Executive Summary
In the two weeks since Northwestern Mutual announced that it was "shutting down" its 2015 acquisition of the LearnVest financial planning business and relaunching the LearnVest brand as an education-only content platform later this year, the industry has been immersed in “post-mortem autopsy” analyses of what happened and how Northwestern Mutual got to the point that they’re closing a business line that they bought just 3 years ago for a whopping $250 million dollars. However, the truth is that Northwestern Mutual acquisition of LearnVest was likely never about the LearnVest business model in the first place, and that by integrating LearnVest technology into Northwestern Mutual, the acquisition not only hasn't been a failure, and in fact may still be just getting started!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why Northwestern Mutual's decision to shut down the LearnVest planning business is not a sign of failure, why the acquisition was likely never about Alexa Von Tobel's "$19 per month financial planning service" in the first place, and where the real value of LearnVest was for Northwestern Mutual instead.
To better understand what was really going on in the LearnVest deal, it’s important to recognize that there were really three separate assets associated with LearnVest, all under one umbrella... The first was the LearnVest financial planning business, which at the time had about 10,000 “premium” clients paying $19/month for financial planning advice, as well as another 25,000 clients who were workers enrolled in the “LearnVest@Work” financial wellness program that they had just launched. The second asset of LearnVest was their content platform, targeted primarily at women and younger investors, that had hundreds of thousands of unique monthly visitors, and was supported by the media exposure of their CEO Alexa Von Tobel herself. The third asset of LearnVest was their Personal Financial Management portal, and the financial planning software they built on the back end, which at the time of acquisition reportedly had a whopping 1.5 million registered users (i.e., retail consumers).
The reason this matters is that much of the criticism of at the time of Northwestern Mutual's acquisition was solely focused on the LearnVest's financial planning business, with commentators asking how a business could be worth 50 to 100 times their revenue while not growing all that much. But the reality is that the real value of LearnVest was not their planning business, it was their planning software and the 1.5 million users that Northwestern Mutual could cross-sell their products to! After all, by some industry measures, 1.5 million leads alone could be worth close to $250M (at least if they're qualified), and Fidelity's purchase of eMoney for $250 million makes it clear the substantial strategic value of financial planning and PFM software for a large brand. Add a strong LearnVest consumer brand on top, and arguably Northwestern Mutual may have gotten a deal for LearnVest... even ignoring the actual LearnVest financial planning business altogether!
And this is why it’s so misguided to suggest that Northwestern Mutual didn’t get, or isn’t going to get, its value out of the LearnVest deal just because the LearnVest planning business is shutting down. Because it wasn’t about the LearnVest $2M/year business model in the first place, it was about Northwestern Mutual's $30B/year business model - manufacturing insurance products - and how the LearnVest’s platform and planning software could better power that Northwestern Mutual model. In fact, one of the “little noted” details about the news that “Northwestern Mutual was ‘shutting down’ LearnVest” is that the actual staffing of LearnVest in New York City is up, from 150 employees when they were bought, to almost 450 employees now. That’s not an acquisition that’s failing. That’s an acquisition that’s becoming a major part of the entire national Northwestern Mutual enterprise!
The bottom line, though, is just to recognize that the Northwestern Mutual acquisition wasn’t really about the acquisition of a financial planning business. It was a technology acquisition of financial planning and PFM software platform, for which LearnVest's cash-flow-and-budgeting-centric focus was an especially good fit for Northwestern Mutual (in a world where insurance agents have always gone the deepest on cash flow planning). And from the perspective of using LearnVest financial planning and PFM technology - plus 1.5 million leads, and a strong consumer brand to generate more Northwestern Mutual Prospects over time - there's still ample room for Northwestern Mutual to gain a positive ROI on its LearnVest acquisition... and their LearnVest hiring suggests that may already be happening!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone. Welcome to Office Hours with Michael Kitces.
A little bit of an unusual Office Hours this morning, we're broadcasting early in the morning here in Dallas. Obviously, I'm at the hotel room getting ready to speak for the FPA Dallas's Annual Symposium.
But for this week's Office Hours, I wanted to talk about something that's been in the news lately, actually, that was really news about two weeks ago, but I think is worth commenting on because the industry still seems to be missing what I think is the significance of what really happened.
And the news I'm talking about was the press release that Northwestern Mutual sent out at the beginning of the month entitled "Northwestern Mutual and LearnVest Are Taking the Next Step in Integration," in which Northwestern Mutual announced that it was terminating its monthly subscription fee financial planning service for LearnVest as well as the LearnVest at Work solution, and the LearnVest brand was going to be going on a six-month hiatus and then relaunching later this year as a fresh digital resource focused on educating consumers about how to meet their financial goals.
And when the news broke, the industry pounced on this with the message, "Northwestern Mutual is shutting down LearnVest," and then it immediately began all the postmortem autopsy analyses of what happened and how Northwestern Mutual got to this horrible point that they're shutting down a business that they bought 3 years ago for a whopping $250 million. Except, the truth, I think, is that the industry and the media have completely missed the point of what's going on. Northwestern Mutual's acquisition of LearnVest has not been a failure because their planning business is shutting down, it's still just getting started. And it was never about Alexa von Tobel's $19 a month financial planning solution, to begin with.
Why Northwestern Mutual Really Bought LearnVest [Time - 1:53]
To better understand what was really going on in LearnVest deal, it's important to recognize that there were really three separate assets that LearnVest was bringing to the table in that deal, all under one umbrella. The first and the visible one was the LearnVest financial planning business, which at the time had about 10,000 premium clients paying $19 a month for financial planning advice, plus another 25,000 clients who were workers enrolled in their then new at the time Learn at Work financial wellness program.
The second asset for LearnVest was their content platform. LearnVest had a educational content website targeted primarily at women and younger investors that are challenging demographics for a lot of the traditional industry, that had hundreds of thousands of unique monthly visitors and was supported by all the media exposure of their CEO Alexa von Tobel herself, who was the consumer face of the LearnVest brand and hit the cover of "Forbes" magazine a few months before the Northwestern deal.
The third asset of LearnVest was their personal financial management portal and the financial planning software that they had built on the back-end to support all of that financial planning business that they were doing, which at the time of the acquisition reportedly had a whopping 1.5 million registered users. And the LearnVest PFM tools and the planning software were actually somewhat unique by industry standards because they were much more heavily focused on cash flow and budgeting planning than most traditional financial planning software tools in the industry, because that's what you need if you want to actually do good financial planning for young people. You have to help them with their cash flow.
So the discussion at the time was critical of Northwestern Mutual, saying, "Why would they buy a $19 a month financial planning business with only 10,000 clients for $250 million?" Because if you do the math, 10,000 clients, $19 a month it's barely over $2 million a year of annualized revenue. Now, maybe it was $3 million because LearnVest also had these $299 one-time upfront fees, and maybe there was a little bit more revenue from LearnVest at Work if employers were paying $50 to $100 a year for each employee. But throw all the dollars in the bucket, I mean, that still made the LearnVest deal probably somewhere between a 50 to 100 times their revenue at the time, which is a somewhat insane price for a business that wasn't growing that fast at the end of the day. I mean, 10,000 clients in a financial planning service is a lot, but they needed something like 1 million clients to justify a $250 million purchase price on the planning business alone.
But as I wrote at the time, the critics that were suggesting that Northwestern Mutual was overpaying for a $19 a month financial planning business were missing the point that LearnVest had three primary assets, and the financial planning business was just one. And the real value of the LearnVest business was not their planning business in the first place, it was their planning software. Because as I just mentioned that planning software and PFM portal already had 1.5 million registered users. So, for Northwestern Mutual, that's 1.5 million leads to whom they can offer existing Northwestern Mutual products. Which if you assume that all Northwestern Mutual bought was a list of 1.5 million leads, they got a decent deal for that business alone. Just $250 million for 1.5 million consumer leads is $166 a lead.
To put that in context, SmartAsset just announced a few months ago a lead generation program for advisors that are going to sell leads between $20 and $190 per lead for advisors, depending on how affluent the client is, and then they're going to sell those leads up to 3 advisors at a time who get to compete for the business. So you 3X the revenue for SmartAsset, the value of a lead is $60 to $570 per lead. Northwestern then arguably got a good deal on LearnVest by paying only $250 million just for the 1.5 million users that they can cross-sell Northwestern Mutual products. And that's if the planning business was worth nothing and there's no software.
But Northwestern Mutual didn't just get 1.5 million leads, it got a consumer brand and a content platform. It got financial planning software and a PFM portal for consumers that can continue to produce more leads. Because bear in mind just a month before Northwestern Mutual bought LearnVest financial planning software and PFM tools, Fidelity bought eMoney Advisors financial planning software and PFM tools also for what was rumored to be about $250 million. So in this context, Fidelity paid $250 million for just financial planning software with a PFM portal, LearnVest paid $250 million for financial planning software with a PFM portal, and the consumer brand to bring in prospects, and a list of 1.5 million existing users who alone might have been worth $250 million. Which means that the market value of the deal all-in might have been low for Northwestern at the price they got it, and then on the side, they got a $2 million revenue per year LearnVest planning business thrown in.
In fact, what I wrote three years ago when the deal first went down was this. What I'd said is:
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.
And so, sure enough, no pressure from Wall Street, it didn't take one or two years for Northwestern Mutual to wind down the subsidiary planning business and focus on the planning software and PFM as predicted, it took them three years to refocus on the planning software and the PFM and wind down the LearnVest subsidiary planning business.
Northwestern Mutual Bought LearnVest for The Northwestern Business Model, Not LearnVest’s [Time - 7:36]
But again, this is why it's so misguided to suggest that Northwestern Mutual didn't get or isn't going to get value out of the LearnVest deal just because the LearnVest planning business is shutting down. It wasn't about the LearnVest business model in the first place, it was about the Northwestern Mutual business model. Because in the end, Northwestern Mutual is an insurance company, their primary business is manufacturing and selling insurance products. They're one of the oldest and largest in the country, that's what they do.
And if you're going to be a successful manufacturer of anything, you not only need to produce the product, you need to distribute it. You have to get it into the hands of consumers. That's why Northwestern Mutual has 6,000-plus insurance agents. Their job is to sell the products that Northwestern Mutual manufactures to get them into the hands of the public. And any tools and software that makes their insurance agents get in front of more prospective clients, better engage with them, makes the company more able to distribute products and be more financially successful.
Think of it this way... imagine a furniture company, like a manufacturing company for furniture that makes sofas and chairs and beds and other household furniture. So to make money, they build the furniture, they sell it to people. To make more money, they sell more furniture to people. That's what happens when you're in a furniture business.
Then one day the furniture company buys a moving company that owns 100 trucks and has built a big client list of all the families they've helped to move over the years. Is it really going to surprise anyone if at some point the furniture company starts using the moving company trucks not just to move old furniture of people but starts calling them and says, "Hey, you're moving, want to buy some of our furniture from us for your new house? We'll deliver it right to you in the moving trucks we have." And then a few years later the furniture company shuts down the moving company and just keeps the trucks and the client list. It's not a surprise. They were a furniture company. They build and sell furniture. That's what they do. If you're in the business, you don't buy a moving company with trucks to expand in the moving business, you do it because it's a distribution channel to sell more furniture.
And it's the same phenomenon that was going on when Northwestern Mutual bought LearnVest. Again, LearnVest had these three primary assets: (1) planning business, (2) consumer brand with 1.5 million leads, and (3) financial planning and PFM software. Sure, LearnVest used the consumer brand and the planning software to build the LearnVest business model, but Northwestern Mutual was and still is a product manufacturing business. So they didn't buy LearnVest content platform, the planning software, and the PFM tools for the LearnVest model, they bought it to power the Northwestern Mutual model, 1.5 million leads, financial planning and PFM software to make Northwestern agents more efficient and better engaged with clients, because that helps them buy more of Northwestern products.
I mean, frankly, the whole idea that a company with $30 billion of revenue bought LearnVest's $2 million a year revenue business as though they were going to pivot the entire 160-year-old insurance company into LearnVest's $19 a month subscription model is almost comical. They already do $30 billion of revenue in the model they're already doing, that they've done for 160 years. Not to mention also closing in on being the fifth largest independent broker-dealer by advisor headcount or revenue as well. The value of LearnVest to Northwestern Mutual just wasn't the LearnVest business model, it was using LearnVest assets in the Northwestern Mutual business model.
In fact, one of the little-noted details about the news that Northwestern Mutual was shutting down LearnVest is that the actual staffing of LearnVest in New York City is up from 150 employees when they bought it 3 years ago to 450 employees today. So LearnVest staff tripled over the past three years. That's not an acquisition that's failing, that's an acquisition that's becoming a major part of the entire Northwestern Mutual enterprise. Now, of course, it wasn't necessarily LearnVest planners who were getting hired by the hundreds, its developers and it's the folks with the digital savvy. In fact, RIABiz reported that founder Alexa von Tobel herself is going to be staying on board with Northwestern to become the chief digital officer for all of Northwestern Mutual, and LearnVest chief marketing officer is now driving Northwestern Mutual's digital marketing efforts.
In other words, it was LearnVest technology and its tools and its digital savvy that are being directly integrated into Northwestern Mutual, not to run the LearnVest business. And so I think when Northwestern Mutual sent out the press release that they were taking the next step with integration with LearnVest, it wasn't just a euphemism for shutting down, that's really what's going on. LearnVest is being assimilated into the Northwestern Mutual business core.
Where Does LearnVest (And Northwestern Mutual) Go From Here [Time - 12:00]
And that's why I think you can expect to see more going forward from here. The LearnVest brand I expect will live on. Because as Northwestern Mutual said, their stated plan is to keep it as a fresh digital resource focused on educating consumers on how to meet their financial goals. Now, what I think that really means is LearnVest will continue to run a fresh digital resource focused on educating consumers about how to meet their financial goals, and may occasionally point out that Northwestern Mutual products will help them achieve those goals.
Northwestern Mutual makes money in one primary way, selling Northwestern Mutual products, so, of course they're going to keep a strong consumer marketing brand that attracts people in. It's a valuable distribution channel for Northwestern Mutual products. In fact, I suspect that's why Northwestern Mutual didn't even spin off what was left of the LearnVest business because the business only had a few million dollars of revenue as a planning business, but that LearnVest brand is worth far more to Northwestern Mutual as its hip, young, savvy content platform that's a distribution channel and a lead generation machine for their core business.
And I think the LearnVest software, you'll find, is not only going to live on but increasingly is going to power Northwestern Mutual. The rumors I've been hearing already over the past year or two is that the integration of LearnVest planning tools and their general digital savviness about how to leverage technology is already dramatically retooling the capabilities of the average Northwestern Mutual agent. And there aren't very many financial service companies out there at all who get to own and control their own financial planning software. There aren't even that many independently-owned financial planning software companies left to buy at this point if you wanted to.
So what I see is Northwestern Mutual making a savvy purchase at just the right time, at just the moment that all the other financial planning software companies like eMoney Advisor and Finance Logix were getting gobbled up. And they got the PFM portal for clients along with it, and a planning software especially well-suited to Northwestern Mutual because insurance agents tend to focus on cash flow planning and budgeting, and that was one of the strengths of the LearnVest tools. That's a heck of a proprietary advantage for Northwestern Mutual and why I suspect they tripled LearnVest staff over the past three years. Not winding it down, but winding it up.
Sure there's been a rumor of culture wars happening between Northwestern Mutual and LearnVest along the way. No big surprise, it was a tech startup company bought by a 160-year-old old line insurer, so culture challenges happen. It didn't stop them from tripling the staff of the company and increasingly turning LearnVest software into the core of the Northwestern Mutual advisor platform.
In fact, just relative to the sheer size of the Northwestern Mutual business with $30 billion of revenue, it's important to recognize that a 1% increase in revenue, because their agents are just a little bit more efficient with the technology and attract a few more clients and grow a little bit faster, means that Northwestern Mutual makes more revenue in a year than it paid for LearnVest in total just from a 1% lift in revenue.
And bear in mind that Northwestern was already an investor in LearnVest previously. They were part of the prior rounds, which means they didn't even actually have to stroke a check for the full $250 million because a portion of the valuation they bought they already owned, they only had to buy out the other shareholders, which means they may only need, like, 0.5% of revenue growth from LearnVest technology to make the whole thing phenomenally worthwhile and profitable for Northwestern Mutual. And that's before you consider that whole 1.5 million leads and the LearnVest brand that can be a lead generation machine.
But the bottom line is just to recognize that the Northwestern Mutual acquisition was not an acquisition of a financial planning business, it was a technology acquisition. And just like so many other deals that happened over the past few years were a large incumbent, bought a start-up technology firm that was going direct to consumer, and pivoted it to be a B2B2C solution, software for advisors so advisors can be successful with their clients. We saw that happen with the robo-advisors, BlackRock buying FutureAdvisor, Invesco buying Jemstep, SigFig partnering with the wirehouses, on and on. And it happened with the LearnVest technology as well. But insurance companies are non-investment-oriented, they're more holistically-oriented.
Remember financial planning was born from life insurance agents. Granted at the time it's because financial planning was a good way to do needs-based selling for life insurance. But life insurance agents have always been in that space, and they've always been the ones that went deepest on cash flow because you can't get someone to save $200 a month in a permanent life insurance policy until you do the cash flow planning for their household. So Northwestern's technology deal wasn't to buy a consumer robo and pivot it to their advisors, because that's an investment deal, it was to buy a consumer cash flow and budgeting planning software and pivot that to their advisors because that's what they do.
And now Northwestern Mutual is just focusing where it gets the best ROI from its LearnVest deal. That's why the deal shouldn't be viewed as a failure because LearnVest planning didn't survive, LearnVest planning wasn't why Northwestern Mutual bought it in the first place. It was a technology deal, and one I think still has a lot of room to run as Northwestern Mutual incorporates that LearnVest technology and developer talent deeper and deeper in the coming years.
I hope this is helpful as some food for thought, maybe an interesting alternative take on the news about Northwestern Mutual shutting down the LearnVest planning business, because they only shut down the planning business they didn't care about in the first place, and LearnVest the technology company has tripled in three years.
This is Office Hours with Michael Kitces. We're normally 1 p.m. East Coast time on Tuesdays. Well obviously, my timing is off this week due to travel for conferences. Thanks for joining us, though, everyone, and have a great day.
So what do you think? Was the acquisition of LearnVest a success for Northwestern Mutual? Was Northwestern Mutual acquiring more than just LearnVest's planning business? What do you think will happen with LearnVest going forward? Please share your thoughts in the comments below!
