AdvisorEngine Acquires Junxure Users And Gets CRM Thrown In!?

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#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone! Welcome to Office Hours with Michael Kitces.

For today's Office Hours, I want to talk about the big advisor technology news that hit the industry newswire this week. That AdvisorEngine is acquiring Junxure CRM.

As many of you know, Junxure is one of the more popular CRM platforms for advisors, particularly in the RIA community. It ranked second in adoption in last year's T3 tech survey behind Redtail but ahead of Salesforce. And it's especially popular with financial planning-centric firms, given that Junxure has a lot of workflow capabilities to support the kind of ongoing service work that you have to do for financial planning-intensive clients.

The company was founded back in 2001 by financial planner Greg Friedman, who also runs a billion-dollar RIA firm called Private Ocean, and originally made the software just to help manage the workflows of his own firm, and then ultimately sold the solution to other advisors and became a software provider.

Now, the terms of the deal weren't specifically disclosed, but in the announcement, AdvisorEngine noted that it was opening up a new $30 million working capital line of credit within WisdomTree, who also invested $20 million of equity in the company back in 2016, and then specifically noted the company was drawing on a $22 million initial funding this week, which pretty much implies Junxure just got bought for about $22 million, give or take a little.

WisdomTree's own announcement about the investment into AdvisorEngine specifically noted that of the $30 million loan, about $6 million of it was earmarked for working capital, which implies that Junxure was probably purchased for about $24 million in total, 90% paid in cash up front and the remaining $2 million or so in contingencies in the coming months or years.

While many financial advisors are at least familiar with the Junxure CRM name, the AdvisorEngine name is far less familiar for most. AdvisorEngine is in the category of what I call "robo-advisor for advisors" software. It was originally a direct-to-consumer robo-advisor called NestEgg years ago that pivoted and made its onboarding technology and nice-looking account aggregation client portal available to other advisors when it merged with a company called Vanare. And then over the past year has been expanding its capabilities with integrations to Smartleaf for rebalancing and acquisition of Wealthminder to offer basic financial planning tools, and an acquisition of Kredible to help us in digital marketing capabilities, and now it kind of rounds out the picture with an acquisition of Junxure to add an integrated native CRM capability.

In essence, AdvisorEngine seems to be trying to build what I call a "full stack" of technology that we as advisors use to run our practices. So something for portfolio accounting and management, financial planning software, and CRM software, which AdvisorEngine then hopes to monetize by charging advisors a technology AUM fee that starts at 10 basis points and scales down at higher AUM levels for all the assets being managed through the AdvisorEngine platform, plus what's actually kind of a kicker of additional revenue for AdvisorEngine if financial advisors use the model portfolios that AdvisorEngine makes available, which, not surprisingly, are made by WisdomTree and include WisdomTree ETFs because the AdvisorEngine technology is now basically an ETF distribution channel for WisdomTree as well.

In essence, we had a robo-advisor for advisors digital platform and a partnerships rebalancing software acquire financial planning tools, still had a gap in CRM capabilities while AdvisorEngine did integrate with Redtail and Salesforce and Wealthbox, thus far they were only one-way push integrations that would send AdvisorEngine data into the CRM but couldn't pull data from those CRMs, which really limits the actual efficiencies of the integration.

But now with their own CRM, AdvisorEngine has full access to do much deeper CRM integrations, which I think is particularly critical for getting efficiency out of a digital onboarding and client portal tool. Because if clients are going to enter their information into AdvisorEngine and interact with the advisor through AdvisorEngine, you need to be able to do a two-way flow of information between AdvisorEngine and Junxure. And so now that AdvisorEngine owns Junxure, they can build that level of deeper integration.

Implications For Junxure Desktop And Junxure Cloud Users [Time - 4:22]

Perhaps not surprisingly, the biggest volume of questions I've actually been getting so far about the news that AdvisorEngine was buying Junxure is from existing Junxure users who're just wondering what this means for them. I think there are a few implications to the deal. And frankly, they're pretty much all good news for Junxure users. First and foremost, AdvisorEngine wants to grow and they've got capital to invest for growth. And this is a big deal for Junxure users because Junxure for years has suffered and struggled a little from the fact that they were capital-constrained. They weren't venture capital-funded, they didn't necessarily have the money to hire the staff to build the features as fast as users wanted.

And, as a result, while the software was originally built as a desktop application, not uncommon in the early 2000s when it was first developed, Junxure has really struggled to move to the cloud. They didn't even originally announce the launch of Junxure Cloud until 2013 when Redtail was already on the cloud by 2003, and then they didn't really fully formally launch Junxure Cloud until 2015. And when it did launch, it still didn't have a lot of features that the existing Junxure desktop solution already had. As a result, even RIABiz coverage of the Junxure acquisition noted that Junxure itself is reporting still more than 50% of its users remain on Junxure desktop and haven't even moved to Junxure Cloud yet, resisting I think what's both just a time-consuming software transition and the fact that the cloud version lagged in features compared to desktop.

So the good news of all this AdvisorEngine acquisition activity, is that this is a web-based company. Cloud software is all they do and they have capital, so I suspect we're going to see a really significant increase in the development pace of Junxure Cloud, acceleration of that roadmap to finish getting Junxure Cloud up on par with Junxure desktop. In part, because AdvisorEngine just has more resources to do the development, and also in part, because the whole point of this acquisition is for AdvisorEngine web-based software to integrate more deeply with CRM, which means they need Junxure desktop users to move to the cloud to leverage the integrations they're planning to build. And it's not very effective to have a web-based API that tries to reach each advisor's individual desktop version of the software.

So AdvisorEngine has a strong incentive to finish all those Junxure Cloud developments, to get it on par with desktop, and to help encourage desktop users to move over. Which I think, ultimately, is a good thing because this isn't the 2000s anymore... this is the 2010s, and we're actually almost in the 2020s now. If you're an advisor running a modern practice, your technology should use the internet. So it's good that Junxure gets the investment to lift up the capabilities of Junxure Cloud, and it's good for Junxure desktop users to get the capabilities they want and need so that they can finally make the transition off of desktop.

Will AdvisorEngine Build Junxure For Junxure, Or Junxure For AdvisorEngine? [Time - 7:09]

That being said, it's important to recognize that AdvisorEngine didn't just buy Junxure to make Junxure better for Junxure users. They bought it to make AdvisorEngine better and to get more AdvisorEngine users by leveraging the value of Junxure. Which means that while you're going to see some investments in their Junxure Cloud to finish matching capabilities to desktop, AdvisorEngine is clearly also going to be spending resources to integrate Junxure Cloud into AdvisorEngine. And that will likely include things like being able to populate AdvisorEngine onboarding data directly into Junxure, flowing AdvisorEngine account aggregation data perhaps through Junxure, tying Junxure workflows to events that occur at AdvisorEngine. Maybe even to push some CRM workflows into AdvisorEngine in the client portal. Because again, the whole point of AdvisorEngine is to be this central technology platform that the advisor uses to run their business, so the deeper the integrations, the more the potential for efficiency.

The caveat, though, is these are all developments that don't help Junxure users. They help AdvisorEngine users and maybe Junxure users who decide to adopt AdvisorEngine. Now, it's important to recognize this isn't an either/or scenario, as though AdvisorEngine will only develop AdvisorEngine features or make Junxure Cloud better for Junxure users, they'll almost certainly be working on both in parallel. Nonetheless, though, this is the problem with... we'll call it strategic acquisitions of advisor software solutions like Junxure CRM.

AdvisorEngine didn't just buy Junxure to make money on Junxure by trying to make Junxure bigger and better, they're doing it to make AdvisorEngine bigger and better by having it integrating to Junxure as part of their platform. Which means even if Junxure software continues to be available and stand on its own, which I expect will be the case, just as eMoney is still available to all advisory firms even though Fidelity acquired it three years ago... but as with Fidelity and eMoney, expect to see the deepest integrations for AdvisorEngine going to Junxure, and a lot of the Junxure enhancements being the ones that help deepen its integration value with AdvisorEngine.

Which may be a little awkward for some of AdvisorEngine's other partners. Thus far, the company has lauded itself as being open architecture, except then over the past 12 months it acquired its own goals-based financial planning software, and now it acquired its own CRM. Which makes it a lot less appealing for other software players in those categories to actually integrate with AdvisorEngine's open architecture because it seems pretty clear about where they're going to be putting their deepest integration resources. And it's not with their open architecture partners.

I can't entirely blame AdvisorEngine for this because the reality is that it's really hard to create efficient streamlined workflows across lots of different disparate technology tools. That's why you're seeing so much advisor technology consolidate. Why Fidelity bought eMoney, why Envestnet has been acquiring left and right... It's easier to deepen these integrations when you own all the components. And that's I think what we're seeing here, at least in part, with AdvisorEngine buying Junxure.

The Risk Of AdvisorEngine Acquiring Junxure CRM [Time - 10:08]

At the same time, I think this also raises what I view is the most concerning part of this deal, of AdvisorEngine acquiring Junxure: That AdvisorEngine needs Junxure users to adopt AdvisorEngine for this to work out. Because the reality is that AdvisorEngine still has the clock ticking on the $20 million equity investment that WisdomTree made back in late 2016, for which after a full year, AdvisorEngine is only reporting about $3 billion in assets on their platform with 60 advisory firms. So even if we're generous and we assume all those firms are paying AdvisorEngine's top rate of 10 basis points, which I doubt, the company only has about $3 million of revenue so far. That's not a good sign relative to the fact that they raised $20 million of cash over a year ago. The pressure on AdvisorEngine to bring more assets fast to justify their capital investment must be tremendous right now.

And that, I think, is the real reason why AdvisorEngine bought Junxure. Not just for the potential to make AdvisorEngine a more holistic platform by deeply integrating advisor with Junxure CRM to attract more advisory firms, but specifically to convert as many of Junxure's 1,400 existing advisory firms over to AdvisorEngine.

In fact, in a kind of subtle emphasis to the point, when AdvisorEngine announced the Junxure acquisition this week, their press release specifically noted that Junxure has a total of 12,000 users and that those users manage $600 billion of AUM. Now, think about that for a moment. Junxure Cloud users pay $65 per month per user, Junxure desktop users pay $44 per month per user, why would a CRM acquisition quote the AUM of the firms that use the software beyond just quoting the user count? Because AdvisorEngine's business model isn't to get paid based on user count, AdvisorEngine gets paid based on assets running across the platform in basis points, right?

If AdvisorEngine can convert just 10% of that Junxure user and asset base, that $60 billion of AUM, which at AdvisorEngine's 10 basis point pricing is a $60 million dollar revenue opportunity. Put that in context. Junxure reported 12,000 users, so the software cost somewhere between $44 and $65 a month, so if we kind of round it off to averaging $50 per month per user, Junxure CRM only had about a $7 million annual revenue run rate. AdvisorEngine makes $60 million of revenue just converting 10% of Junxure users to their platform. That's the real key. AdvisorEngine didn't just buy Junxure for the Junxure business, they bought it as a marketing channel to get direct access to the opportunity to convert 1,400 Junxure firms with $600 billion of AUM, and then they got the actual CRM software thrown in for some nice capabilities.

The problem, though, is I'm not certain how well this is realistically going to work out, because Junxure users tend to be deep financial planning firms. Greg Friedman's firm is (Private Ocean). He built Junxure to serve his firm and then others like his. AdvisorEngine is an investment-centric platform with the client portal focused on investments and onboarding process focused on investment accounts. Because it's not like AdvisorEngine onboarding data goes to actual planning software. They have no planning software integrations and their own internal financial planning light solution through Wealthminder that you can't even turn off in the AdvisorEngine portal if you're actually using third-party planning software like eMoney Advisor or MoneyGuidePro. And I'd be willing to bet that virtually every Junxure user is using some third-party financial planning software. eMoney, MoneyGuidePro, maybe newer tools like Advizr or RightCapital, and will not be satisfied with the limited capabilities of Wealthminder's planning tools inside of AdvisorEngine.

So we have this real conflict and challenge that AdvisorEngine wants to get Junxure users to switch to AdvisorEngine, but Junxure users are financial planning-centric firms and AdvisorEngine is an investment-centric onboarding tool and portal with "financial planning light".

Heck, for all the Junxure users on eMoney, I suspect that probably most of you are already using the eMoney portal with clients because that's an actual financial planning software portal and probably won't have any interest in switching to an AdvisorEngine portal. And even if you look overall, you know, 1,400 reported firms, $600 billion in reported assets, the average firm using Junxure is a sizable firm with a few hundred million in AUM already. That means they're already probably using their own rebalancing software and won't necessarily want to switch to Smartleaf with AdvisorEngine. They probably have their own trading processes infrastructure. They probably have their own existing portals that clients are used to. All of which makes it very difficult and time-consuming and stressful for a Junxure firm to switch to AdvisorEngine.

And of course, if AdvisorEngine can really deliver greater efficiencies, it can still make business sense for Junxure users to switch, right? Obviously, the whole point of adopting better technology in advisory business over time is that you switch to the tools that serve you better. And maybe, hopefully for their sake, AdvisorEngine can win over a few.

But even if AdvisorEngine can deliver some incremental efficiencies, there's still this other dark cloud that looms... the fundamental challenge of AdvisorEngine's business and pricing model. Unlike Junxure (and virtually every other advisor technology which prices in dollars per month or dollars per year, like a flat software fee), AdvisorEngine charges basis points. Starting at 10 basis points and then moving down as the firm grows.

Will Advisors Pay Basis Points For Advisor #FinTech? [Time - 15:43]

Certainly understandable, the technology firms would want to charge on basis points, because charging based on AUM means your revenue automatically grows each year as the market grows. And there are very few other business models out there anywhere, in any industry, where you can grow revenue per client by a real rate of return above inflation just by keeping your clients and letting the markets do the revenue lifting work. That's why advisory firms that run on the AUM model have grown so much more than commission-based firms, and that's why technology firms want to charge basis points instead of just flat monthly or annual software fees.

But from the advisors' perspective, paying for software price in basis points sucks because we don't get any scalability out of it. The virtue of fixed cost advisor technology is that as our firms and revenue grow, our technology costs don't have to. That's why if you look at advisor benchmarking sites like the InvestmentNews study, the average small advisory firm spends 4% to 5% of revenues on technology, but large firms only spend 2% to 3% of revenue on technology, because as the firm grows, the fixed software cost become a smaller percentage. You can't do that if your software providers charge you in basis points though.

And certainly not at AdvisorEngine's levels. When the typical RIA only spends, you know, maybe 2% to 4% of revenues on all technology and a typical firm charges 1% on client assets and actually averages about 70 to 80 basis points on all assets, given breakpoints for affluent clients and such, typical advisory firm really only spends the equivalent of about 2 to 3 basis points of revenue on all their technology. And AdvisorEngine's pricing starts at 10, and it doesn't include full financial planning. And it still requires you to use outside rebalancing software, and it still doesn't include all the other add-on tools that advisors need, like document management. Charging 10 basis points when a typical RIA charges 70 to 80 basis points of revenue yield on AUM means AdvisorEngine would essentially cost a typical advisory firm upwards of 15% of revenue when the typical firm only spends 2% to 4% of revenue on technology.

To be fair, if AdvisorEngine charged one basis point or two basis points akin to what a comparable flat fee would be, it's perhaps somewhat more feasible, but then I'm not sure AdvisorEngine can make its projected numbers given WisdomTree's big $20 million equity investment. And what's to stop an advisor from just shifting their assets out of the AdvisorEngine ecosystem once the client is already on board it just to cut AdvisorEngine out of the basis point charge? You know, it's not clear to me how AdvisorEngine even ensures that the advisor is reporting all their assets in the software so AdvsiorEngine can bill on them, especially planning-centric firms that are more likely to use something else for planning software, something else for a planning portal, who still keep actual client assets custody at an actual RIA custodian that offers its own technology, that will replace most or all of what AdvisorEngine does once the firm is really large and those basis point fees start adding up.

You know, as I've written in the past, this is the fundamental problem with advisor FinTech firms trying to be a platform business when they don't actually control the platform because they don't actually control enough custody of the assets. You know, the custody and clearing business may not be high margin, but at least those platforms know what the assets are. You can't hide them because they're custodians. They literally have custody of the money. And more importantly, they have ways to cross-subsidize their revenue by making money on the actual custody and clearing business while charging little or nothing for competing technology. And to the extent that basis points are paid, it comes from the transaction cost of the client, not off the advisor's profit and loss statement. That's the challenge with trying to run a custodian-like model generating basis points without actually being a custodian.

And so, if advisors continue to not be willing to pay basis points on tech or if AdvisorEngine can't compete with platforms like Wealthscape that provide similar capabilities but it's almost entirely free because Fidelity makes their basis points on the custody and clearing instead, then the question arises, what happens to Junxure in a year or a few if AdvisorEngine can't convert all those Junxure users paying $44 to $65 per month per user into AdvisorEngine users paying 5 to 10 basis points? Because again, that's what AdvisorEngine actually needs to do with this acquisition, not to justify the cost of the Junxure purchase but to justify the amount of capital that WisdomTree has already put into AdvisorEngine for the AdvisorEngine core business.

Now the good news is that Junxure is a viable CRM company on its own. It has real users, it provides real value, and has real value as a company. So even if this doesn't work out, I think Junxure lands somewhere just fine. Frankly, I suspect RIA custodians like Fidelity and Schwab were probably both already interested in buying Junxure, along with maybe other companies making platform plays right now like Envestnet and Morningstar. So Junxure can and should survive just fine even if AdvisorEngine can't convert Junxure users and doesn't survive itself.

But nonetheless, the bottom line here is that while in the very near term Junxure users should see a big investment from AdvisorEngine, new Junxure features, particularly to finish getting all the Junxure desktop functionality up into Junxure Cloud, the real value of Junxure for AdvisorEngine is Junxure users, and getting them to pay basis points for AdvisorEngine technology. And it's not at all clear to me that Junxure users will be willing to pay AdvisorEngine's basis point pricing model or the technology is that much better, that they'll be willing to abandon their existing tools that don't cost basis points, or even if financial planning-centric Junxure users are the best fit for an investment-centric platform like AdvisorEngine in the first place. Although given that the terms of the deal were apparently almost all cash up front for the Junxure purchase, that's primarily just a risk for AdvisorEngine at this point, and perhaps Junxure users will have to live with the long-term consequences.

Still, at a minimum, if you're a Junxure user, I would expect some phone calls coming from the AdvisorEngine sales team in a couple of months here in 2018 making their case for consolidating more of your technology with Junxure-integrated AdvisorEngine. And we'll see what happens and whether the sales team is compelling enough.

In any event, I hope this is helpful food for thought. This is Office Hours with Michael Kitces. Normally 1 p.m. East Coast time on Tuesdays, but I pushed back our Office Hours this week so we could talk about this big Junxure news. Thanks for joining us, everyone. Have a great day.

So what do you think? Will AdvisorEngine's acquisition of Junxure lead to improvements for Junxure users? Is AdvisorEngine really just hoping to get Junxure users to adopt the AdvisorEngine platform? Would you consider paying basis points instead of a fixed fee for technology? Please share your thoughts in the comments below!