Ric Edelman, founder of Edelman Financial Services, says he personally drove one of the largest-ever RIA deals between his firm and robo advice giant Financial Engines. It's a marriage he believes will prove to be a bellwether.
"This thing was my idea," he says. "I think in the future we will turn and look backwards and say that this transaction was the beginning of a sea change in the financial services industry."
Edelman expects to see a wave of similar RIA-robo pairings, pushed by consumer demand for cheaper, unconflicted online services.
Private equity firm Hellman & Friedman, which owns a stake in Edelman, is paying $3.02 billion in cash for online robo pioneer Financial Engines, which serves 11 million largely middle-class 401(k) clients, mainly through their employers.
While Edelman's 35,000 clients are a rounding error in comparison to the larger firm's client base, they make his firm a giant among RIAs.
Edelman manages almost $22 billion in client assets, versus Financial Engines' $169 billion, $12 billion of which comes from the retail side which Edelman serves.
Both firms specialize in the mass affluent and have no minimum net worth requirement for clients. By contrast, smaller RIAs often require minimums of $100,000, $250,000 or $500,000.
The deal might look from the outside like an equity exit for Edelman, but Edelman says it’s the opposite. Moreover, he's comfortable with the prospect that his brand name may cease to exist going forward, he says.
Whether or not his namesake survives the merger, the industry can expect to see more, rather than less, of him, Edelman says. As chairman of the new firm, he anticipates having more freedom to focus on his educational seminars, book writing and other promotional work.
Rather than cashing out, he and his wife Jean, his longtime collaborator and an employee of the firm, made a substantial investment in the newly combined firm "to demonstrate our confidence."
"This was a big decision for Jean and me," he says. "The size of the deal on a percentage basis, it's not that great, but on a dollar basis, it's significant."
In 2014, Edelman held a 21% stake in his firm after private equity firm Lee Equity Partners bought a 56% stake in 2012. Hellman & Friedman subsequently bought out Lee, although the latter retains a small share in the new venture, Edelman says.
An astronomy fan, Edelman likens the merger to the way worlds remake themselves over time.
"Right now there are a couple of galaxies that are about to collide," he says. "When they do collide, no stars in either galaxy will actually hit each other because the universe if so big."
The same may be true with regards to his own firm's prospects and future big RIA-robo match-ups given that, when it comes to financial advice, there remains plenty of room to grow.
"It's a $90 trillion industry," he says. "Concerns of competition are a little overblown."
The following conversation with Edelman has been lightly edited for clarity.
How long has this deal been in the works?
John Bunch (COO of Financial Engines and former CEO of The Mutual Fund Store, which the former acquired in 2015) and I have been working on this for a long time — six or seven years, I think. John did a masterful job at The Mutual Fund Store. When we saw them partner with Financial Engines, it just made perfect sense for us to do so as well.
That transaction did not diminish my enthusiasm or confidence in any way that another one with us wouldn't make sense. Rather than saying, "Gee, too bad for us. We can never do a deal," this just made the notion make all the more sense than ever.
Why does it make sense?
Our two businesses were very similar — how they were structured and how they were marketed — and yet there was very little overlap between them.
Larry Raffone [the CEO of Financial Engines] founded his organization on the same premise that we founded ours, which was a focus on the client first. A fiduciary approach serving the clients' interests creates a complete alignment in the way he serves the client, even though he is predominantly serving them in the workplace and even though we predominantly serve them outside the workplace.
Do you anticipate your new firm will grow rapidly because other RIAs haven't figured out how to profitably serve middle-class clients?
It is not a fact that other firms cannot serve the mass affluent. It is a choice that they make. If they make that choice, I regard that as arrogant and obnoxious. Millions of Americans are being denied access to talented financial planners for the mere fact that they don't have the money that advisors demand to serve them.
Does this failing, then, open up new opportunities for your new firm? And what does this mean for your growth?
I used to say 20 years ago to my staff that I wasn't interested in doing anything once. I wanted to do it 1,000 times. Whatever we could do for one client, we want to do for 1,000 clients. Now we are going to start saying, "Whatever we can do for 1,000 clients, we want to do for a million clients."
Talk more about the advantages of scale.
The infrastructure Financial Engines has is strong enough to have more clients than any of us do and their technology is infinitely scalable.
We don't have to worry about our ability to serve the client. Clients are going to get more services than we've ever been able to provide. Our seminars, webinars, newsletters, articles, my nine best-selling books, my radio show, my television show — all of this content now becomes available to Financial Engine's employer clients.
Edelman has historically charged clients about 2% for its services. Will that change?
We don't anticipate it.
In what other ways is Financial Engines a good fit for you?
Financial Engines has been a pioneer in the field of financial wellness in the workplace. There's a lot of excitement on our side. Everyone is thrilled because their reputation is so strong. Our advisors encounter Financial Engines a lot among our clients. We know them well from an advisory perspective.
The Mutual Fund Store brand ceased to exist after its acquisition by Financial Engines. Do you expect the same for Edelman Financial?
We don't know. We are not worried about it. Larry [Raffone, the CEO of Financial Engines] and I have agreed that for now the two brands will remain intact and that, going forward, we will figure it out, whether it should be Financial Engines or Edelman or a combination of the two or something totally different.
It's not about what’s in it for Edelman or Financial Engines or Hellman & Friedman. The question is what's in it for the client and what's best for the business long term. And, if Edelman is our name, great, and, if it isn't, so be it.