Acquisition Starts Search for Financial Education Technology

Corporate Insight analysts tell PLANADVISER the recently announced deal between LearnVest and Northwestern Mutual could be the start of a financial industry “technology feeding frenzy.”

It caused a lot of retirement industry chatter when Northwestern Mutual announced last week that it is acquiring financial education technology provider LearnVest, but relatively few concrete details have yet emerged about how the acquisition and subsequent partnership will be shaped.

In announcing the deal, John Schlifske, Northwestern Mutual chairman and CEO, said there has “been a gap between what consumers want and what the financial industry has been able to offer” in terms of client-facing technology. He suggests Northwestern Mutual will fill that gap by taking more clients “from start to finish,” leveraging LearnVest’s digital capabilities to address “all parts of the planning equation, and to be a partner at the center of clients’ financial lives through all stages.”

Since then, plan sponsors and advisers alike have asked what the acquisition means for the broader financial community—as have Corporate Insight analysts Sean McDermott and Matthew Eschmann. The team of researchers spends significant time tracking developments in the “robo-adviser” space. They tell PLANADVISER this most recent deal fits nicely into the ongoing trend of expansion and increasing influence for robo-advisers.

“The high-level comment to make first is that we really expect the trend of technology-driven acquisitions to increase dramatically in the years ahead,” McDermott says. “There is strong evidence that this technology acquisition trend is going to develop into a feeding frenzy by the mainstream industry players. They sorely need to shore up their technology offerings in the face of client demand.”

As the pair explains, financial firms looking to improve technology offerings and address the growing presence of robo-advisers are faced with a difficult decision: The need to update technology offerings is clear, while the path forward is anything but. “Do we do this technology development internally? Or do we look for an opportunity to partner with someone or to acquire someone? That’s the question firms are asking today, and this latest deal represents at least a part of Northwestern Mutual’s answer. Others could take a different path.”

For any given company the choice between internal and external technology development is going to come down to the business model, resource availability, cash flows and cultural factors, suggest McDermott and Eschmann.

“Some firms will find themselves better positioned, given their internal staff and operations, to create their own unique and original technology,” McDermott explains. “But many firms won’t be in this position. It’s probably safe to say that most firms will likely find it easier and more cost-effective to look externally for the answer to this problem. That’s the conclusion Northwestern Mutual seems to have reached.”

One approach McDermott and Eschmann feel will become increasing popular is something of a hybrid approach, which they describe as “white-labeled technology” or the “B-to-B-to-C model,” short for business to business to consumer services.  

“We see this approach taking off big time in the years ahead,” notes McDermott. “This approach represents an independent technology firm selling its own proprietary tools as an ongoing and modifiable service to a financial company. The financial firm usually can plug the technology tools directly into its own existing website and then brand the tools with their own marketing materials, without taking actual ownership of the technology.”

This is not the approach settled on by Northwestern Mutual, the team notes, but they “are seeing a macro trend starting to emerge around this theme. More and more fin-tech startups we talk to see huge opportunity in the white-label approach. It allows major industry players and small independent advisers alike to partner with a skilled technology firm and to use their solution. I think this will become more and more common—more plug-and-play solutions that seek to be really cost-effective.”

Eschmann adds that this white-label approach may be appealing for firms that are worried about investing in their own proprietary technology—only to see it outpaced and outperformed by all the new technologies constantly being rolled out both inside and outside the financial services realm.

“If you’re going to spend all that time and money internally to create a system, you might be afraid it will become obsolete by the time you can even roll it out,” he explains. “There are really smart and driven technology firms out there that do nothing but think about how to optimize robo-adviser technology and where they can push and expand the technology moving forward. Can an internal tech team compete with that? It’s an important question to ask.”

For large and well-established institutions in the financial advisory space, the amount of red tape, internal politicking and corporate inertia involved in creating entirely new and proprietary client service technology will be a huge hurdle. This seems to be part of what Northwestern Mutual was thinking when it decided to go with the acquisition route, Eschmann and McDermott feel.

“Inside one of these really large and historic firms, by the time you get the ball rolling on the idea of improving the technology versus when it will actually get implemented, perhaps years later, there’s a real risk you will again fall behind on current client expectations,” Eschmann adds. “I am not saying that this approach will never work. Some firms will choose to go internal, and they could benefit from having truly unique proprietary offerings and absolute control over their own system.”

The researchers say this highlights a critical issue that has always plagued financial services firms looking to create unique technology offerings: “In technology, more control and responsibility isn’t always preferable, especially if there are trusted, capable and affordable partners you can turn to instead.”

This specific deal between LearnVest and Northwestern mutual will be a great test for the industry to see how a major and established financial services provider can integrate a company created as an industry-disrupter.  

“There are key cultural differences that will have to be addressed,” says McDermott. “Many of the robo-advisers made a big splash when they first entered the space. Part of their whole ethos was to disrupt the current financial services model and industry. They were storming onto the scene to bring transparency and low costs to consumers, often in direct opposition to the ‘older ways’ of doing business.”

The team feels many sponsors and advisers will be watching closely to see if LearnVest can maintain its independent identity after being integrated into Northwestern Mutual ownership. From the details that have emerged so far, this is clearly the goal and intention of Northwestern Mutual—to keep the LearnVest brand intact and independent.

“One reason why it might not be such a challenge on the conflict of interest point to maintain the independent LearnVest identity, is that the LearnVest technology does not make direct financial product recommendations,” notes Eschmann. “It’s much more of an education and training platform for participants. That shows me Northwestern Mutual is cognizant of this debate—they don’t want to force LearnVest to start recommending only Northwestern Mutual products. In some ways it would defeat the purpose of the deal, if they wanted to really change how LearnVest does business.”

Eschmann goes on to explain the Northwestern Mutual likely targeted LearnVest over other technology firms because “they are a company that doesn’t really disrupt what Northwestern Mutual already does.”

“So in other words, LearnVest has this great technology platform and great education, and they don’t really recommend specific investment advice, so it's a good fit,” he says. “I think Northwestern Mutual really saw this as a great opportunity to get that educational content and delivery system that can really appeal to young people who are really only starting to invest. It gives Northwestern the chance to say, ‘look how we are innovating with the times and making connections with younger generations of investors.’”  

Looking ahead, McDermott and Eschmann expect LearnVest to start churning out more retirement-plan specific educational pieces—especially given that the LearnVest platform is to be integrated directly into the Northwestern Mutual defined contribution (DC) plan offerings, which already touch millions of plan participants across the United States.  

“The current content that LearnVest provides is really geared towards the young people out there in the market—the less financially savvy people who don’t have a lot of assets yet but who want to learn more and invest more and who will one day become promising clients,” Eschmann concludes. “It is still speculation, but perhaps we will see more of a focus on wealth-protection products, like the insurance products sold by Northwestern Mutual. Again, they will be focused on avoiding the perception of conflicts of interest starting to taint the LearnVest product, but there is no doubt this deal is going to lead to very strong lead generation for Northestern Mutual’s insurance agents.”