Largest RIA In $3 Billion Buyout

Josh O'Neill

1 May 2018

Hellman & Friedman, the private equity house, is to buy Financial Engines, the US’ largest registered investment advisor, for $3.02 billion, intending to merge it with Edelman Financial Services, a previous acquisition.

The all-cash deal closed at $45 per share, 32 per cent higher than Financial Engines’ April 27 closing share price of $33.95.

Hellman & Friedman said it will seek to tie up Financial Engines, which oversees $169 billion of assets, with Edelman Financial Services, which has offices in New York and Washington DC and manages some $21.7 billion for clients.

“We see tremendous alignment and commitment to our vision, and we believe the partnership and the combination with Edelman is the best path for us to achieve our long-term strategic objectives, while providing significant and immediate upside to our stockholders, employees and clients,” Financial Engines president and chief executive, Larry Raffone, said.

The deal, one of the largest to date in the US investment management sector, highlights the pressures falling fees, rising compliance costs and low-cost robo-advice are placing on industry participants, prompting them to merge to achieve economies of scale and remain competitive. The Financial Engines transaction is the fourth-largest takeover of an asset or wealth manager since the beginning of 2017, according to data compiled by Bloomberg. The market for M&A in the RIA space has been busy so far this year. ECHELON, a US investment firm that advises wealth managers on M&A deals, said the first quarter of this year saw a total of 46 transactions, and the company predicts the US market will clock up more than 185 deals in 2018.

Two years ago, Financial Engines bought The Mutual Fund Store, enabling it to tap the retail financial advisory market.

“When they acquired The Mutual Fund Store, they said ‘we have the robo, we know investments, now we can go outside the 401 space’,” said Michael Baron, vice president of Baron Funds, which owns over 3 per cent of Financial Engines’ stock. “The 401 market is a nice business, but it’s a small segment of the overall market.” Cross-selling retail advice to plan participants, and giving retirement plan advice to retail clients, is a way to continue growing, without having to share revenue with the record keepers in the plan sponsor space, he said.

“Two years ago they went out and bought the advisors,” Baron said. “Now you see advisors going out and buying the technology. They both feed off of each other.” In addition to its own network of advisors, “Financial Engines now has 160 more advisors to go out and recruit and gain assets”.