RIA executives and market observers agree that Ric Edelman’s brand of radio populism has little bearing on wealthy clientele. But in the wake of a $3 billion deal that would combine robo advice and 401(k) pioneer Financial Engines with Edelman Financial Services, industry leaders are also convinced that there will be increased pressure to accelerate digital services and capabilities.
“This should be a wake-up call to RIAs that the future is coming whether they like it or not,” says Chris Cordaro, chief investment officer at RegentAtlantic in Morristown, New Jersey. “We are researching, thinking and testing digital capabilities. No one has cracked the code of how to marry digital and personal advice to have maximum impact for the individual.”
The transaction won’t push a robo advice platform into the arms of an established RIA, says Mark Casaday, former CEO of LPL Financial, and now general partner and founder of venture capital firm Vestigo Ventures. But there will be a need to seek new partnerships, add digital capabilities or even change offerings, he says.
“The bigger implication is the continued drumbeat of digital solutions,” Casaday says. “This combination creates a major player to exploit the best of both companies to deliver a better digital experience.”
RIAs should be focused on the latter point when evaluating their practices, says Savant Capital CEO Brent Brodeski.
"Digital capabilities used to be a differentiator," Brodeski says. "They are now quickly becoming table stakes. The firms that flourish and dominate in coming years will have embraced working digitally with clients — particularly next generation investors."
The deal certainly has executives thinking about possibilities, says United Capital CEO Joe Duran, a champion of RIAs embracing digital while promoting human advice.
“It should inspire the industry to think big,” Duran says. “It prompts us to consider strategic opportunities, as we’re of similar size to Edelman. There’s no doubt it makes us think bigger, which I view to be a huge positive.”
Unlike his peers, Duran foresees more M&A activity as a result.
“When large transactions occur that create a seismic shift in the landscape, other firms will typically do the same thing and start thinking bigger. There’s been other firms acquiring smaller RIAs, but we’ll begin to see a land grab for more large scale, strategic acquisitions,” Duran says. “There are just not a lot of at-scale advisory firms out there, and that’s one of the only constraints.”
RIAs should pay close attention to how mega investments in digital platforms could affect the industry at large, says Apex Clearing CEO Bill Capuzzi.
"The rise of digital wealth platforms has triggered a race to the bottom with new pricing paradigms,” Capuzzi says. “This deal is another example of the increased consolidation that we're seeing across the wealth management industry, as brokers and advisors face increasing pressure to reduce fees, increase transparency and drive efficiencies.
“The era of digital wealth is here to stay,” he adds. “The companies who succeed in our industry will be the ones who transform their businesses with direct-to-consumer digital channels."
Not all are convinced the deal is a game-changer.
“I view the Financial Engines deal as a move into the digital market by a large retail mass-affluent player,” says Andy Berg, CEO of Homrich Berg in Atlanta. "The need for RIAs to continue to seek ways to leverage technology to improve service is urgent. At the same time, I do not believe that most RIAs will be pressured to offer targeted robo advisor services just because some large firms choose that path."
Casaday says firms don’t need to acquire tech players to get competitive.
“Those firms can rent this capability quite easily and cheaply,” Casaday says. “The key here is the combination of a retail-oriented firm with a company/retirement plan focus. This transaction may create more interest in a retail RIA adding a retirement-focused set of advisors.”
What the deal represents, Casaday adds, is how the advisory business is increasingly turning a focus to scale and customer experience.
Some executives acknowledged the message in the premium paid for Financial Engines by private equity firm Hellman & Friedman, which is a majority shareholder in Edelman. The $3.02 billion deal is expected to be completed by the end of the third quarter.
“Whether or not it puts some sort of direct pressure on RIAs, it will certainly get their attention that the price paid was north of $3 billion, meaning that private equity is valuing this combination very highly indeed,” says Russ Hill, CEO of Halbert Hargrove in Long Beach, California.
Hill says his firm does not expect to make an acquisition, but is more aggressively pursuing advanced capabilities. “We look at both the cost reduction and client acquisition side as being attractive, and we are near to forming a new subsidiary — and hiring new people — to accelerate what we’ve already been doing,” he says.
Whether or not there’s an immediate uptick in M&A activity by RIAs and advisor techs, such levels of investment demonstrate opportunity for flipping practices, says Steven Evanson, founder of Evanson Asset Management. “It’s a great time for M&A because you can still borrow money very cheaply,” Evanson says.
“The vast majority of advisors in the country are primarily interested in gathering assets and making money from those assets,” Evanson continues. “I’m privy to conversations among people who do own successful RIA firms, like myself. I can tell you that when they’re not talking with clients, they’re talking with each other about the next M&A and how they can realize the equity in what they hold.”
The level of investment in this deal also demonstrates the interest from private equity and hedge funds to get into the digital RIA space, notes Lex Sokolin, global director of fintech strategy at Autonomous Research.
“It's now clear that a fiduciary robo-enabled solution is the right customer answer,” Sokolin says. “To entrepreneurs this was clear in 2008. But it took a long time for the industry to digest this, and now even cash flow investors can get behind the idea. See Tiger Global Management’s support behind Wealthfront, Hellman & Friedman backing Financial Engines, or any of the number of PE firms shopping for aggregated wealth tech.”
Sokolin says for the moment, the industry will be waiting to see how Edelman combines with Financial Engine’s physical footprint.
Financial Engines boasts $169 billion in AUM, agreements with more than 750 companies to manage over $1 trillion in retirement assets and more than 140 locations across the country. Edelman manages over $21.7 billion for more than 35,000 clients across the country.
Digitally enabled wealth management, with a unifying mission and a physical presence across the country “is the right answer for the future of financial advice,” Sokolin says. “Whether this particular mix of assets achieves that goal remains to be seen, but the rationale makes sense.”
Duran agrees the deal could open up a new field of competitive assets.
“There’s a big race to capture all of the rollover business from these 401(k)s,” Duran says. “We’ve seen custodians and investment firms going after this business for years and now we have a wealth management firm going after it, as well.”