Executive Summary
The first quarter of 2015 has been a record-breaking flurry of merger and acquisition activity in the world of financial advisors, not just amongst advisory firms buying each other, but with acquisitions of the technology companies that serve advisors. In fact, 2015 continues to shape up as a breakout year for advisor FinTech.
The latest news is this week’s announcement that “robo-advisor” LearnVest is being acquired by traditional insurance company Northwestern Mutual for an undisclosed sum. Yet for all the buzz about the robo-advisor movement, the reality is that LearnVest’s business model was actually built around human advisors – it was not a true robo-advisor – and the Northwestern Mutual purchase may have actually been focused more on the software tools that LearnVest built for itself, in particular its integrated Personal Financial Management (PFM) and financial planning software, not the core LearnVest Planning business model.
In fact, with details emerging that LearnVest may have only had a few million dollars of revenue and been far from profitability (or even scaling to profitability) after 6 years of growth, its free PFM app for consumers and supporting integrated planning software for its advisors had a whopping 1.5 million users, giving Northwestern Mutual both a powerful technology tool to leverage across its existing advisor base, and a treasure trove of data on 1.5 million prospective clients to which it can cross-sell financial services products in the future. Which means in the end, LearnVest may simply finish as an example of a company that started out to disrupt the financial services with a unique business model, raised too much capital and created expectations that couldn't be fulfilled, and ended up being sold (out?) as a technology solution pivoted to serve the financial services establishment and its traditional manufacturing and distribution of financial products instead. And now the only questions are: how long will Northwestern keep LearnVest planners in place, and which advisor FinTech solution – PFM or otherwise – will be bought out next?
This story was updated with further comments and details at 5:33PM on March 26th.
Further updated with additional comments at 6:02PM on March 27th.
LearnVest Sells (Out?) To Northwestern Mutual
In the news yesterday was the big announcement that LearnVest financial planning was sold to mega insurance company Northwestern Mutual. Notably, Northwestern Mutual was not new to the scene; the company’s investment arm was already a participant in LearnVest’s Series D funding round almost exactly a year ago, when LearnVest raised $28M at a valuation that was rumored in a Forbes cover story to be north of $250M.
However, while the terms of the LearnVest acquisition were not disclosed, the available data suggests that this was probably not the “unicorn” that LearnVest’s venture capital investors were hoping for, and may have been closer to a salvage deal given a high cash burn rate for LearnVest, rather than a successful big exit for LearnVest’s founder and funders.
As the Investment News coverage noted based on the public press release of the deal, LearnVest only had 10,000 “premium” clients paying its normal fee of $19/month, which amounts to recurring revenue of just under $2.3M (or possibly even less, as their Form ADV only shows 3,700 [ongoing?] clients as of their last February 2015 update, not 10,000). New LearnVest clients also pay $299 upfront as a sign-up fee, though notably LearnVest has been growing its client base for 6 years now just to reach the 10,000 mark. Even generously assuming that 40% of LearnVest’s clients came in just the past year (and therefore recently paid the $299 upfront fee), the company would have barely $3.5M of revenue in its core model.
Also included amongst LearnVest’s client base were 25,000 clients enrolled in their new LearnVest at Work program, a financial wellness program for corporations that LearnVest was using its Series D funding to expand and scale last year. While pricing for the program is not public, given the scale of corporations buying wellness programs, it would likely have priced lower than LearnVest’s direct-to-consumer retail offering. Assuming pricing of $100/year for employee participation (which may be generous?), LearnVest at Work might have been generating another $2.5M of revenue, for a total of $6M.
And while there may have also been some advertising revenue from LearnVest as a media company – where it started – all in it’s not clear that LearnVest had any more than perhaps $7M of revenue, and possibly far less given that some “premium” clients and early LearnVest At Work deals may have been enrolled with discount offers, free trial periods, and other reduced-revenue strategies as client acquisition deals.
In the meantime, LearnVest’s costs were clearly not trivial. A Wall Street Journal article pegs their financial planner headcount at 50, and Investment News notes the company’s total employee count was 150 across New York and Arizona locations, including the planning staff to the software engineers and everything in between. At an average salary of “just” $60,000/year – which seems quite low – LearnVest was burning through $9M/year on just staff compensation alone, not to mention its costs to maintain data flows to its PFM-style app and other technology maintenance costs. And this tool for estimating salary (and equity) compensation at startups suggests that even customer support staff would likely earn more like $60k - $80k, with most staff earning $90k - $110k and software engineers earning $130k or more (good startup staff isn’t cheap!); so assuming average compensation of $90k per employee, the company’s burn rate on just staffing alone was closer to $13.5M/year, plus all of their other technology and operating costs (including office space to house 150 employees!). Not to mention all of LearnVest’s marketing and client acquisition costs as well. All in, it’s not difficult to imagine that LearnVest’s spending was well over $15M/year at this point.
Which means that for a company that had been in operation for 6 years, and still may have had no more than $7M of revenue while managing operating costs that were pushing north of $15M, LearnVest’s sale seems likely to have been similar or less than its last $250M valuation round. It does not appear to have been approaching profitability, nor even generating all that much revenue given $69M of VC funding over 5 rounds and 6 years worth of cumulative growth. Even growth seems to have been persistently more sluggish than anticipated; two years ago, LearnVest announced that it expected to reach 100 planners by the end of 2013, yet the reports are for only 45 planners now at the time of its acquisition based on the company's Form ADV. As with so many other companies in the “robo advisor” category, LearnVest appears to have grossly underestimated the challenges of client acquisition, failing to realize that the true reason advisors don’t serve the masses already is a function of how difficult it is to reach them in the first place.
Of course, we may never know what promise Northwestern saw in LearnVest and what price it was willing to pay for that vision... although at least one publication is reported "unnamed sources" confirmed the sale was for at least $250M, which would have LearnVest's final sale at no higher (but no lower) than its estimated valuation with its Series D funding a year ago. But as nice as it would be to see a financial planning firm for the masses bought for $250M+ (it would certainly bode well for our XY Planning Network!!), with a burn rate this high, it still seems likely that LearnVest’s sale wasn't driven by a chance for a big exit, but perhaps another attempt to raise capital that wasn’t going well, a decision to find a graceful transition that could still salvage some of the company’s value, or simply that Northwestern saw significant value in LearnVest's other ‘unique’ assets that could be leveraged in other ways.
LearnVest – A Financial Planning Company Or "Just" Another PFM And Planning Software Solution?
So given that LearnVest had a high burn rate, does not appear to have been approaching profitability, and did not appear to be finding the kind of exponential growth necessary to justify a $250M+ valuation in a sixth round of funding, why did Northwestern Mutual choose to buy the company at all, and what asset(s) was it really after?
The key answer may lie in a highly notable statistic buried in the Northwestern Mutual acquisition announcement: while LearnVest only had 10,000 premium clients paying for its services, it had a whopping 1.5 million users of its Mint.com-style PFM (Personal Financial Management) software app. In fact, the LearnVest PFM tool, which the company built internally from scratch and served as the data hub for its proprietary middle-market-oriented financial planning software as well, may have actually been its greatest asset.
After all, it was just under two months ago that Fidelity announced their acquisition of eMoney Advisor, an acquisition of “financial planning software” that was noted to have likely been more about eMoney’s unique and highly successful PFM solution. While eMoney was publicly viewed as financial planning software with a PFM tool thrown in, the Fidelity acquisition appears to have approached eMoney as a PFM purchase with financial planning software thrown in. And while eMoney’s financial planning and PFM solution generates far more revenue (the company was estimated at more than $60M of annual revenue at the time of purchase and is believed to have been quite profitable), the phenomenal reach and user base of LearnVest’s PFM solution suggests that it may have been the prize jewel for Northwestern Mutual as well. (Though notably, eMoney was purchased at 4X revenue for its software solutions; at a similar price point, LearnVest’s acquisition may have been no more than $30M or about the size of its last Series D funding? To say the least, if Fidelity bought eMoney and its $60M+ of stable revenue for $250M and Northwestern bought LearnVest and its $7M of not-even-profitable revenue for the same price... woe to Northwestern!?)
Yet in the case of eMoney Advisor, the acquisition was “just” about technology and Fidelity’s ability to leverage it across the entire enterprise to deepen relationships and potentially expand their existing client wallet share given Fidelity's broad range of products and services. With Northwestern Mutual, the company acquires not only a proprietary PFM solution it can leverage internally to deeper relationships with clients, make their planning process more efficient, and uncover more product opportunities to expand their “wallet share” of each existing client… but Northwestern also acquires the personal financial data of 1.5 million potential prospects.
In other words, Northwestern Mutual just bought access to the personal data flows for 1.5 million client leads (though to be fair, this likely includes every user who ever downloaded the app and registered, and is not necessarily active users), including information about their investments, net worth, income, and whatever else is revealed by the accounts its users connected to the LearnVest app. And to the extent Northwestern can further grow the visibility and adoption of the software, and more users download the app for free and use it to manage their personal financial lives, the more the growth in lead generation opportunities for the company’s core business lines with its insurance agents and brokers.
From this perspective, the Northwestern Mutual acquisition of LearnVest means the company may be adopting a similar business model to Personal Capital, whose most unique contribution to the technology-augmented-advisor movement may be its incredibly creative lead generation process, which similarly is built entirely around developing a great PFM solution that it gives away to consumers for free… and then by looking at its user base, can identify exactly who has available assets to manage, and contact them to “upsell” them into a full financial planning relationship. In essence, Personal Capital’s growth model has entirely been a “freemium” story of giving away PFM software tools for free and then converting those clients into a full advisory relationship… and Northwestern Mutual now has both the means to do so with LearnVest’s app, and a 1.5 million user base to begin converting to not only assets-under-management but Northwestern’s insurance products as well.
And it’s a lucrative opportunity for Northwestern Mutual, which is literally in the business of manufacturing and distributing its own (and other) financial services products, and therefore has a much wider array of products to distribute to that user base to monetize them than what LearnVest could do with “just” its $19/month financial planning service. In other words, the sad conclusion seems to be that while LearnVest was celebrated as a disruptor of financial services, it may ultimately just become a technology-based distribution solution for traditional financial services products, albeit with a novel technology-based lead generation approach – a resolution that has left some industry commentators with a remarkably negative view of LearnVest altogether as a “sell out” to the traditional establishment, though LearnVest maintains that its planning business will remain separate from Northwestern's product distribution (at least, for now?).
Takeaways From The LearnVest Acquisition – Robo-Advisors, Bionic Advisors, And PFM Opportunities
So given the dynamics of the LearnVest acquisition, what are the takeaways?
While some will call this exit a “success” for the robo-advisor movement, I have to admit that it doesn’t look like a big success to me. While LearnVest started out with a mission to disrupt financial services and reach an underserved population in a new and unique way, it has ended out at a point where its primary economic value may “just” have been a PFM technology tool that will be leveraged by a traditional financial services company to help it distribute financial services products to consumers. And while the terms of the deal were not public, given LearnVest’s limited revenues after 6 years of growth and $69M of VC funding, it’s difficult to see how they could have possibly commanded a premium over their last round of valuation… at least, unless Northwestern was truly willing to pay a spectacular sum just for the opportunity to get “big data” insights and marketing opportunities to LearnVest’s 1.5 million free user base (which again is more a story about traditional financial services product distribution than any kind of technology disruption with a unicorn sale).
On the other hand, it’s also worth noting that while LearnVest was often characterized as a “robo-advisor”, in practice it was anything but. The firm was not a robo-advisor at all, but instead was “just” an online financial advisor solution. LearnVest hired dozens of full-time dedicated financial planners to serve clients and give personal financial advice, most with CFP certification, and while they did work with clients remotely using technology for both communication and collaboration (through their PFM and financial planning software), LearnVest was more a glimpse of the future of financial planning in the digital age with technology-augmented human advisors than a disruptive replacement of advisors with “robots” and technology automation. So it’s also notable that for better or worse, LearnVest’s sale still doesn’t mark the exit (successful or not) of any of the true robo-advisors. But it does indicate yet another big vote of confidence for the technology-augmented human, as whether Northwestern ultimately intends to grow LearnVest's online financial advisor model, or use the LearnVest software to support its own agents and brokers, the acquisition seems clearly to be a commitment from Northwestern to a human-technology "cyborg" or bionic-advisor solution.
For some, LearnVest’s exit to a traditional financial services company also has echoes of the Veritat acquisition by LPL (subsequently rebranded as NestWise), which similarly was meant to be a model to serve the middle market for a monthly financial planning fee and heavy use of technology… and in the end, NestWise was shut down after just a year. The question now is whether LearnVest will face the same fate. Ultimately, LPL CEO Mark Casady acknowledged that the failure point for NestWise was the realization that it would be enormous expensive to generate the requisite leads to successfully scale a low-price-point high-volume financial planning business model, and the limited success of LearnVest suggests that it, too, may ultimately be succumbing to the same fate. After all, while 10,000 premium clients certainly isn’t “bad” by any traditional measure of client acquisition for an advisory firm, LearnVest raised so much capital it may have created unrealistic (and unachieveable?) expectations for growth. For instance, for LearnVest to generate $100M of revenue and justify continued uprounds of funding and growth for the company, at $19/month or less than $250/year of revenue per client the company would have needed more than 400,000 premium clients, which makes “just” 10,000 after 6 years look like paltry growth indeed. Which means LearnVest’s biggest problem may have been failing to realize that the primary reason advisors struggle to serve the masses is not a lack of desire or even operational efficiency but a challenge to scale the marketing required to generate the necessary volume at a reasonable client acquisition cost. Picking up 400,000 paying clients in just a few years would be a truly astounding feat, given that LearnVest only managed 1/40th of that in the past 6 years, and may have required a truly astounding sum of money to accomplish, far more what even its $69M of venture capital could support.
And of course, it’s not entirely clear whether LearnVest would have been very profitable even at that point, as 400,000 premium clients would require an astonishing number of financial planners to serve them. As is, LearnVest had an estimated 50 financial planners to serve both its 10,000 premium clients and 25,000 LearnVest At Work clients. If we “merely” assume half the advisors were dedicated to each, LearnVest was averaging a whopping 400 clients per advisor. And while it’s not even clear if 400 clients per advisor is sustainable (the average in more established RIAs is typically no more than 75-100 clients per advisor), even at those numbers serving 400,000 premium clients would have required 1,000 financial planners! Even if LearnVest paid a below-industry-average $75,000 per experienced advisor for the incredibly high client load, it would have consumed 75% of its revenues just on planning staff, and would have likely still been underwater once accounting for the rest of the overhead and infrastructure necessary to support the scaling of a staff of 1,000 advisors. And of course, that still doesn’t account for the incredibly high client acquisition costs to get those 400,000 clients in the first place. Either way, the real moment of truth for LearnVest's existing model will come in 1-2 years, when we see whether Northwestern continues its commitment to LearnVest as a subsidiary planning firm, or instead chooses to wind down LearnVest as a planning firm and "just" continue to use its PFM and planning software for the core business instead. On the other hand, the fact that Northwestern is a mutual insurance company, and doesn't answer to Wall Street and quarterly earnings like LPL, means the company likely has more room to let their LearnVest acquisition play out over time.
Though ultimately, none of this necessarily means that it’s “impossible” to serve the middle class on the basis of some kind of monthly financial planning fee, but simply that a price point as low as $19/month (or less than $250/year/client) just doesn't seem to be feasible, especially given the client acquisition challenges of a direct-to-consumer model. Either the price point needs to be somewhat higher (as is being done by many of our advisors in XY Planning Network), the client acquisition model has to be stronger (perhaps high-volume with large employers as a form of "prepaid financial planning" employee benefit?), and/or the business needs more/different ways to monetize than just financial planning fees (e.g., by offering investment management and/or other financial services products). In the end, the latter may be exactly what Northwestern Mutual plans to do – “expand the product line” of solutions to LearnVest clients, though for the time being, LearnVest insists that it is still “business as usual” given the Northwestern Mutual acquisition. But it remains to be seen whether or how LearnVest will be changed in the coming year or two, especially if Northwestern’s purchase was primarily about LearnVest’s PFM tools and technology capabilities (and perhaps cross-selling opportunities to its existing client base), and not its actual business model of bringing fee-only financial planning to the middle market for $19/month. Time will tell, as we see whether Northwestern is still committed to the LearnVest planners in another 12-24 months.
In the meantime, the Northwestern Mutual acquisition does seem to make the point that once again, large established firms are getting more aggressive about playing “catch-up” on technology (from Schwab’s launch of Intelligent Portfolios to Fidelity’s acquisition of eMoney and partnership with Betterment Institutional). In addition, the Northwestern deal also reminds once again, the real hot sector of the advisor FinTech world right now is in PFM solutions, an area with incredibly lucrative potential that has remained woefully underinvested and underdeveloped for years. And with the recent acquisitions of eMoney Advisor and now LearnVest, the fact that Intuit still owns Mint, and that Personal Capital appears to have no interest in selling or spinning off its PFM solution, the landscape of available tools is already becoming remarkably sparse, especially for those that holistically view the client’s entire balance sheet and their cash flow (and not just pure investment-only account aggregation tools). Given the energy in this area, it wouldn’t be surprising if other potential established financial services firms start knocking on the door as potential acquirers for the few players that remain, like Wealth Access or Guide Financial or Quovo or perhaps even FlexScore. Stay tuned.
So what do you think? Why did LearnVest choose Northwestern as a buyer, and why now? Will Northwestern adopt the LearnVest model, or simply use the technology for its existing product distribution approach? Was Northwestern buying a business model, a PFM technology solution, or simply a user base of 1.5 million leads?
(Disclosure: Michael Kitces has an Advisory Board relationship with Guide Financial.)
