Class 14

• Other People's Money (Stanford Case)
• E-Strategy Brief: Merrill Lynch, The Economist, June 9, 2001.

1. Assume that a traditional wealth management firm acquires a mass-affluent investor with $200,000 in investable assets.  Assume the expected annual return on investments is 8% (you may assume all taxes can be deferred) and each customer has a constant churn rate (this is a parameter that you are going to vary). The wealth management firm collects a fee of 1% of customer assets each year.  The wealth management firm's cost of capital is 12%.  Under what conditions should the firm acquire the customer?  
2. Now answer question 1 assuming the customer invests $500,000 in additional assets in year 7 of the relationship (if he or she stays with the firm through that year).  What are the implications of this for the wealth management firm?
3. Evaluate the strategic position of Financial Engines.  Do the industry trends of the early twenty-first century reinforce or impede its business model?
4. Should Financial Engines be in the B2C online advice market, B2B, or both?  Why?  
5. What should Financial Engines, Charles Schwab and Merrill Lynch do next?  Why?