Financial planners, watch your backs. Financial Engines [FNGN], a retirement plan advisor co-founded by a Nobel Prize winner, completed an initial public offering Monday that blew the doors off the IPO market and affirmed investor belief in a business model that offers low-cost sophisticated retirement advice to individual investors.
Financial Engines raised $127.2 million in its debut. Shares were originally offered at $9 to $11 per share, but priced at $12. After the deal hit the secondary market, when institutional shareholders sold their stock to the public, prices went up to $17.
In late Tuesday trading, Financial Engines was up 40%, according to Bill Buhr, an IPO strategist for Chicago-based Morningstar [MORN].
“In comparison to other IPOs we’ve seen the last few weeks and months, this is one of the better performing IPOs,” he said. “There is a lot of investor interest in this business model. The market is looking for quality.”
That is no small praise, especially coming from a competitor like Morningstar.
Similar to Morningstar, Financial Engines offers retirement planning and investment advice to investors enrolled in company-sponsored defined contribution retirement plans, like 401(k) plans. Launched in 1996, it uses an automated, web-based platform to collect information from investors and assess their retirement income needs. It then uses mathematical algorithms to make recommendations.
“There is a growing market for financial advice, specifically for defined contribution plans,” Buhr said.
Financial Engines certainly thinks so. In its registration statement filed with the Securities and Exchange Commission on Dec. 9, Financial Engines said shifting retirement industry trends will allow it to provide independent and customized portfolio management, advice and retirement advice to investors who are not affluent and would not be able to afford personalized services.
Much is said in the financial planning professions these days about how Americans are not preparing for retirement adequately. Now, a 14-year-old company that offers respected Web-based advice has convinced the capital markets that its business model offers a viable way to address that issue.
Should financial planners, who specialize in providing hands-on investment advisory services to their clients, worry?
Financial Engines provides easy-to-understand retirement advice, said Katharine Wolf, a senior analyst at Cerulli Associates in Boston. “What sets them apart is their ability to provide something that is not so much investment-focused as it is outlook-focused,” Wolf said, adding that she has heard from broker-dealers who have implemented some of the Financial Engines solutions for their employer-sponsored retirement plan advisory services.
Daniel Deighan, the chief executive officer of Deighan Financial Advisors in Melbourne, Fla., is not worried about competition from Financial Engines. His company has $150 million in assets under management and serves an affluent client base, and can offer several services that seem out of Financial Engine’s reach at the moment. Employers would also have to ensure that they are not exposed to potential liabilities for offering just one advisor to their employees.
Financial Engines generates revenue by signing contracts with employers and plan providers like Valley Forge, Pa., based mutual fund company Vanguard Group, which has been using Financial Engine’s computer-based advice program since 2001.
"We thought highly of their methodology, as a low-cost provider," said Linda Wolohan, a spokeswoman for Vanguard. "It made more sense to use a third-party provider for their computer-based model."
Financial Engines is appealing mostly to investors who want to be actively involved in their retirement planning and are comfortable using Web-based financial services, she said.
Vanguard offers two levels of service from Financial Engines: Online Advice, which Vanguard calls Personal Online Advisor internally, is free and allows investors who are comfortable using an online tool to manage their own investment program. That service lets the user forecast their chances of reaching their retirement goals, provides specific recommendations and allows them to monitor their selections. Financial Engines’ Professional Management service, called the Vanguard Managed Account Program, is designed for participants who want to have professionals manage their retirement portfolio for them, and are willing to pay a small fee for the added service. Financial Engines provides the advice, regular monitoring and rebalancing. The managed account service charges a fee of about $60 a year or an asset-based sliding fee, Wolohan said.
But there are caveats to Financial Engine’s success. It has had net-income losses every year since 2006, which Buhr attributes to the company’s cost structure, which has not allowed the firm to generate enough scale to be profitable.
In addition, its revenue structure depends on three- to five-year contracts, which can be canceled at any time for fiduciary reasons or breach of contract.
As of Sept. 30, Financial Engines had signed contracts with 107 Fortune 500 companies, and had $23.5 billion in assets under management from 383,000 plan participants.
To promote its growth, it plans to increase enrollment in managed accounts by converting plans from active enrollment, which requires the employee to opt in, to passive enrollment, which signs them up automatically.
