As CIO of Financial Engines, Christopher Jones works at the intersection of two provocative retirement investing themes. First, as so-called robo-advisers keep gathering assets, Financial Engines combines a technology-driven platform with personal service. Second, the firm’s promise of objective advice free from conflicts of interest dovetails with the U.S. Department of Labor’s recent effort to apply that standard throughout the financial services industry.
Sunnyvale, California–based Financial Engines is the largest independent U.S. investment adviser. The brainchild of William Sharpe, the Nobel laureate and Stanford University finance professor emeritus, the firm launched in 1996 to provide a technology-based solution for the growing number of 401(k) participants forced to make investment decisions for which they were ill prepared. When Jones learned that Jeffrey Maggioncalda had been tapped as CEO, he approached his former colleague from consulting firm Cornerstone Research and became Financial Engines’ third hire.
Today Jones, 48, who started out as director of financial research and has held his current post since 2006, oversees investments on behalf of 647 plan sponsor clients and 9.5 million workers with a total of more than $1 trillion in assets. Senior Writer Frances Denmark spoke to him about the DoL push and technology’s role in providing financial advice.
1. What has driven the growth of Financial Engines?
There are a number of factors. By using technology as the basis of our advice platform, we can invest a lot of money to solve the problem of offering personalized, unconflicted, high-quality advice and amortize those costs over lots and lots of people. The result is not only lower cost, but the answers are almost always going to be better than what you would get by relying on most human advisers, who have widely varying capabilities, expertise and investment philosophies. Another factor: After our launch we found there was a big cohort of people, from assembly-line workers to airline pilots, who had fair-size 401(k) balances and cared about their retirement security but would not engage with their own financial planning. So in 2004 we started a managed accounts program for a modest fee for people who wanted to delegate that responsibility. Within three months we had $1 billion in assets under management. Today we manage more than $110 billion on a discretionary basis.
2. At the Department of Labor’s August hearings, you testified in favor of the agency’s proposed conflict-of-interest rule. Why do you believe that stockbrokers and insurance salespeople need to follow the same fiduciary standard as registered investment advisers?
There are 88 million defined contribution participants in the U.S. The vast majority of those folks are responsible for making critical decisions about how to save and invest for retirement. There’s a crying need for objective and independent investment advice on what to do, not for salespeople trying to sell you a particular product. The conflict-of-interest rule will protect retirement investors from salespeople masquerading as advisers. We think it is crucial that all retirement advisers be required to act in the sole best interests of their clients.
3. What about the financial services industry’s contention that if its members are held to a fiduciary standard, it would become more difficult for smaller, middle-class investors to get advice?
These arguments are incredibly cynical. They are trying to justify a broken, conflicted system that costs investors billions of dollars each year. In today’s world you can get high-quality, unconflicted advice, even if you have a modest balance. Our median account size across our book of business is $58,000, and about 25 percent of those accounts have less than $25,000. Financial Engines has always acted as a fiduciary for our customers.
4. What do you think of the new robo-advisers like Betterment and WealthFront?
We don’t compete directly with the robo-advisers today. They use a small number of model portfolios, while we have to develop technology that can handle any set of investments for 647 different plan sponsors, all with different investment lineups that include mutual funds, institutional products and separate accounts.
We believe both human beings and technology are necessary to meet customer expectations, but neither one alone is sufficient to create a world-class experience. We call ourselves a technology-enabled advisory firm, and we believe in the hybrid model. That’s one reason why Vanguard’s hybrid robo kind of approach is doing so well in comparison to the pure robos. We think that relying on technology to generate the advice and having a human being involved in the delivery of that advice — we have call centers where we take thousands of calls a day — is the way of the future. It’s something we’ve been investing in for nearly 20 years, and we think that’s the model that will continue to play well.
The current crop of robo-advisers are facing challenges that feel like déjà vu all over again. In the late 1990s we were one of more than 20 small start-ups that were going to revolutionize the advice business. Almost all of them went out of business when the money dried up after the dot-com crash, except Financial Engines and Morningstar. We were very fortunate. We raised a strategic round of $85 million in 1999, and we didn’t spend it too quickly. That’s a big reason why we survived. I think a lot of the current crop of robo-advisers, just like the previous generation, are going to struggle because it’s hard to reach that critical mass and develop the kinds of services that will have mass market appeal unless you have hundreds of millions of dollars to throw at it. And they don’t.
5. How will technology drive financial advice in the future?
The world is changing dramatically. The impact of technology, irrespective of what happens with this Department of Labor rule, will continue to make it cheaper, easier and more convenient for people to get high-quality investment advice that’s unconflicted. That will have a big impact on the industry over time. The trend is irreversible, and I think it will benefit consumers because it will create a more transparent marketplace with more reasonable fees and a better quality of service than what they have today.
