It’s been nearly three decades since the prefix “robo” entered the popular lexicon, thanks to the 1987 film RoboCop, in which a fatally wounded policeman returns to fight crime as a powerful cyborg. (My own initial viewing of the movie came courtesy of a bootlegged VHS tape in a basement in Ukraine, but that’s another story.)

Since then, we’ve been exposed to robopets, robosigners, robocallers, and robochefs, among others.

And now the investing community has a “robo” of its own, and it’s emerging as one of the biggest trends in the money-management business: robo-advising. 

Mostly thanks to their rock-bottom costs — robo-advisers have progressed from relative obscurity just a few years ago to a becoming a significant force in the industry. 

Management consulting firm A.T. Kearney recently predicted that robo-advisors will manage $2 trillion in assets in the United States by 2020, compared with an estimated $300 billion this year. That’s a compound annual growth rate of 68%.

#-ad_banner-#The business got its name from the rather mechanical approach to money management that it utilizes. Robo-advisers employ automated processes and algorithm-based approaches in plying their trade, which is largely devoid of human interaction. 

One can argue that some of the best features of robo-advisors are not the cheap advice and rebalancing they provide but their digital platform and services they build. Regardless, just as with other disruptors, size matters, as does the ability to defend its market niche. 

401(k) Market Opportunity

While some of the robo-advising newcomers have just begun conquering the huge online market, Financial Engines (Nasdaq: FNGN) has been building its presence there since its inception 20 years ago. 

Financial Engines was co-founded in 1996 by Nobel laureate William Sharpe (the same guy who developed the “Sharpe ratio,” the industry standard in measuring risk-adjusted returns). In the company’s own words, Financial Engines was one of the first to offer “technology-enabled portfolio management services, investment advice and retirement income services”. Financial Engines’ first online advice platform dates as far back as 1998.

Just as with any asset manager, the revenue for Financial Engines is generated mostly from management fees on assets under management (AUM). 

A rule of thumb for valuing financial firms is this: an asset manager is worth 2% of its assets under management. 

Let’s apply this rule to Financial Engines. Its total AUM, as we learned earlier this month when the company reported financial results for the second quarter of fiscal 2016, were $125.3 billion, up 9.4% from a year earlier. The quick estimation would peg its market value at somewhere in the $2.5 billion area. The company’s current market cap: $1.9 billion. That’s a $600,000,000 gap.

Of course, this calculation is based on a simple estimate. But a gap is a gap.

One reason for the apparent disparity: the market’s concern about the slowing pace of AUM growth. At the end of fiscal 2014, Financial Engines had $104.4 in AUM; at the end of fiscal 2015, the company had grown the AUM to $113.4 billion. These are solid growth numbers, but far from explosive.

Also, there is some concern about the company’s margins. Financial Engines’ expenses as percentage of revenues have been on the rise, and, as a result, profit margins have been declining. 

FNGN’s Profits Margins Have Been Declining

I like the stock at its current levels, though, as I believe these issues are priced in. Financial Engines isn’t just your average asset manager. Its business is to provide investment advice primarily to participants in defined contribution retirement accounts, or 401(k)s. Among its clients are 144 Fortune 500 companies.

These accounts tend to stay for a while. That’s because employees, once enrolled in a 401(k), often cannot change plans until they get separated from their companies. Moreover, participants tend to regularly contribute to their accounts, providing a steady stream of AUM increases. According to the company’s annual report, 99% of Financial Engines’ 2015 revenue came from existing plan sponsors, with asset retention as high as 98%. And rising stock prices also add to AUM growth. 

Then there’s this: In February, Financial Engines closed a $560 million cash and stock acquisition of privately-held The Mutual Fund Store first announced in November of last year. The Mutual Fund Store is an advisor that brought with it $10 billion in AUM to Financial Engine’s business, plus more than 125 physical locations that provide financial advisory services. 

That’s right — bricks, mortar and humans. For the tech faithful, this may not seem like something out of a robo-advisor playbook.

But The Mutual Fund Store acquisition has morphed Financial Engines into a more powerful financial advisor, differentiating the company from the new crop of robo-advisors who believe (as Financial Engines once believed) that computers can entirely replace humans in the investment advisory business. (After all, even the cinematic RoboCop is part human!)

Another factor in the company’s favor: Financial Engines continues to benefit from legal and regulatory tailwinds, including the Department of Labor’s fiduciary regulation update released in April, which requires financial advisors to act in the best interest of clients when it comes to their retirement accounts, whether they are IRAs or employer-sponsored 401(k) plans. Not only did Financial Engines operate in the fiduciary capacity pretty much from its inception, but the proposed rule seems to continue tipping the scale from commission-based advisory compensation to the fee-based models, such as Financial Engines’.

FNGN went public in 2010, but unlike many companies this young, it is profitable. And from the point of view of more traditional valuation measures, the stock looks attractively valued as well. While it trades at about 29 times expected next year’s earnings, this is in line or cheaper than many of its peers. To top it off, Financial Engines also has no debt. 

Financial Engines serves a high-growth and a massively underserved business. I recently added this undervalued stock to my Game-Changing Stocks portfolio. But it’s just one of several stocks with high-growth potential I’ve been featuring recently in my premium newsletter. To learn how to get the names and ticker symbols of other game-changers, simply go here.