INTERVIEW: Envestnet On Bringing Down The Costs Of Pooled Investments For Family Offices

Harriet Davies Editor - Family Wealth Report 26 October 2012

INTERVIEW: Envestnet On Bringing Down The Costs Of Pooled Investments For Family Offices

James Lumberg, co-founder and managing director Envestnet, outlines his firm's plans to grow its partnership accounting business, after having integrated the software in its wealth management platform three years ago.

Envestnet is looking to grow its partnership accounting business, after having integrated the software in its wealth management platform three years ago.

There was a “lightbulb moment” for Envestnet in deciding to do this, said James Lumberg, co-founder and managing director of the firm, when one of its large single family office clients approached it with a particular request.

“We have one large family office in particular that said ‘we’re spending tremendous amounts of money on partnership accounting, can you automate the accounting on your platform?’,” says Lumberg.

This client requested to work with Envestnet, and invest along with the firm, to build the partnership accounting system and run it in parallel with its existing systems to prove over a couple of years that the calculations were accurate. Three years down the line and, as a result of this request, two family office clients and a foundation are now using the integrated partnership accounting system. But Envestnet is looking to widen this use.

“Not yet widely used”

Lumberg says this approach is not yet widely used in the industry, despite the popularity of pooled investments among family offices. For example, according to research from Cerulli Associates, offering pooled investments is one of the ways multi-family offices can create a differentiating factor from most RIA firms. Meanwhile, for single family offices, pooled investments can create operating efficiencies and buying power.

“Partnership investing is a best practice for many family offices. However, in implementation it can be cumbersome to do the underlying accounting to manage the assets in a single pool,” says Lumberg.

Lumberg says the expenses for having a CPA do partnership accounting can be significant, and that the alternative option of running separate accounting software is also expensive as it requires someone to administer the partnership accounting. Traditionally, the main costs for partnership accounting are professional services fees and accounting software, he says. 

This is largely due to the complexity of partnership accounting – which has to take into account different family members’ ownership interests, as well as distributions and contributions to the pooled investments.

“So if you can imagine a family with five members who have all contributed assets into a pooled portfolio, first of all you need an accounting system that keeps track of each family member’s share of the pool, but what becomes complicated is that each family member will have different cash flows – contributions to the pool, distributions from the pool – and the earnings of the portfolio need to be allocated across family members appropriately,” he explains.

“Envestnet has recognized that pooled investment approaches for many families is a best practice but heretofore there has not been a wealth management system that addresses both the investment management  and accounting integrated into one solution.”

However, given that partership accounting was integrated into its platform three years ago, its adoption among Envestnet clients has been relatively slow.

“I think there’s an inertia certainly in the marketplace – that’s part of the explanation, another part of the explanation is just [a lack of] awareness that these capabilities are available,” says Lumberg.

The big push

The firm has also not broadcast these capabilities widely, as it wanted to be absolutely sure of its systems first.

“We’ve been in that process, so part of it is we’ve been very careful and methodical in making sure that the calculations and systems are working properly before we go out and make a big push in the marketplace and start offering these capabilities to others,” says Lumberg. 

But he says that now the firm is starting to do more work with prospects in this area, it has found that when it engages with family offices on this idea “it really becomes very compelling.” One of its single family office clients has saved hundreds of thousands of dollars in accounting fees, he says.

“The fees that we charge for partnership accounting are very modest, typically anywhere from $300-$500 per year per partnership.”

“We feel very confident in the system and we are now bringing on additional clients that are using it.”

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