Home > Library > Stable Times > Volume 3, Issue 4  

Financial Engines: Providing Investor Advice Via the Web

For many plan sponsors, it's become the new frontier: offering investment advice to participants in their defined contribution plans. The question, of course, is how to offer it effectively and affordably.

Conveniently, a Nobel laureate has come up with some answers.

In 1990, Stanford University professor Bill Sharpe won the Nobel Prize in economics. Today, while still teaching at Stanford, he serves as chairman of Financial Engines, an Internet-based company he co-founded that provides investment advice to individual investors over the Web.

Financial Engines has attracted considerable notice, and some early customers, for two fairly obvious reasons. First, it carries the imprimatur of a Nobel laureate, assuaging the fears of plan sponsor that they will be offering bum advice to their employees. Second, the economics of the Internet make it affordable. It's also easy to use.

In an address to the SVIA National Forum in Washington, D.C. in October, Sharpe shared some of the secrets behind Financial Engines early success.

"Individuals care about outcomes," Sharpe said. "They have three questions on their mind. Will I have enough money when I retire? What specific investments should I make? And what should I do when markets change?"

Financial Engines answers those questions, he said, when investors log onto its Web site and enter a few details about their life and finances, such as their age, sex, income, current investment holdings, and savings rate. Moments after that data has been entered (for anybody with their account statements in front of them, the job won't take more than five minutes or so), the site lets them know how likely it is that their current investment program will meet their financial needs in retirement.

To get to the answer, Sharpe explains, Financial Engines runs a sophisticated Monte Carlo analysis of the investor's inputs, generating thousands of potential outcomes based on the funds in which the person is invested, the volatility of those funds, their historical performance and their costs.

If that were all Financial Engines did, it would be providing a valuable service. But the service also goes on to let investors perform a variety of "what if" analyses by changing the variables they've entered into the program-how much they're investing, how long they plan to work, their retirement goals and their tolerance for risk-to come up with the best possible investment portfolio for the level of risk they're willing to assume. Then, the program recommends specific funds for the investor, and indicates what percentage of their portfolio should be allocated to each fund.

Financial Engines' Web site, www.financialengines.com, is accessible to the public, and much of what it makes available to registered participants in 401(k) plans is also available free to anybody who visits. At this time, Financial Engines' does not include or recognize Stable Value in its asset allocation models. The free service doesn't include what-if analysis or specific fund recommendations, but individuals can buy that service.

"What we're seeking to do is to help the average investor with terribly important, and even life-threatening, issues," Sharpe said. "The question is whether we can bring sophisticated investment analysis to the individual at low cost, quickly, and in terms they can understand. I would say we have the technology to make that possible."

Read Next: Changing Demographics Should Help Stable Value Industry