People are starting to notice that Financial Engines is really a robo-advisor afterall. It is also reported to be looking at the space beyond 401(k) plans. Should mutual fund firms care about these devfelopments?

The answer is "yes" but not because Financial Engines wiill steer business to funds, or even because it will steer business away.

Jessica Toonkel's excellent coverage of FE's current business strategy drives home a simple point: marketing to individual investors is very costly and that cost is hard to earn back unless the accounts won are very large indeed.

In fact, it was this realization that led Financial Engine founder Jeff Maggioncalda to focus on the 401(k) market nearly two decades ago. And, soon after its launch FE tightened its focus to distribution agreements with recordkeepers over large plan sponsors. Yes, it is easier to do deals with a few dozen recordkeepers than hundreds of plan sponsors. Today FE is still focused on recordkeepers to open new markets (Toonkel breaks word of a coming alliance with Wells Fargo) and then using its captive plan audience to build a following.

And even that path is a tough to one succeed on. Today FE is converting 10 percent of participants in the 401(k) plans it services. Its goal is to raise that number to 20 percent. Yet, even that figure is well below the 40 to 50 percent take up rates the industry pioneers were promising at the turn of the century. Its new services -- such as Social Security integration -- are intended to keep its existing client base when they roll out of their 401(k), not to enter new arenas.

So why is FE sticking with 401(k)? Along with the rest of the mid 1990 generation advice firms, FE learned that it costs a lot more money and time to sign up millions of investors one by one than it does to convince a plan sponsor to sign a deal. It also quickly learned that it is even faster and cheaper to convince a few dozen recordkeepers to sign deals than it is to reach thousands of plan sponsors. Even today, it is following that course (in her article Toonkel breaks the news that FE is about to sign a pact with Wells Fargo to serve its 401(k) clients). Along with Morningstar, FE appears to have the 401(k) market sown up.

So where does that leave the new generation in their quest to build the client base their VC investors and potential IPO shareholders are seeking? The obvious path is for them to ink deals with broker-dealers and custodians to lock in their reach to advisors. That makes Walt Bettinger's move at Schwab an obvious preemption. Look for B-Ds to make multiple deals just as recordkeepers did. Offering alternatives to advisors is always nice. Expect some advisors to use roboadvisors as tools to help with client portfolios and free time to provide other services. Look for the rep as PM types to use these tools as cost-effective ways to incubate new and smaller accounts before they are large enough for bespoke service.

One thing not to expect is for FE itself to be a major player. One of its legacies is that it is known as a black box provider using its own models, something that many reps and BDs are uncomfortable with.

So why should fund firms care? Roboadvisors do not enjoy a round of golf, wine and a dinner out or even an expert seminar with a PM. They go with the numbers, not their passions. If they are driving the advice at the lower end of the market to less costly products (and they are), advisors may have to match them. 

Edited by: Sean Hanna, Editor in Chief


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