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Ric Edelman's RIA empire to merge with legacy The Mutual Fund Stores in $3-billion deal that takes Financial Engines private

Hellman & Friedman stake the eye-popping sum in cash to outright own an RIA with nearly $195 billion of AUM including robo-advised 401(k) assets

Monday, April 30, 2018 – 11:57 PM by Brooke Southall
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Ric Edelman: It's all additive.

Brooke's Note: Yes, wow. Three ventures I have followed for more than a decade -- Edelman Financial, The Mutual Fund Store and Financial Engines -- are now one RIA in a very Wall Street-style valuation that takes into account how the whole is expected to be worth more than the sum of its parts. It'll be the nation's most far-flung national RIA powered by two massive engines -- Ric Edelman and the existing 11 million investors with Financial Engines accounts. It will be fascinating to watch as Larry Raffone, Ryan Parker, John Bunch and Ric team up with one of the most successful wealth management private equity firms on the planet.

The PE owner of $21-billion AUM Edelman Financial Services LLC has purchased $169-billion AUM Financial Engines Inc. with plans to leverage the heck out of the later-arriving robo-advisor in order to justify a whopper of a price tag.

Hellman & Friedman LLC, the giant San Francisco-based private equity firm that bought Ric Edelman's Fairfax, Va.-based RIA in late 2015, will now pay $3.02 billion in cash to add the giant Sunnyvale, Calif.-based 401(k) robo to its holdings. See: Why the PE that helped take LPL public now controls Edelman Financial and plans to invest more heavily.

"I'm super-impressed that Financial Engines was taken out at a 41% premium and at a price of $3 billion," says Dan Seivert, CEO of ECHELON Partners, an investment bank in Manhattan Beach, Calif. "I think it's really exciting that somebody is making such a big bet on the space."

Of the $169 billion managed by Financial Engines, about $12 billion is part of the retail RIA formerly known as The Mutual Fund Store. Hellman & Friedman invested $35 billion in its 29 years of existence. It was also the last owner of LPL Financial before the national broker-dealer's successful IPO. See: How Mutual Fund Store is the real engine now at Financial Engines

Financial Engines bought the The Mutual Fund Store from Warburg Pincus in late 2015 for $560 million, when it had about $9.5 billion of AUM. See: Hitting a robo wall, Financial Engines buys The Mutual Fund Store for $560 million to bust out of 401(k) confines.

'Creative' competition 

The new Hellman & Friedman-owned RIA will essentially be a $34-billion retail RIA under one ADV with an additional $135 billion of 401(k) assets managed largely by Financial Engines' automated processes. 

Dan Seivert: I'm super-impressed that Financial Engines was taken out at a 41% premium and at a price of $3 billion

"It almost sounds like a reverse merger," says Tim Welsh, president of Nexus Strategy, a consultancy in Larkspur, Calif. "Financial Engines is so much bigger."

The new RIA's managed assets place it in a virtual dead heat with Creative Planning Inc., the Leawood, Kan.-based RIA that manages more than $34 billion of assets.

Peter Mallouk, Creative Planning's CEO and founder, says his firm's assets climbed above its usual 30% growth rate in 2017. Unlike Edelman Financial, his firm has no radio show to drive referrals. Instead, Creative Planning relies on TD Ameritrade and Charles Schwab & Co. branches and motivational speaker Tony Robbins for leads. See: What to make of Peter Mallouk's sweeping deal with Tony Robbins -- and where the unlikely pairing goes from here.

Add to that, Mallouk says, Creative Planning's number one source of new assets: organic referrals. Mallouk says he is content to stay on his organic-growth path, regardless of what deals other big national RIAs may strike.

"I think we overlap a little but generally serve different clients," he says. "I expect to see more consolidation as everyone tries to scale to survive and compete in the future. I have zero plans or desire to acquire any firm. We plan to continue to grow one client at a time." See: Power Player: Peter Mallouk hired 100 advisors in the past year to sop up referrals and fill 12 new brick-and-mortar branches.

Rollover wager

One variable to watch in this deal, which is expected to close in the third quarter, is Financial Engines' $135 billion of 401(k) assets, which are managed for slim margins on behalf of 11 million individuals, many of whom work at Fortune 500 companies. 

"If you do a merger, it has to be one plus one equals 100," says Welsh.

Allen Thorpe is the power behind the power in this deal as the partner of PE firm, Hellman & Friedman. 

The bet here is that all those Financial Engines customers would want to roll over their 401(k)s to the retail side. Edelman says his new Edelman Financial-stoked RIA is poised and ready to address those 11 million investors.

"Suddenly I have the ability to reach all these people with our education -- and at little to no cost," Edelman says, referring to the firm's hundreds of seminars, nine books in print, a monthly newsletter and massive geographical expansion. See: How Ric Edelman manages to bring on 4,500 new clients each year by force of personality while diminishing key-man risk at the same time.

But making retail hay out of those 401(k) assets will prove far more difficult than Edelman imagines, according to Welsh. "Even Fidelity does a really lousy job with rollovers and Wells Fargo is being investigated for its practices. It's no lay-up." See: Fidelity's bet on ultra-compliance with the DOL rule pays off big as 401(k) assets jump stunning $280 billion in 2017.

Seivert counters that although it be may no lay-up, the opportunity to realize those 401(k) assets is a short-range jump shot, well within the range of the incomparable Ric Edelman.

"[Edelman is] amazing at it," he says. "He's a master at the multichannel approach with his books, seminars, robust website and TV appearances. Other than Ken Fisher, nobody's close." See: How Ric Edelman's bounty of radio and TV leads pushed his $12-billion RIA from Microsoft to GoldMine to Salentica.

Radio star wars

Edelman notes that the legacy retail branches of The Mutual Fund Store and current Edelman branches have "very little geographical redundancy." The combined entity will have 330-plus human advisors, with each side contributing about half that number.

"It's all additive," Edelman says

That said, the two radio programs that propelled the two RIAs to massive AUM are actually redundant in many instances -- some are even broadcast by the same radio stations. That may result in some eliminations, though such decisions have yet to be made. "Do we need two radio stations in the same market?" Edelman asks. See: Radio-star RIAs drive giant growth at national chains one $400,000 investor at a time.

Peter Mallouk: I have zero plans or desire to acquire any firm.

Adam Bold, The Mutual Fund Store's founder and radio star, has retired from the financial advisory business. See: Alleging gambling habits, SEC concerns and steady AUM declines, The Mutual Fund Store is offering $5.5 million to Jeff Roper to sell and walk away

'Edelman Engines'?

One decision yet to be made in the wake of the deal's announcement is how the firms' names will be reconciled.

In a reverse-branding scenario, Financial Engines could assume the Edelman brand. Then again, Edelman -- like The Mutual Fund Store before it -- could be renamed "Financial Engines." A third possibility is some brand amalgamation or de novo solution, Edelman says.

Even with the branding unresolved, Edelman says he was happy to sign off on this deal having kept a close eye on how the Financial Engines- Mutual Fund Store deal has evolved.  

"It was a stroke of genius," he says, and led to the invention of a new category of RIA service. In 2017, Ford announced it would take its mega-sized $15-billion retirement plan and use Financial Engines' new suite of services to plan participants. Boeing Company also added Financial Engines' Personal Advisor program.

Financial Engines now dominates large-plan business advice, which means it can now use 401(k) business in the spirit of a loss leader, CEO Larry Raffone told Wall Street analysts in December. See: What's behind the sudden exit of Voya's top 401(k) exec, Maliz Beams, and her replacement by the firm's CEO, Rod Martin.

"Part of the thing is, is now we have Personal Advisor and Personal Advisor is a way to kind of monetize smaller plans in a different way .... We've always kind of looked at whether or not we should go down-market," he said. 

"We actually have a way with these down-market plans dominated by executives who want these services. So we actually feel like we've got a better mix, and so we've been looking at how we could take our platform, which is very scalable, simplify the offering, and then take it out in a way in which Personal Advisor is included in kind of a linchpin." See: See: Power Player: Larry Raffone is racing to 'lock up' the 401(k) market by taking its robo head start and combining it with a semi-national RIA.

Tim Welsh: Even Fidelity does a really lousy job with rollovers and Wells Fargo is being investigated for its practices. It's no lay-up.

Preach it

That said, Financial Engines is playing defense against a new threat -- the invasion of Fidelity Investments into its 401(k) advice realm. The shock waves of Financial Engines' decision to slash its own prices sent its share price spiraling down to $26. It later recovered to $35 before soaring to $45 in the wake of today's deal announcement. See: Fidelity Investments (explicitly) enters 401(k) advice game -- then Financial Engines' shares plummet despite its 'Mutuall Fund Store' RIA winning Boeing and Ford accounts

Another source of comfort for Edelman is his retail counterpart at Financial Engines -- John Bunch. See: John Bunch climbs high at Financial Engines as two execs vacate power spots and rollover retail gets accorded higher priority  

Ryan Parker is CEO of Edelman. Edelman Financial gets its CEO from LPL but the chief executive's job description isn't exactly what the old one was

Edelman says that he and Bunch have been chummy for years, meeting at the bi-annual Tiburon CEO Summits where he also met Hellman & Friedman principal, Allen Thorpe. Event producer Chip Roame declined to comment for this article because he sits on the Edelman board of directors.

But what this deal boils down to is a buyer creating a platform for a visionary superstar to do what he's been doing exceptionally well for decades, Seivert says.

"He just seems to have an endless amount of energy to evangelize."

Related Moves

John Bunch is out at Financial Engines Advisors after merger integration 80% complete; 'big reveal,' relaunch planned in coming months

The No. 2 man at the $181-billion RIA built a uniform client experience, but now has a chance to be CEO of VC-backed firm based in his hometown

July 11, 2019 – 4:26 AM

UBS bets its 'wealth' future on ex-Schwabbie Naureen Hassan, a corporate digital A-lister, who analysts give a fighting chance to transcend PaineWebber's ossified culture

Still a $2-billion cash-flow cow, the Swiss bank's 6,000-broker, US-based wirehouse is milking aging broker relationships with aging investors but needs a new kind of human presence, empathy, mindset and smarts to draw in Gen Z.

July 16, 2022 – 1:35 AM

The new 'Tony Robbins' book debut coincides with Ajay Gupta revealing plan to retire, which leaves Creative Planning to keep the referral spoils with Robbins down to a 'with' credit on the cover

Peter Mallouk's and Robbins' book, 'The Path: Accelerating Your Journey to Financial Freedom,' was released this week through a new publisher and word got out that 50 year-old Gupta was departing with little explanation

October 16, 2020 – 7:49 PM

Dan Seivert's ripping success in RIA M&A deals has odd side effect of having some sidearm staff leave for new vistas

Carolyn Armitage and Mark Bruno left to mutual benefit, while Echelon Partners roars on, feeding the beast of deal-crazed RIA buyers and sellers.

July 20, 2021 – 1:17 AM

See more related moves

Mentioned in this article:

Financial Engines
401k Plan Consultant

Nexus Strategy
Consulting Firm
Top Executive: Timothy D. Welsh

Creative Planning
RIA Serving Other RIAs
Top Executive: Peter Mallouk, JD, MBA, CFP®

Jeff Spears

Jeff Spears

May 1, 2018 — 6:33 PM
The best evangelists are able to adapt ancient scrolls to the current realities. This combination should help.
Brian Murphy

Brian Murphy

May 1, 2018 — 7:32 PM
Ouch! This is gonna hurt in a few years...just sayin'.
Aidan Yeaw

Aidan Yeaw

May 1, 2018 — 10:16 PM
As a former FE employee, this is surprising news. This deal seems to move FE even further away from its pioneering "robo" roots. With 60% of FE's business being sub-advised for the likes of Voya, Vanguard, Empower and Alight (formerly, Aon Hewitt) FE doesn't "own" the relationships with plan sponsors or participants, so trying to coax IRA rollover assets may not sit well with their current clients. It will be interesting to see if any of them terminate their relationships with FE now that this deal has been announced.
Stephen Winks

Stephen Winks

May 3, 2018 — 2:28 PM
Given the new SEC suitability Standard which leaves no place for advisors within a brokerage format, look for the new Edelman to advance innovations and modernity in advisory services not possible within a brokerage format. The filling of this leadership vacuum left by brokeratge will drive significant market share to Edelman from our best advisors who aredriven by professional imperative in advisory services. This will preempt conventional brokerage affording an unprecidented level of investment and administrative counsel at far lower cost while better compensating the advisor. SCW

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