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mPower and Financial Engines:
Comparing and Contrasting Two Advice Providers

In the few short years that their industry has existed, mPower and Financial Engines have established themselves as two of the dominant providers of online investment advice for participants in defined contribution plans. Although each firm strives to market itself as the best in the business, Jo Anne Davis, principal and director of stable value for State Street Global Advisors, told attendees at the 2000 National Forum of the Stable Value Investment Association that a careful review of their advice methodologies revealed the two competitors to be much more alike than dissimilar.

Among the differences: mPower maps investors to predefined asset allocation models, while Financial Engines optimizes a unique portfolio for every investor. Financial Engines relies heavily on returns-based style analysis to classify investment funds into their appropriate asset classes, while mPower uses returns-based style analysis but puts more weight on other factors.

Both firms populate their asset allocation models with a predefined universe of asset classes, though, and neither includes stable value as one of those asset classes. Both firms employ style mapping to evaluate investment options, and both employ mean variance optimization techniques to generate recommended portfolios. Both optimize portfolios on a pre-tax basis then adjust projected returns for taxes afterward.

In modeling stable value funds, Davis said, both companies take into account the characteristics of the underlying securities held in the fund, along with asset transfer restrictions applicable to the plan. However, the two services model the volatility of stable value funds somewhat differently. Financial Engines assigns a volatility factor near zero for stable value funds over the short term, and assumes that volatility will approximate the volatility of the underlying assets over the long term. mPower uses a discounted volatility model based on fund factors such as the duration of the underlying portfolio, and assigns each fund one of three volatility ratings: low, medium or high.

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