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 Inc (NASDAQ:FNGN)’s peers include Ameriprise Financial, Inc. (NYSE:AMP) and Principal Financial Group Inc (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 Inc (NASDAQ:FNGN) 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 Inc (NASDAQ:FNGN) 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.
Conclusion
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 Inc (NASDAQ:FNGN) 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.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article The Country’s Largest Independent Investment Adviser Is Priced At A Premium originally appeared on Fool.com.
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