Surprising news on the robo advisor front, and extremely unexpected. Financial Engines, the mega-RIA founded by Nobel laureate Bill Sharpe and generally considered the first digital investing platform, is adding a human touch.
The firm announced it will to acquire The Mutual Fund Store to specifically expand independent advisory services for 401(k) plan participants. The move will add comprehensive financial planning and dedicated in-person advisors at over 125 brick-an-mortar locations. While the industry is generally moving towards technology (if not necessarily away from financial advisors), a move in the opposite direction is raising eyebrows. The company did make an announcement in September that they would offer personalized advice to plan participants, but few envisioned this is what in meant.
Warburg Pincus, who currently has the majority stake in The Mutual Fund Store, will receive approximately $560 million, including cash and stock. Based on the terms of the transaction, Warburg Pincus is expected to become Financial Engines’ largest stockholder with ownership of approximately 12.5% following the closing of the transaction. Michael Martin, managing director of Warburg Pincus, will be appointed to Financial Engines’ board of directors upon closing.
The Mutual Fund Store is a fast-growing RIA that provides personalized financial planning. It has approximately 345 employees, approximately 84,000 accounts at about 39,000 households and over $9.8 billion in assets under management, as of October 31, 2015.
Strategic Rationale
As a result of the acquisition, Financial Engines intends to expand its independent advisory services for 401(k) participants through The Mutual Fund Store’s comprehensive financial planning and in-person advisors powered by Financial Engines’ scalable advice technology. Financial Engines believes this will deliver:
- Greater usage and retention of Financial Engines’ services
- Expanded market opportunities to help 401(k) participants with more complex needs
- Significant earnings per share accretion
- Strong synergies and higher future growth
“We are excited to meet the growing demands of our customers and help 401(k) plan participants with their complete financial picture,” Lawrence (Larry) Raffone, president and chief executive officer of Financial Engines, said in a statement. “By leveraging Financial Engines’ scalable advice technology to power The Mutual Fund Store’s services and in-person advisors, we believe we will be able to make high-quality investment advice and comprehensive financial planning available to everyone with access to our services through their employer..”
“We are thrilled to join forces with Financial Engines to provide comprehensive advisory services through the workplace,” added John Bunch, chief executive officer of The Mutual Fund Store. “This transaction marks an exciting new chapter for our organization and for the advisory industry.”
Outlook
For the company, post-acquisition, based on financial markets remaining at November 2, 2015 levels, through all of 2016, and taking into account an anticipated closing of the acquisition of The Mutual Fund Store in the first quarter of 2016, Financial Engines estimates its 2016 revenue will be in the range of $403 million and $410 million and 2016 non-GAAP adjusted EBITDA will be in the range of $125 million to $130 million.
Under typical market conditions, Financial Engines estimates that 2016 revenue will be in the range of $419 million to $426 million and non-GAAP adjusted EBITDA will be in the range of $137 million to $142 million. We expect that any synergies will be realized beginning in 2017, and beyond.
“We believe the acquisition to be significantly accretive to adjusted earnings per share in fiscal year 2016. Importantly, post-closing we expect to remain debt free and we expect to generate significant free cash flow that will enable us to continue to invest in the business and drive growth initiatives,” said Ray Sims, chief financial officer of Financial Engines.
Transaction Details
The total transaction purchase consideration includes approximately $250 million in cash and 10 million shares of Financial Engines common stock. The combined company will be debt free following the transaction.
Based on the common stock portion of the transaction, Warburg Pincus will receive Financial Engines common shares representing approximately 12.5% of the pro forma shares outstanding. Concurrent with the closing of the acquisition, Michael Martin, Managing Director of Warburg Pincus will be appointed to serve on Financial Engines’ board of directors.
The transaction is expected to close in the first quarter of 2016 and is subject to regulatory approvals and other customary closing conditions. DBO Partners acted as financial advisor to Financial Engines, and Pillsbury Winthrop Shaw Pittman provided legal counsel. JP Morgan acted as financial advisor and Wachtell, Lipton, Rosen & Katz provided legal counsel to Warburg Pincus.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
