Joe Duran in his home in Newport Beach Calif Photo: Joseph Llanes
Joe Duran

Joe Duran: Financial Engines Deal Reinforces the Strength of Advisory Firm Margins

The United Capital CEO says the deal between Financial Engines and Edelman confirms the rise of the bionic advisor.

In an unprecedented deal, private equity firm Hellman & Friedman announced plans earlier this week to buy Financial Engines, the publicly traded, largest registered investment advisor in the U.S., for $3.02 billion and will merge it with its previously acquired Edelman Financial Services, the mass-affluent-facing RIA giant founded by Ric Edelman. While the deal brings many synergies to both Financial Engines and Edelman, it also could shape the future of the wealth management industry as a whole.

WealthManagement.com spoke with United Capital CEO Joe Duran, whose RIA is comparable in size to Edelman’s, about what the deal means for the advice industry. For one, it demonstrates the power of advisory firm margins and the value of the human advisor.

“To think that a brick-and-mortar advisory firm is paying a premium to a digital technology firm—the very first robo really—is remarkable,” Duran said. “And it tells you that all of the real margins are made by the advisory firms, even though the valuations are higher for the technology firms.”

Here are the highlights from our chat, edited for length and clarity:

WealthManagement.com: What does this deal mean for the wealth management industry?

Joe Duran: One, the great hybridization is what I’m calling it—the making bionic of everything, where every advisor’s going to have to have a digital footprint and very strong technology. That is an unquestionable statement about this. That’s been happening everywhere—from Betterment adding advisors to the expansion of Personal Capital to Vanguard. You have of all of these digital-first solutions becoming much more human. Then you have a lot of the human advisors becoming a lot more digital. Everyone’s rushing to the middle ground, and the middle ground is basically that you’re both digital and human.

There’s one really big thing for the wealth management industry that everyone needs to look at about this in particular, which is, that nobody in the 401(k) space has figured out how to do that. They’ve basically now got a robo solution they can deliver to their non-401(k) participant clients—their Edelman clients. But they can then take the Edelman education system and plug it into all of these plan participants and pick up a ton of assets under management—either full service, with a human, or increasing the participation rate at Financial Engines. They’ve got over $1 trillion in assets under advisement, but only $169 billion in AUM. So they can now go to one of these dozens of institutions that they have as clients—these corporate sponsors—and say, ‘Hey, we’re going to increase participation by giving you the Edelman education conferences to get more people to participate in their Financial Engines 401(k).’ So it’ll increase the AUM under Financial Engines, but at the same time they can be looking for clients who are big enough that they can bring them and service them full-service with the Edelman advisors.

When you look at that combination—the fact that they can increase participation in a 401(k) but also increase the level of prospective clients that are close to rollover point or about to be laid off or about to retire and hand them off to an advisor—it’s going to allow them to do a third thing, which is to expand into more cities because they’ll have dedicated markets. They may have Procter & Gamble in Cincinnati; they might have Coke in Atlanta, as a client. Edelman will be able to radically increase its actual office footprint as well.

WM: So the real source of those new clients for Edelman will be plan participants?

JD: They get to keep all of the assets that automatically leave when people leave their company and get rolled into an IRA. Edelman will be standing there picking off all the very best ones, which will of course create a war between the Edelman/Financial Engines combination and all the custodians trying to do the same thing and all the mutual fund companies trying to do the same thing. But they’re in a logical spot to make it happen, and they’re on top of it. And then on top of it, they can have those same education series increase participation inside of the actual plan.

It’s got a lot of synergies that could be incredibly exciting for the combined entity, which is why they can pay such a huge premium for a company that was a public company. That is what is highly unorthodox about this; to think that, a brick-and-mortar advisory firm is paying a premium to a digital technology firm—the very first robo really—is remarkable. And it tells you that all of the real margins are made by the advisory firms, even though the valuations are higher for the technology firms.

Look at Betterment, Wealthfront. Look at how much they make in money: Zero. Look at how much a small RIA makes in money. The reality is that the pricing for a human advisor still has a massive amount of margin, whereas the digital solutions have no margin. By combining the two, you can end up with higher margins and scale and reach.

WM: Edelman had its own robo. So what does this give him that he didn’t have before?

JD: Clients. It gives him a willing audience. Once you get to our size; we’re at a similar size at $22 billion. The difference is, he now has a willing participatory audience that he can speak to, and growing at 20 and 30 percent, like we do every year, means bringing in $5, $6, $7 billion a year. That gets hard to do.

It’s an incredibly exciting opportunity for them. I’m a little envious. I tip my hat to them. 

WM: Do you think this is going to spark another wave of M&As in the wealth management industry?

JD: It would if there were enough opportunities. There’s just so little out there. And then, the private equity firms—I don’t think they think bold enough. Hellman & Friedman is unique in its courage and willingness to go big. Most firms will do this by making a small investment or making an investment in one company and try to grow it one by one by one. This is a very bold stroke, ‘Hey, let’s get this done big and let’s become a national powerhouse quickly, right out of the gate.’ The original price seemed aggressive when they bought Edelman. But this again, shows that they are a very progressive and forward-leading private equity firm. They’re a truly strategic investor, unlike many other private equity firms that just give money to the management and don’t really consider doing follow-on investments that are really of this scope and magnitude.

WM: Do you think more RIAs are going to look to acquire robo advisors?

JD: You can rent them for so much less; I don’t see that happening. There’s also none that are that good, and maintaining it is a massive spend as well. And by the way, you can rent a robo for almost nothing because they’re all so desperate for new clients. It’s a complete commodities business. Frankly, there’s more supply than there are clients to use the products.

A firm like us can get a robo solution for low basis points.

WM: What does this deal signal is the next big thing in wealth management?

JD: People are going to crawl up the value stack and start talking more about people’s lives. We just know humans have to go beyond investing and planning. You have to go where Vanguard isn’t, and that means doing three things: one, having investment solutions that are far more sophisticated, much more personalized than simply buying an index product. You need to have a breadth of investment solutions. Two, that you’re planning is dynamic and interactive with the client. And three, you’re participating in clients’ lives way beyond investing. You’re helping them live better today, and you’re doing it in a totally dynamic, human-led but technology-powered way.

One-hundred percent of the profitability and growth of every advisory firm in the country will be driven by one thing and one thing only: the client experience. How does the client consume your planning and investments. 

I don’t see any firm spending any money on R&D. I don’t see any firm spending money on behavioral economics. I don’t see any firm spending money on the client experience. And if you think about it, the reason Starbucks can charge $5 for a 0.50 cent cup of coffee is not the coffee. It’s everything that happens from the point at which the client says, ‘I want some coffee’ to the point at which they take their first sip.

Over the next five to 10 years, client experience will be the thing.

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