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Financial Engines-Edelman Deal: Where Are the Synergies?

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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.

Financial Engines has some $169 billion in assets under management and works with some 750 employers to deliver digital-based retirement planning and related services for over $1.2 trillion in assets under contract; it bought the Mutual Fund Store, which included about 350 employees and advisors, for about $560 million in late 2015. Edelman has some $22 billion in assets and does advisor-based financial planning.

“Financial Engines is extremely excited to enter the next chapter of growth through a partnership with Hellman & Friedman,” said Larry Raffone, in a statement. “We see tremendous alignment and commitment to our vision, and we believe the H&F partnership and the combination with Edelman is the best path for us to achieve our long-term strategic objectives, while providing significant and immediate upside to our stockholders, employees and clients.”

For his part, Edelman explained: “Our unwavering focus on our clients has allowed us to build a rapidly growing business and we are proud of our long-time commitment to delivering high-quality financial planning and investment advice. We are very excited to join forces with Financial Engines to serve more clients better than ever and to accelerate growth in the business.”

Earlier this year, the popular RIA said at an industry event that he has long embraced tech tools in his practice and outlines how advisors can embrace it in his latest book, “The Truth About Your Future.”

About a year ago, the industry leader said that the technologies that will most radically impact advisors aren’t robo-advisors, but “exponential technologies” such as artificial intelligence, robotics, 3D printing, nano- and biotechnology, bioinformatics, big data, materials and science.

What’s Next?

“Fintech is leading consolidation in the wealth management space,” Welsh explained. “There’s been lots of predictions about consolidation in wealth management and fintech … and this could be one of the largest deals to date [tied to] this trend… and a harbinger of more to come.”

Hellman & Friedman also owns stakes in LPL Financial, Franklin Templeton Investments, Nasdaq, Mondrian Investment Advisors and a number of other firms in the financial sector and other industries.

“Financial Engines is a pioneer in the high-growth financial technology sector,” said H&F Partner Allen Thorpe, in a statement. “We will work closely with Larry and the rest of the Financial Engines team and Ryan Parker and the Edelman team to bring these companies together into a unique business with an unparalleled mission to bring better financial help to millions of investors.”

— Check out Ric Edelman to Advisors: Your Advice to Clients Is ‘Fatally Flawed’ on ThinkAdvisor.