With more Americans living longer and employers increasingly adopting defined contribution plans, demand for retirement-related investment advice is growing. Financial Engines Inc (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 Inc (NASDAQ:FNGN) is able to maintain its status as the largest defined contribution managed account provider in the country.
Financial Engines Inc (NASDAQ:FNGN) 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.