Largest fee-only RIA's fourth-quarter profit shot up 43%

Financial Engines' results buoyed by strong markets and growing DC assets

Feb 21, 2014 @ 11:32 am

By Trevor Hunnicutt

Defined contribution plans, RIAs, defined benefit plans, rollovers
+ Zoom

Strong markets, sticky assets and solicitation of an aging workforce are giving retirement account managers something to crow about.

Financial Engines Inc., the largest managed-account provider for defined-contribution plans by assets, increased its profits by 43.1% in the fourth quarter of last year to $9.3 million. For the full year, the firm earned $30 million in net income, up from $18.6 million in 2012.

Nevertheless, Financial Engines missed analyst earnings estimates by a penny, sending shares of the advisory firm down nearly 13% in late morning trading Friday to $54.24.

But the firm's chief executive, Jeffrey N. Maggioncalda, cast a positive light on the results.

Financial Engines continued to increase its member base, largely through print marketing campaigns with employers under contract.

“Near-retirees' need for a holistic income planning strategy is urgent and growing as their financial decisions become more complex and their life expectancies continue to increase,” Mr. Maggioncalda said on a conference call to discuss the results.

“For a 65-year-old couple, there is a one-in-four chance that one spouse will live until age 97,” he said. “As the demographic wave of baby boomers enter into retirement, we believe that employers will be motivated to provide more holistic help to their plan participants.”

Financial Engines managed $88.2 billion at the end of last year, up from $63.9 billion in 2012, making it the largest fee-only registered investment adviser in the United States.

(See where Financial Engines lands in IN's RIA Data Center.)

The firm benefited from consistent contribution of assets and strong markets.

Financial Engines said that employee and matching employer contributions, which are added to accounts automatically, generated more than a fifth of its asset growth, while market movement contributed about half the asset growth.

But the firm also took a hit when a large plan sponsor switched to a record keeper with which Financial Engines lacks an affiliation.

In part to improve client enrollment and retention, the firm is rolling out more offerings that deal with retirement planning issues outside 401(k) plans.

For instance, Financial Engines is beginning to roll out, at no cost, personalized Social Security-claiming guidance for some of its clients, Mr. Maggioncalda said.

The firm is expecting that employers will try to buy out more employees participating in pension or defined-benefit plans in order to remove those liabilities from their balance sheets, he said.

That move could benefit financial advisers if employees need help deciding whether to take and how to spend a lump-sum payment offered as an inducement to give up pension benefits, according to Mr. Maggioncalda.

(Mary Beth Franklin: Don't get greedy with Social Security strategies)

Financial Engines is by far the largest operator of its kind. But it still competes with plug-and-play retirement products such as target date funds, firms with recognizable consumer brands such as Morningstar Inc. or GuidedChoice Inc., which works with the Charles Schwab Corp., and a wave of investment advisers looking to build their own retirement services.

Many of those businesses and products have been growing, too.

Assets in target date funds rose by 26.6% to $122.2 billion for the year ended Sept. 30, according to sister publication Pensions & Investments.

In an earnings report this month, Morningstar said that its assets under management and advisement rose to $65.6 billion at the end of last year, up from $47.2 billion at the end of 2012.

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