Edelman's robo play: 'What financial services will look like in 2030'

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In a deal seen as remaking the digital advice landscape, the robo-advice pioneer Financial Engines is being sold to Edelman Financial Services.

The private equity firm Hellman & Friedman, a majority shareholder in Edelman, agreed to pay $3.02 billion in the all-cash deal, which is expected to close by the end of the third quarter.

The deal will bring together the sizable assets of Financial Engines — $169 billion in assets under management, agreements with more than 750 companies to manage over $1 trillion in retirement assets and more than 140 locations across the country — with Edelman, which manages over $21.7 billion for more than 35,000 clients across the country.

“The digital model is the future,” said William Trout, who heads Celent's global wealth management practice. “Plus market share. Remember, Financial Engines is the original robo-adviser and 10,000 investors turn 65 each day.”

Ric Edelman, chairman and co-founder of Edelman Financial Services, would be a board member and chairman of financial and investor education of the combined company.

Financial Engines CEO Larry Raffone will become president, CEO and board member.

“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,” Raffone said in a press release.

Executives from both firms were unavailable for additional comment.

With digital advice expected to collectively top $1 trillion in assets by 2020, and incumbents quickly gathering up billions in retail and institutional assets, large advisory firms must make a move now into digital and extend their brands, market observers said.

Edelman is "placing a bet on the defined contribution space," Trout said. "I think he's run as far as he can with his model and recognizes he needs to tilt the wheel to digital.”

Industry consultant Tim Welsh agreed that Edelman is making "a huge bet" on the 401(k) market.

"He hasn't been in it up to now, so it's a big strategic decision," Welsh said. "Are there any real synergies between a traditional RIA and a digital 401(k) adviser? A deal like this only makes sense if one plus one equals five and there are vast synergies. Otherwise the risk, costs and disruption doesn't make sense."

Unlike other digital advice competitors, Financial Engines filed for an IPO in 2010, raising $127 million in its debut. It has continued to build scale in its ongoing business of signing contracts with employers and plan providers. In February, it teamed up with the human resources giant ADP to offer its digital platform to ADP’s employer network.

Also, Financial Engines clients are able to visit an adviser. Only three years ago, Financial Engines acquired the Mutual Fund Store from Warburg Pincus for $560 million to gain 129 storefronts across the country.

Across the wealth management industry, executives privately expressed shock at the tie-up.

“This is a major deal in our industry,” said John Furey, principal of Advisor Growth Strategies in Phoenix. “Two leading scale providers in two different channels of distribution."

“They should be able to build a unified process across private wealth and retirements plans and hopefully cross-pollinate,” Furey noted, adding the combined company should also benefit from the capital structure, which could lead to further deals.

“They should have the ability to acquire and do more M&A,” he said. “Could be for capabilities or assets.”

The benefits of the deal for Edelman, said Carolyn Armitage, managing director of Echelon Partners, a leading M&A consultant based in Manhattan Beach, Calif., include "synergies, accelerated revenue growth, and improved profitability through economies of scale."

One potential challenge for Edelman, Armitage said, will be "efficiently integrating the two firms while sustaining a homogeneous culture and consistent set of values."

The signs suggest a good corporate marriage, said David DeVoe, managing partner in DeVoe & Co., M&A consultants in San Francisco. “This is a very strategic transaction. The companies have many points of alignment, but also complementary assets.”

DeVoe said Edelman and Financial Engines used old tech to build up their asset base.

“Both firms are leaders in using radio to build their business and serve the mass affluent well. Financial Engine's strength in retirement planning will benefit from Edelman's footprint of advisers across the country.”

With its scale and physical footprint, the combined company will represent an evolution in wealth management, said Grant Easterbrook, CEO of the 401(k) digital provider Dream Forward.

“People have been asking for a long time what financial services will look like in 2030,” Easterbrook said. “People look at self-driving cars and think there will be no more taxi drivers in 10 years. The ultimate evolution is a really good tech platform that screens the needs of average clients, so that human advisers become more efficient and effective, and only step in for major decision points or for complex high-net-worth needs.

"It’s a utopian dream and we’re not there yet," Easterbrook added. "Edelman might be taking a shortcut to defining that vision.”

This article originally appeared in Financial Planning.
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