Private-equity firm Hellman & Friedman LLC will pay $3.02 billion
for robo adviser Financial Engines Inc., highlighting Wall Street’s
intensifying interest in providing financial-planning products to investors
nearing retirement.
Hellman & Friedman plans to combine the Sunnyvale, Calif., company,
which manages $169 billion in 401(k) and similar accounts, with its Edelman
Financial Services LLC unit, which is one of the largest firms dedicated to
providing families with in-person financial planning advice.
While robo-advisory services, which pair algorithms with human
help, have long been popular because of their low fees, the deal underscores
the efforts of many asset managers to provide financial planning that includes
both retirement and taxable accounts, at varying price levels.
“The right product at the right time for millions of people is real
financial advice,” said Allen Thorpe, a New York-based partner with Hellman
& Friedman, in an interview. “How can you deliver high- quality financial
advice at scale? We now have many more tools to do that.”
Founded in 1996 by Stanford University economist William Sharpe,
Financial Engines is the leader in the fast-growing market for 401(k) managed
accounts, which compete with target-date funds that automatically reduce
stockholdings and increase allocations to bonds as an investor ages.
Managed accounts give investors professional help with their retirement
investments, often at a lower cost than they would pay for a traditional
financial adviser. Customers generally work with a call-center team rather than
a particular adviser, although Financial Engines says clients can request a
specific adviser. Managed-account staff don’t typically provide help with
broader financial issues such as insurance or estate planning.
Alight Solutions LLC, a 401(k) record-keeper, said about 58% of large
401(k) plan sponsors offered managed accounts in 2017, up from 11% in 2007.
The combined entity will provide multiple levels of service at a range
of prices. Edelman will gain access to a pipeline of retiring 401(k) investors,
many of whom may wish to roll their money over tax-free to individual
retirement accounts. Many industry watchers expect demand for Financial
Engines’ services to grow as the baby boomers get closer to retirement,
frequently a time when employees seek out the more customized advice available
through a managed account.
The company can “take clients who are retiring and move them into a
high-fee service,” said William Trout, head of wealth-management research at
consulting firm Celent, a division of Oliver Wyman Group.
Financial Engines’ fees range from about 0.2% to 0.6% of assets a year
for the managed account service, in addition to the fees of the mutual funds
that 401(k) participants invest in. The exact fee depends on the size of an
individual’s account as well as the size of the plan they belong to.
Edelman, in contrast, charges as much as 2% of assets, depending on an
account’s size.
Hellman & Friedman, which has offices in San Francisco, New York and
London, bought a majority interest in Edelman Financial Services in 2015, from
private-equity firm Lee Equity Partners in a transaction that valued the
business at $800 million, The Wall Street Journal reported.
With markets near all-time highs, private-equity firms have increasingly
been using their portfolio companies as platforms to pursue industry
consolidation. The argument is that the cost savings or new revenue
opportunities that come from merging two companies can help offset the lofty
prices firms must pay.
At the time of the 2015 deal, co-founder and chairman Ric Edelman told
the Journal the goal was to “aggressively add advisers and offices” and to
explore mergers and acquisitions in the fragmented world of wealth management.
Shares of Financial Engines surged 32% to $44.65, just shy of Hellman
& Friedman’s $45-a-share proposal. Financial Engines said Monday it was
selling itself for cash at that per-share price, a 33% premium to its Friday
closing price.
Click here for the original article form The Wall Street Journal.