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Ric Edelman: I’ll be a $1 trillion RIA due to digital

You’ve been highly critical of robo advisors. How will the combined platform of Edelman Financial Services and Financial Engines avoid the issues you find problematic in digital wealth advice?

RIC EDELMAN: The criticism that I've leveled against robo advisors has been proved correct. What I have said over the years is that they have unsustainable business models. These organizations can't even meet payroll. If it wasn't for their venture capital funding, they would have been out of business a long time ago. It's impossible to stay in business charging 15 basis points.

They have an attitude that I call the Kevin Costner syndrome: If you build it, they will come. But they quickly discovered that they had to spend money in marketing that they didn't anticipate. So you now see late night infomercials by these outfits trying to drum up business.

They also discovered that consumers want human interaction. They want to talk to an advisor to get their questions answered. These online sites didn't have that capacity. Now, guess what? They're raising their prices. They're changing their service model. They're adding human advisors. Exactly as I predicted.

Financial Engines is completely different, because it did not build itself to serve individual retail investors. It built itself to serve the institutional 401(k) market. That is a completely different environment that has enabled them to build a highly successful and sustainable business model. They recognized the importance of adding human advisors, which is why three years ago they purchased the Mutual Fund Store, and why they were interested in our merger. They recognized the value to their workplace clients of having human advisors serve them more broadly than they are able to do electronically.

How does Financial Engines’ technology compare to other robo advice offerings?

The company was founded by Bill Sharpe. It’s pretty unusual to have a Nobel Prize-winning economist serving as the founder of your organization. As a result, their investment management expertise is second to none. Other automated sites create model portfolios. Financial Engines produces personalized portfolios. Those million employees each have a unique portfolio, unlike everybody else's, based on the individual nuances of the client, coupled with the unique offerings of their employer's 401(k). Despite the intense complexity of technology and investment management, the user interface is very friendly, very easy to use. Employees report very high levels of satisfaction working with Financial Engines.

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What are the advantages for your clients in this merger?

Financial Engines is the oldest and largest robo advisor. Most folks don't know that and it's because they fly under the radar. They have $176 billion in assets under management. They serve about 750 employers around the country; about 150 of those are Fortune 500 companies. They're not a household name because they haven't tried to work in the retail space. They built technology designed to enable them to serve millions of people in the workplace, which is now exactly what they do. More than 1.1 million employees are using Financial Engines systems and services. And we now will have access to this technology, which we will be able to provide to our clients.

Many of our clients have worked with Financial Engines in the workplace because their companies use them as their 401(k) provider. We have not been able to directly provide advice to them in the past because of regulatory restrictions. But now that we are all one company, we're going to be able to provide our clients with more direct advice and services regarding their workplace retirement account. Which will further improve the quality and breadth of the advice and services our clients receive from us.

What then are some of the first benefits that clients are going to see?

Most likely it will be in the user interface on the website because that's probably going to be a fairly easy one to implement. There will be an array of additional services we're going to be able to provide clients because of our economies at scale, the depth of talent that we have in both organizations and the buying power, frankly, that both organizations combined now offer… The client portal does allow for mobile. We will be looking to enhance and improve the user interfaces on all devices.

Can clients see changes in portfolio balances dynamically either throughout the day or at the end of the day depending on what is happening in the markets?

We don't do intraday reporting on our website. But that isn't a feature that our clients have expressed any interest in seeing. Our clients are not day traders. They're not market timers. They're long-term investors focusing on retirement goals predominantly. And they haven't expressed a desire to see intraday market movements. They can see daily results, daily values of their accounts online.

Are there some mobile device capabilities that Financial Engines has that you think might work for everybody?

That's what we're studying right now.

What's a more immediate decision that has to be made?

For example, what's our name going to be? It's in process. We're doing a lot of analysis and research to identify what our name should be.

How does this merger change Edelman?

I believe that we will one day be a trillion-dollar RIA. With this merger, we're now a fifth of the way there. We are by far the largest independent RIA in the nation with this merger.

This merger isn't the end. This is just the beginning of our growth. Now how we will grow? That is to be determined. Whether there will be mergers or not; whether the growth will be organic or a combination. We will determine that over time.

There's been speculation about how this merger was going to put an end to 401(k) rollovers.

We all know that a very significant part of asset flows for the advisory community are rollovers. We also know that regulators have an issue with this, because it's not always in the client's best interests. Some firms do it as a knee-jerk reaction. Anytime they can grab a rollover, they can whether or not it's in the client's best interests.

When we first announced the deal, we saw suggestions that this would enhance our rollover business because the Financial Engines workplace client was rolling over to Edelman retail. That’s missing the point because we're now one company, we're already managing the assets in the workplace. There is no economic incentive for us to roll the money over. That's the reason advisors do rollovers. They want to capture the assets so they can charge a fee on those assets. But if we're already earning the fee by managing the assets in the workplace, we don't have the economic incentive to do the rollover. Which means the only reason we would do the rollover is if it's in the client's best interest. And even in doing so, it would probably be a fee neutral or revenue neutral transaction.

So if that proves true, and I think that's a pretty good hypothesis, we will see a dramatic reduction in rollover business.

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