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April 30, 2018 at 01:40 PM
Private equity firm Hellman & Friedman is buying robo-advisor Financial Engines for about $3 billion in cash and combining it with Edelman Financial Services, which it has held a majority stake in since late 2015.
“This is interesting on two levels, since Ric Edelman always has been out there talking about the digital future — how that’s coming faster than we think, and [the wealth industry] is not prepared,” said Tim Welsh, head of consultancy Nexus Strategy, in an interview. “Now, he’s backing up that prognosis in a big way.”
But the deal raises plenty of questions as well, Welsh adds. “What are the synergies? What does he get? Will there be separately run businesses?”
Financial Engines works mainly in the 401(k) space, “and that’s low-margin fare,” the industry veteran points out. Individual retirement accounts are higher margin.
“But it’s tricky rolling things together and rolling over accounts,” Welsh explained, pointing to regulators’ current investigations of Wells Fargo’s retirement rollovers, fund sales and related wealth operations.
Michael Kitces, author of the Nerd’s Eye View blog, says the move “is … a huge win” for both firms.
“Simply put, for Financial Engines, this is about deepening their bench of HUMAN advisors, affirming they’re seeing positive results with humans from [the Mutual Fund] Store. For Edelman, it’s a massive ‘distribution’ opportunity to bring their [financial planning] advice to more consumers [without] relying on Ric,” Kitces explained on Twitter.
For the broader advisor community, the news “is yet another affirmation of the value of human advice over pure tech. But also a warning that there’s another big competitor trying to get your future clients before they ever retire,” added the blogger, who also is a partner and director of financial planning research for Pinnacle Advisory Group.
Others agree: “It’s a big bet on digital and commoditization of investments. It means intense price compression yet to come,” tweeted advisor Bryan Beatty.
Welsh refers to the news as “a merger of a robo-advisor and real advisors” and as a “reverse merger,” with Financial Engines poised to take on the dominant role.
The deal is expected to close in the third quarter of 2018. Financial Engines President and CEO Larry Raffone is set to become president, CEO and board member of the combined company, while Ric Edelman — Edelman’s chairman and co-founder — will serve as a board member and chairman of Financial and Investor Education for the new entity.
