Joe Duran

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Joe Duran

3 insights on the Financial Engines-Edelman combination and how it might affect you

The combined company is likely to become a nationally dominant firm

May 3, 2018 @ 10:54 am

By Joe Duran

On Monday, Financial Engines announced that it was being taken private by the respected private equity firm Hellman & Friedman for $3 billion in cash, a 30% premium over the pre-announcement closing price.

Financial Engines will merge with Edelman Financial, the $21 billion national RIA that H&F acquired three years ago for what was then reported as a purchase price of over $850 million. I've written in the past about the rise of the mega firms. Clearly, the combined company is one of the wealth management firms likely to become a nationally dominant firm.

The next big thing

This blockbuster deal is a very exciting development for our industry. H&F has committed almost $4 billion in capital to the wealth management industry. This is particularly interesting when one considers recent reports suggesting that valuations on certain robos has been on the decline.

PE firms don't take big bets, they make reasoned long-term investments. So what are the big trends that would make this acquisition a good investment over the long term? How might those trends impact the wealth management industry?

The power of mega distribution. A couple of years ago Financial Engines acquired The Mutual Fund Store in what was an opportunity for the largest independent 401(k) adviser (and the original robo-adviser) to pick up rollover assets from plan participants and offer human-led advisory services to executives. This time around, the owner of Edelman Financial Services, a firm with offices around the country that services a larger average client than the Mutual Fund Store, looks to use the 401(k) client base as the centerpiece for building a major national wealth management firm. It can use its size to drive cost efficiencies from vendors and derive multiple areas of synergy across the platform.

Continued blending of technology and people. The winning combination for wealth management in the future mixes humans with a heavy dose of technological help. The new Financial Engines/Edelman combo will be one of the largest bionic firms. No doubt the new combination will seek to expand its reach and continue to invest in marketing, research and development to deploy technology across its platform. How much does the typical independent firm spend on research and development and brand building? How will they compete in this ever more competitive world?

Exponential growth in a clearly defined market. The real secret to this transaction is the belief that a meaningful portion of the $169 billion in plan assets on which Financial Engines advises will need human help and guidance once participants leave their existing employer. But why not start early as well? The 401(k) plan is a Trojan horse to building a larger, more substantive relationship with clients now and into the future. How will it work? I presume Ric Edelman and his team will provide educational seminars nationally to help teach existing plan participants, but also to identify and convert some of those folks into full-fledged human advice relationships along the way. How many independent firms have such a clearly articulated growth strategy?

How to compete

Financial Engines already has a direct relationship with more than $169 billion in plan assets, a relationship that was not being optimized successfully. In order for the new firm to deliver an attractive return, it needs to provide services to the billions of plan assets that roll out of its plans annually.

This will mean a new competitor to the custodians and mutual fund companies all angling to pick up the billions of dollars of retirement assets available once employees roll out of the corporate plan. It will also mean heightened competition for independent wealth managers who were once accustomed to being first in line to capture IRA rollovers. Is it any wonder it's getting harder for independent firms to capture new rollover assets?

If you want your advisory firm to grow exponentially into the next decade, I believe this merger lays the blueprint for what it will take: a willingness to commit boldly to expansion and growth, the integrated use of evolving technology throughout your firm, and a clearly articulated target market you can access and serve profitably.

I tip my hat to Ric and the team at H&F. If they can coordinate all of the components in the right way, they have the opportunity to build a phenomenal institution. Any independent firm can change its future, but how many are brave enough to change the status quo in order to get to the next level?

Joe Duran is founder and CEO of United Capital. Follow him at @DuranMoney.

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