As in politics, deep countercurrents and sudden opportunity-taking determine many of the trends shaping the retirement plan advisory space—and it often makes for strange bedfellows, as the saying goes. Such is the case with the newly announced acquisition of The Mutual Fund Store, a 125-location advisory chain serving various retirement market verticals, by Financial Engines, one of the more successful robo-advisers in recent years.
You read that right—a robo-adviser has decided to scoop up a large national registered investment adviser (RIA) in order to deliver more in-person advice and holistic, relationship-based advising. Terms of the deal include total consideration of approximately $560 million to be paid by Financial Engines, including cash and stock.
PLANSPONSOR sat down with Financial Engines President and CEO Lawrence (Larry) Raffone to unpack the deal details and what it all means in the context of the institutional defined contribution (DC) retirement planning market. For the record, Raffone says this “is not a brick-and-mortar” play, and instead represents a move towards a more holistic offering for Financial Engines’ many clients. He says the driving rationale for the acquisition is presented clearly and concisely in research the firm published earlier this year, “The Human Touch,” which shows clearly that a middle ground is emerging in the robo versus traditional advice debate.
“The research found that even those who are interested in using robo-advisers would value access to in-person advice for certain situations and circumstances,” Raffone explains. In other words, robo-advising and traditional advising are not mutually exclusive approaches to doing business in the intuitional retirement plan advisory space.
Raffone summarizes four additional strategic objectives for Financial Engines in obtaining the traditional advisory chain: Greater usage and retention of Financial Engines’ services by a given client; expanded market opportunities to help 401(k) participants with more complex needs; significant earnings per share accretion; and strong synergies and higher future growth.
NEXT: Terms of the deal
Raffone says the culture at The Mutual Fund store will make it a great fit, as the firm already has the capacity to deliver high quality personalized financial planning and objective, fiduciary advice through advisers in locations across the United States. Specifically, Financial Engines will gain the use of approximately 345 employees/reps and immediate access to approximately 84,000 new accounts at about 39,000 households. The Mutual Fund store carries over $9.8 billion in assets under management, as of October 31, 2015, according to press materials.
For merger and acquisition buffs out there, Financial Engines explains the total transaction purchase consideration includes approximately $250 million in cash and 10 million shares of Financial Engines common stock. The combined company will be debt-free following the transaction. Based on the common stock portion of the transaction, private equity firm Warburg Pincus will receive Financial Engines common shares representing approximately 12.5% of the pro forma shares outstanding. Concurrent with the closing of the acquisition, Michael Martin, managing director of Warburg Pincus, will be appointed to serve on Financial Engines’ board of directors.
Raffone says this introduction of a private equity representative onto the Financial Engines board of directors is also a natural extension for the company, which “started as a Silicon Valley play back in the mid-90s.” He says the ongoing discussion and investment from Warburg Pincus will accelerate innovation and improve client services and growth potential over time.
The transaction is expected to close in the first quarter of 2016 and is subject to regulatory approvals and other customary closing conditions. DBO Partners acted as financial adviser to Financial Engines, and Pillsbury Winthrop Shaw Pittman provided legal counsel. J.P. Morgan acted as financial adviser and Wachtell, Lipton, Rosen & Katz provided legal counsel to Warburg Pincus.
NEXT: Deal from the ground level
Raffone explains that participants and plan sponsors have simply been hounding the company for more services—not to replace the robo-advising core of what Financial Engines does but instead to complement it.
For the company’s existing 9.2 million clients, who are distributed across the United States and are connected to Financial Engines through their workplace defined contribution retirement plans, a whole host of new services will soon be rolled out, Raffone says, from greater access to advisers in the workplace to weekend and evening meeting hours at The Mutual Fund Stores’ existing offices. Critically, as much as 50% of the current client base of Financial Engines lives/works close enough to an existing Mutual Fund Store location to make evening and weekend advising very practical.
“From day one it’s going to be an effective complement to what we already offer and will represent a true, comprehensive financial wellness benefit,” he explains, noting that clients will still be able to use video-calling features and over-the-phone advising. “Our client base has told us clearly that video advising and advising over the phone are very useful for some things, but even though you’re dealing with a real person, in some ways it is still not the same as true in-person advice. They really want the holistic approach and a chance to meet face-to-face with a pro.”
Interestingly, Raffone appears nonplussed by danger of trying to do too many things for too many people. “To do everything for everyone you need to have the best technology and the best approach, and I believe we have that,” Raffone concludes.
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