The pieces -- 401(k) pricing, DOL, Supreme Court and massive scale -- are all in place to make the Silicon Valley-San Francisco deal make sense, analysts say

May 26, 2015 — 7:56 PM UTC by Lisa Shidler


Brooke’s Note: I first picked up on this Financial Engines-Wells Fargo supposed deal Thursday night when it was reported on the PBS show, Nightly Business Report. I looked it up on Google and learned Reuters had broken the story. Lisa Shidler got to work to see what more we could add. It turns out that the groundwork is very much laid for the signing of this kind of bank-and-robo-advisor partnership.

The biggest robo-advisor and Wells Fargo are near to signing one of the largest automated advice deals on record, according to Reuters. See: Wells Fargo to sign on Financial Engines

Financial Engines, a Sunnyvale, Calif.-based firm that manages $895 billion in assets for about 8.3 million plan participants, will soon add a swath of the 3.5 million or so participants that come under the recordkeeping aegis of the San Francisco-based super-bank, according to the reporting of New York-based Jessica Toonkel of the London-based news agency. Wells Fargo administers about $325 billion of retirement assets.

Neither Wells Fargo nor Financial Engines would comment on the report but Toonkel stands by her story that she sourced from a Wells Fargo presentation document that tendered the information as a fait accompli. Toonkel declined to expand on how she received the presentation. “As I am sure you understand, I can’t comment on how I obtained the presentation or provide any details about it since I need to protect my sources,” she writes in an e-mail.

The Reuters article also quotes Financial Engines chief executive Larry Raffone telling analysts in a February call that the firm had signed a letter of intent with “a leading provider.” During his firm’s first-quarter earnings call in May, Raffone said that letter of intent was still in place, Reuters reported. See: Financial Engines more than doubles its share price by defining a niche in the 401(k) market between target date funds and RIAs.

Foot in the door

If it comes off, the deal would be a “huge win” for Financial Engines, putting it in reach of a previously unreachable market, says Mike Alfred, co-founder of 401(k) tracker BrightScope, Inc. in La Jolla, Calif.

“This is an interesting deal and would expand their distribution beyond mega-plans to a number of participants that plan sponsors wouldn’t have chosen.” See: How giant advice provider Financial Engines can sweep the 401(k) field — or not. Financial Engines serves about 600 plan sponsors directly.

It would also mark a huge proof-in-concept for robo advice in the 401(k) business, according to Will Trout, a senior advisor in Houston-based Celent’s wealth management practice.

“Absolutely, Financial Engines is a 'robo-advisor,’ he writes in an e-mail. “Like other online investment platforms [e.g. Jemstep, Future Advisor] they offer non-discretionary advice as a teaser, but the goal — and the location of the pay wall — is to get investors to let them manage those assets. This has worked to the tune of $100-plus billion in AUM.”

Financial Engines manages $104.4 billion for more than 848,000 investors, half of whom have less than $56,000 in their accounts.

DC plans lagging

Will Trout: It will make them pretty much bulletproof -- as long as they make employees aware of the Financial Engines offer -- against future lawsuits from employees.
Will Trout: It will make them
pretty much bulletproof — as long
as they make employees aware of
the Financial Engines offer — against
future lawsuits from employees.

For Wells Fargo and Financial Engines the deal marks a departure. Wells Fargo is big enough to do things in house and Financial Engines typically goes straight to plan sponsors — and the fatter profit margins therein — rather than signing enterprise deals with third-party intermediaries.

“I think the reason they may want to go to this direction is their big challenge as a public company is to demonstrate their growth,” Alfred says. “The DC business isn’t growing as fast. There aren’t as many new plans and now there are assets leaving plans. So to me, this is a natural way to find more growth in a market that isn’t growing as fast anymore.” See: Fidelity, Vanguard and Schwab have top 401(k) brands but plan sponsors like the service of off-brands better, study shows.

Bulletproof plan

Meanwhile, Wells Fargo has lately made a number of hires, including Scott Chason and Daniel DeKat, and related moves to build out its 401(k) presence in Houston, New York and Dallas, according to this 401(k) Wire article on May 21 [Subscription required to link.]

John Papadopoulos, head of Wells Fargo’s retirement business, was quoted by the 401(k) Wire saying: “It’s all really coming together,” adding that his firm is actively seeking 401(k)-related acquisitions. See: Wells Fargo targets tempting but treacherous UHNW market with Abbot Downing launch.

The prospective deal comes on the heels of a far-reaching U.S. Supreme Court decision last week, Tibble vs. Edison, that industry leaders predict will result in more scrutiny on what class of mutual funds are used in 401(k) plans. See: How 12(b)-1 fees and revenue sharing may be the real victims of Monday’s 'narrow’ Supreme Court ruling.

Given the recent rules by the Labor Department and rulings by the Supreme Court, it is not surprising that Wells Fargo would look to add a layer of advice to its 401(k) plans, according to Trout.

“Given the desires of plan sponsors to forestall employee lawsuits, it would make a lot of sense for plan sponsors [and thus the plan providers competing for their business, such as Wells Fargo] to want Financial Engines on their 401(k) menu,” Trout writes “It will make them pretty much bulletproof — as long as they make employees aware of the Financial Engines offer — against future lawsuits from employees. That is to say, the presence of Financial Engines means advice is built in.”

Still liable

Meanwhile, the bullets have been flying.

Wells Fargo has limited advice to 401(k) participants through Chicago-based Morningstar, Inc.'s managed account program since 2003, according to a spokeswoman, who declined to comment further. Reuters also reported that Wells Fargo and Financial Engines declined to comment for its piece.

Financial Engines stock closed at $40.87 last Wednesday and shot up after the Reuters report published on Thursday, closing at $42.49. But by Friday the stock closed at $42.08. It was trading around $42.14 during the day Tuesday.

Alfred agrees that this potential deal between Wells Fargo and Financial Engines could help Financial Engines as the retirement area receives more scrutiny. But he points out Financial Engines won’t give employers a free pass by relieving them of their duties to provide prudent investments to participants.

For instance, Financial Engines doesn’t ensure that the fund lineup is perfect, says Alfred. The debate between the DOL and Supreme Court centers on ensuring the funds available in 401(k) plans are less costly institutional funds rather than the pricey retail funds. See: 401(k) industry flummoxed over Yale professor’s 6,000 'threatening’ letters to plan sponsors.

“Financial Engines can only offer advice on the funds on the menu. The funds can be terrible and they can do a wonderful job with the allocations. You can still have bad retail funds even with the best advice,” Alfred says.

Growing wave

The ruling adds momentum to the Department of Labor’s efforts to apply a single, fiduciary standard to the retirement advice business, and as such, is very good news for Financial Engines as it cleverly reinforces its first-mover position in the online 401(k) advice space by splitting revenues with plan providers, says Alfred. See: Why almost nobody seems fazed by an ominous lawsuit hanging fire against Financial Engines.

The move by Financial Engines also shows the potential for robo-advisors in the retirement arena, says Rob Foregger, executive vice president and co-founder of Chicago-based NextCapital Group Inc., which intends to launch a robo-effort in the defined contribution arena. See: How one 'robo-advisor’ got $25 billion on its platform with a mindset, 401(k) friendliness, a merger and 16 years of work.

“Digital advice is where the puck is going, both in the DC and retail market. There are several market forces converging simultaneously: consumer demand for advice, industry shift to a post-product world, low cost computing driving scalable personalization and the pending new ERISA Fiduciary Standard,” Foregger writes in an e-mail. See: As President Obama takes the gloves off, pro-broker groups throw up 'sledgehammer’ response.

Mentioned in this article:

Financial Engines
401k Plan Consultant

BrightScope, Inc.
Data and ratings for RIAs

Share your thoughts and opinions with the author or other readers.


Brian said:

May 26, 2015 — 9:47 PM UTC

Much ado about nothing…

Playing the same losing game by scaling to a larger audience doesn’t make the game any more compelling.

I suspect the FE peeps will realize this down the road.


Bill Thompson said:

May 27, 2015 — 5:17 PM UTC

FE is unique among Robos because it has scale. It has scale because it is focused on a few concentration points of very large assets—large 401(k)plans. FE is uniquely qualified to solve large plan problems – - they advise and manage from company stock among other distinctions. This is just the next logical step in a killer distribution strategy. FE is successful because it has data connections with 7 of the top 10 plan administrators. This would make it 8. Think of it this way . . . Administrators with large plans are like big affluent zip codes: large plans are like great malls: great malls are same-store-sale sources. This will only be interesting/dramatic if Wells Fargo and FE collaborate to redesign the 401(k) for plans with less than 1000 participants. Say complete auto including auto deferral to managed solution, with ability to 'opt out’ for the truly self directed. Otherwise, this is there excellent 'Business as Usual”


Stephen Winks said:

May 27, 2015 — 8:17 PM UTC

This is a very powerful manifestation of a relentless evolution to faster, better, cheaper individualized advice. Institutionalized fiduciary duty is creeping closer, while the brokerage industry is trying to figure out if it wants to be in the advice business despite Supreme Court rulings and Presidential Executive Orders that blunt Brokerage Lobby influence over Congress. Note in the free market Financial Engines has garnered $895 billion in 401 (k) assets versus Wells Fargo’s $325 billion.

We don’t think of modern medical technology as Robo Medicine, nor should we think that a higher level of continuous comprehensive counsel in support of fiduciary duty as “robo advice”. It is just a far higher level of advice better executed in ways not otherwise humanly possible.

Wells Fargo understands robo advice in the context of empowering a higher level of counsel at lower cost. In three years, every brokerage firm in the industry will be taking full advantage of robo advice or they will be left behind because in a free market it is in the consumer’s best interest. Robo Advice is not in lieu of brokers but empowers brokers to provide a far higher level of counsel at lower cost than can be humanly processed—just as physicians use modern technology.

The issue is whether broker/dealers have the presence of mind to formally acknowledge brokers render advice and have fiduciary duties to fulfill or whether the next generation of advisors render brokers obsolete.

Stephen Winks


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August 24, 2016 — 6:55 PM UTC

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