The Country’s Largest Independent Investment Adviser Is Priced At A Premium

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With more Americans living longer and employers increasingly adopting defined contribution plans, demand for retirement-related investment advice is growing. Financial Engines (NASDAQ: FNGN), the U.S.’ largest independent investment adviser offering personalized retirement plans, is a natural proxy for this growth in demand. In addition, Financial Engines is favored by its clients for its independence and proprietary investment methodology void of human behavioral biases. However, Financial Engines trades at a premium to its peers, being valued at 1.8 times PEG. Peter Lynch sees stocks trading below PEG as undervalued and will not consider Financial Engines. I advise investors not to buy into this stock at current valuations.

Demand for retirement planning advice growing

Like many developed countries, the U.S. faces the issue of an aging population. According to forecasts by the Administration on Aging, almost one in five Americans will be aged 65 and above by 2030. As more Americans live longer, they will find it harder to meet their daily expenditures with savings alone in their retirement years. They will need to invest their money wisely, and that is where investment advisers like Financial Engines play a role.

An increasing number of employers are ditching defined benefit plans in favor of defined contribution plans, as a means of reducing their own financial burden. Under defined contribution plans where employers have no responsibility over if and how money is invested, employees could see their money rotting in the bank or be lost investing in speculative penny stocks. As a result, employees are left on their own to earn inflation-beating returns on the monies lying in their retirement accounts.

The investment adviser of choice

There are two key reasons in my opinion why Financial Engines is able to maintain its status as the largest defined contribution managed account provider in the country.

Financial Engines is perceived as independent by its customers. Some of the other investment advisers in the marketplace either sell in-house proprietary products or are compensated by the funds they recommend. As a result, these investment advisers are incentivized in the wrong way, that leads them to promote the sale of products or funds that is most rewarding for them, and not necessary the most suitable products for the customers.

In other cases, even when certain advisers claim to be independent, their parentage or association with another financial services company usually suggests otherwise. In comparison, Financial Engines is truly conflict free, as it neither sells investment products, nor is owned by any financial institution.

In a traditional advisory setting, investment advisers interview their clients using a questionnaire and subsequently dish out financial advice based on their individual experience and knowledge. In contrast, Financial Engines leverages technology through its platform called Advice Engines to churn out consistent and personalized advice based on the client’s attributes, using an investment methodology developed by its founder Nobel Laureate William Sharpe.

Peer comparison

Financial Engines’ peers include Ameriprise Financial (NYSE: AMP) and Principal Financial Group (NYSE: PFG).

Ameriprise Financial is far more diversified than Financial Engines. It is among the top ten Individual Retirement Accounts providers in the country, while Financial Engines is still trying to penetrate this market. In terms of geographic exposure, only 40% of Ameriprise Financial’s AUM comes from the U.S.; while Ameriprise Financial is more of a domestic player focusing on defined contribution plans. Besides fees from financial advice, wealth management and asset management, Ameriprise Financial derives the other half of its revenues from its protection & annuities businesses, which provides its advisers with accumulation focused products.

Like Ameriprise Financial, Principal Financial Group is not purely focused on retirement planning, instead it provides a range of investment and insurance solutions under its asset management arm Principal Global Investors and insurance arm U.S. Insurance Solutions. In the area of retirement services, it is the number one ranked defined benefits plan provider in terms of the number of clients, compared with Financial Engines which is the largest defined contribution managed account provider in the country. Principal Financial Group currently sports a 2.4% forward dividend yield, and has set a target of growing its dividend payout ratio from 30% currently to 40% in 2017.

Financial Engines delivered the highest ROA of 7.2% among its peers and trades at a premium to its peers with a PEG ratio of 1.8. In contrast, Ameriprise Financial and Principal Financial Group are valued by the market at 0.8 and 1.0 times PEG, respectively.


All things equal, I would prefer investing in Financial Engines vis-à-vis its peers, as it is a pure independent retirement investment advice play. Although Financial Engines is the clients’ investment adviser of choice riding on the growth in demand for retirement planning advice, its share price has doubled in the past year. At 1.8 times PEG, it is overvalued both on an absolute and relative basis.

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