlackRock and Fidelity, State Street, Franklin Templeton, we're all buying 150 to 200 stocks to say, replicate the S&P.

So when you have more stocks in the actual sleeve, and if you did small cap international, we gotta have a portfolio of 400-500 stocks. It's just more opportunities to loss harvest. And then, that's the tax side, you could do things with direct indexing that get really unique in the impact, the SRI space, where we can actually build a, I talked about the ESG overlay we have. That's putting it on top of third party managers and it's a very good thing. That's a negative screen. If a PM bought Coke, but we may restrict it. And you have a different portfolio. What if we did a positive screen and you told me you wanted to avoid corporations that test on animals, a pharmaceutical corporation.

So that's a very specific thing. So we can figure out those companies. Maybe it's Pfizer, right? And then you pull Pfizer out, but you were like, I also would like to have a value and a quality kind of alpha generation schematic. So we build those factors into it, avoid those securities. That's what I call a positive screen.

That's hyper-personalization.

[00:08:45] Doug Heikkinen: Speaking of sustainability, are you seeing an interest from younger high net worth clients focusing on that? Or what else are they focused on if they're not focused on that?

[00:08:55] Michael Featherman: Yeah, for sure the, millennial is absolutely hyperfocused. my daughter is a Gen Z. I mean, we gotta hand it over to them, right? The world. So they're absolutely hyper-focused on it, and they should be. So that's a big area of growth. But then when you get back to the millennials, they have an enormous amount of debt. It's the college, the college loans.

So we, we have to help them. They're good savers, but we really have to help them financial plan to start getting out of debt and figure out, How do I actually buy a house? So those are these pain points that like a millennial is looking at, but they're absolutely wanting to make that positive impact on the environment.

And fortunately, we've been investing heavily in our values, impact, ESG approaches and we've got all these wonderful tools to help them.

[00:09:48] Doug Heikkinen: Let's talk about the, Envestnet proposal desk. I know it streamlines managed account proposals for advisors. Talk a little bit about more about that, for high net worth clients,

[00:09:57] Michael Featherman: I love the proposal desks, for a couple reasons. We were able to hire some incredibly talented guys and gals out of college that had a finance background. They want to get into sales. So it gives them this wonderful entry point. So they're running a proposal for an advisor.

Just a simple proposal that's, an advisor really doesn't want to run a proposal if they don't have to. So we'll do that for them. Then it gets better. So if they want to do a tax overlay on the UMA, you might have 150 tax loss to upload to get to that personalized gain budget. So they're going to help you do that.

We also have another great tool, more in the mass affluent space called Fund Strategist Tax Management. So think of, I have a brokerage account of mutual funds and ETFs, and I want to move it into maybe the BlackRock target allocation model. Or our own active passive ETF. Same thing. We will run that software for the advisor. So it's great for the advisor, but talk about the actual folks that we hired. Now they've got this awesome way to grow their careers. Maybe they want to get a CFA like me and go become an investment specialist. Or they want to maybe just get more into sales and then go up and be like a regional director.

And it's just nice to be able to hire people right out of college and give them this awesome career path.

[00:11:08] Doug Heikkinen: How are you thinking about AI in its effect on what you are doing?

[00:11:14] Michael Featherman: Personally, I've been really diving deep in the ChatGPT, and it's made like, outside of work, it's pretty incredible.

But you gotta make sure you check it, because the chat bot might change things that you don't expect, so you have to be careful with it. So let's get into the investment world. So where I think it's interesting is, when you think about changing market conditions and, we're maybe we're getting marketing content created for advisor interactions.

It's incredibly useful to help us create content quicker so we can be better at delivering messages to help keep clients invested. And then we pivot to invest in that. We're a tech stack. I'm on the investment management side, but I have built some technologies like design them with my partner Seth Weger, and the team coded it.

But I think AI, right? I think it can help us get better at writing code so we can make the platform better to help advisors be better at what they do, which is ultimately most importantly improving end client outcomes.

[00:12:11] Doug Heikkinen: Advisors have a lot to do. They have to manage the assets of their clients, they have to build their businesses, and the ultra high net worth are very very demanding.

So with everything that you said, what's the biggest challenges they face in managing their business?

[00:12:25] Michael Featherman: An advisor, the biggest challenge they have is time. So we talked about all those, like the, family office model. When you want to go after the $20 million client, or you really want to go after a hundred million client. That's a family office, a hundred million, a billion. So it's very challenging to build your kind of platform of services around investment management. Again, it's financial planning, trust services, wealth transfer advice, long-term care. Asset backed loans, understanding private equity and private assets and hedge funds. If you don't have that, you're not able to interact there.

That takes a lot of time. Be seen, meaning set up your website, so that's out there. Be heard, market it. So if you're doing investment management, by our calculations, we're a six and a half trillion dollar ecosystem. Things that PMC does, which is the investment management capability for Envestnet, or BlackRock or State Street, or Clark Capital, all these great managers here. It takes on average to do what we do for a multi-asset class portfolio construction, 800 hours a year. And the end result becomes, BlackRock's fantastic. We're fantastic, all these managers are, but the alpha on a multi-asset class portfolio is, it's very commoditized, and this is my business.

So what can I offer an advisor? It's time. Which is an important thing. So if you're not spending 40% of your work here doing investment management, you can do those other things to build a family office experience so you have a better probability of keeping your clients invested or better yet moving up into that most underserved segment of $5-$30 million.

That's a great place to be. And those clients need our help. They're expecting multi-asset class diversification. So the investment management sale is easy, but if you can't talk about wealth transfer, you know, I own an asset backed loan, or I need a private asset or private equity, you're literally not going to win the business.

[00:14:32] Doug Heikkinen: Last one for you, and you're deep into this every day, get out your crystal ball and paint a picture of the future for me. What's it going to look like for an advisor?

[00:14:42] Michael Featherman: You as an advisor. You're going to outsource. We're going to keep building technology to make it easier for you to do business. So the way I see it, it's we're trying to have this cross section of personalization, which is hard, but that's where the tech helps at scale.

We talked about that UMA model. I got one great model at 60/40 equity fix. Could have 200 clients in it, but then we can keep personalizing the account attached to it. So what I see is advisors are going to have more time if they move away from saying, my value add is investment management, and they recognize they have to let go of the reins there, and it's a hard, change is hard.

It's hard, right? It takes work. That's a hard thing to do. If my value add is my investment process and there's some incredible advisors that do an incredible job at building multi-asset class models, but it's free up time through our technology stack and service. And let's push and get better at really helping clients stay invested and achieve goals.

That's where this is heading. I think, again, this, it's AI, it's our focus on tech and innovative products. We can really, what I really like doing is helping that client. If you've got $10 million in Apple and that's 90% of your wealth? We want to help you recognize and help the advisor recognize, give you tools to recognize the risk you have.

Let's hedge that. Let's take direct indexing. Let's open an account over here and start slowly transferring that idiosyncratic security risk and help the client. I bring this up because I, I'm a failed stockbroker, but I did help one client, and I was unable to help another, and the one I was able to help was get them out of Bank of America before the liquidity crisis.

I didn't have a crystal ball like you asked. I just saw a problem and I was able to get them to de-risk and I saved their retirement. I had another individual that was invested in Wachovia and, unfortunately, they, it was like a bank that bought a bank that bought a bank that Wacovia bought, and they were unable to, I was unable to find the basis, help them look for the stock certificates.

I couldn't get them to unwind it. And unfortunately, the liquidity crisis took out Wachovia Bank. And it's, that's something that is a pervasive problem for clients. And we think about, I want to help people, right? I want to help advisors. We want to make, we want wealth and we want to all have a nice life, but I want to literally help that end client.

And that is one of the biggest things out there because those assets typically are sitting in brokerage and they're not managed and we now have great tools to bring them in and actually get that concentrated security risk reduced because that is a meaningful problem that can be solved.

[00:17:35] Doug Heikkinen: Michael, that was fantastic.

Thanks so much for joining us and best of luck out there.

[00:17:39] Michael Featherman: Thank you so much.

[00:17:40] Doug Heikkinen: For more information about Envestnet, please visit Envestnet.com. Please follow us on X, LinkedIn, and Facebook, all at @Advisorpedia. For everyone at Advisorpedia, our producer Tory Miller and the Power Your Advice podcast team, this is Doug Heikkinen.