Ric Edelman: Financial Advisor Pain Is Investors' Gain | ETF.com
Ric Edelman is chairman and former CEO of Edelman Financial Services, which has more than $16 billion in assets under management. He is the author of several personal finance books, including the newly updated “Rescue Your Money,” and the host of a syndicated weekly personal finance talk radio show called “The Ric Edelman Show.” Edelman was ranked the No. 1 Independent Financial Advisor in the U.S. by Barron’s in 2009, 2010 and 2012. ETF.com caught up with him to talk about the state of the financial advisory world, and how investors have never had it so good.
ETF.com: Is it more difficult to be a financial advisor today than, say, 15 years ago?
Ric Edelman: There's no question it's harder to operate as a financial advisor today than 10 or 20 or 30 years ago. There's great sophistication among consumers. They have obtained greater knowledge and experience, so their demands and expectations are higher.
There is much greater regulatory scrutiny, much greater obligation for recordkeeping for regulatory purposes. There's greater competition than before. There are more and more organizations involved in the financial planning and investment management world than there used to be. And there's much greater complexity in the financial markets and the economic, legal, tax, financial environment than there used to be.
At the same time, compensation structures have dropped dramatically. Back in the '80s, stockbrokers used to earn 8.5% front-end commission for selling a mutual fund. Today robo advisors are charging 25 basis points [0.25%]. So the ability to earn as much money on a transaction—either a commission or a fee—is sharply reduced, while costs are higher, competition is higher and challenges are higher.
So, yes, it's much more difficult today to operate than it used to be.
ETF.com: Is that going to pose a problem for investors if the business gets to be too difficult to run, where it's just harder to find people like yourself?
Edelman: No. This is great news for investors. Because it means the advisors they hire are far more likely to have greater skills and experience to be operating their practices like a real business, with structure, formality, process, accountability, financial capability that will dramatically improve the client experience.
When I look at my 30-year career, there’s no question that the quality and value we deliver today has never been higher.
When I compare to what my wife and I did when it was just the two of us in the 1980s, working in a single office, with a shared telephone, there is no question we’re delivering far more value to our clients than we’ve ever been able to do. And those advisors who can't will be out of business.
It's not a problem for investors, it's a problem for investment advisors, which is why I've long said that over the next 10 years, half of the industry is going to quit. They will discover they can't meet the bar.
ETF.com: Your firm has had some changes over the last year, at least on the executive side. You're still the chairman of your company. Can you explain a bit about what happened?
Edelman: I'm the executive chairman now. We've brought in our first-ever CEO who's not me, Ryan Parker. He came to us from LPL, and has a long career in this industry. He's now running the business on a day-to-day basis, not me, so that I can focus on financial education and client services.
ETF.com: Let’s talk about your newly updated book, “Rescue Your Money,” which implies that a lot of people aren't doing the right thing with their money, or that we're coming up on some rocky times. What's the impetus behind the title?
Edelman: Many people aren’t doing the right thing with their money. And we’re facing tumultuous times. Everybody’s very anxious about the election and our next president. We have historically low interest rates. We have unprecedented increases in the financial markets—the bond market, the stock market, the real estate market; they're all doing fabulous. People are wondering, what's coming next, and how can I ensure that I’m going to be able to achieve my goals and enjoy financial security and retirement?
That's what the book is all about—showing you how to develop the investment strategy you need in tumultuous times like these.
ETF.com: Could you give some insight into that strategy?
Edelman: Well, this book is different from all of my other books. It’s very, very short. You can read the entire book in a single sitting. And it covers only one specific subject, and that is investment management. My other books—this is my eighth book—are rather extensive, as much as 700 pages, covering a broad spectrum of personal finance topics. But this one is very specifically focused on your investment portfolio.
What we discover is that many people are making very basic mistakes with their investments: They engage in market timing. They listen to the media. They believe that the pundits are right. They don't understand that the proper way to manage money is straightforward, simple to understand, easy to implement and time tested.
In a very quick, easy read, the book lays out the three basic
steps involved in successful money management: 1) to extensively diversify your account on a global basis, which you can do with ETFs very easily; 1) to maintain that portfolio for a very long time, and I mean decades; and 3) to periodically rebalance the portfolio as it adjusts over time to keep your allocation model intact.
That's really it, those three steps. What we discover is that most people don't realize these three steps are the key to successful investment management. They don't realize the mistakes they're making.
ETF.com: You mentioned the upcoming presidential election. Is the election something people shouldn't be concerned about when it comes to their investments?
Edelman: They shouldn’t. We've been spending a lot of time educating our clients that the election won’t have the impact on their investments that many people fear. And fear's the right word, because most people are very unhappy with the two candidates, and are convinced, even if they do like one of them, that their candidate will lose.
Many are very concerned it’s going to have a very negative impact on the financial world. We’ve been very busy reassuring our clients and the public that those fears are overblown.
History is very clear on this point. Going back to 1948, the impact of every president on the financial markets is very clear. Presidents do not adversely affect the markets. The likelihood that you’ll have four years of negative markets is highly remote. It's only happened under two presidents—Nixon and Bush—both of whom were in office during severe recessions. I don't know that in either case you can blame those two presidents' economic policies on the results of the S&P 500.
That aside, the stock market has performed very well to extraordinarily well under all of the other U.S. presidents since 1948. And the best part is, no matter what happens under a given U.S. president, it's temporary. Presidents are around for no more than eight years. And if you have retirement goals, you have a time horizon of far more than eight years, meaning that the impact that any given president might impose will be temporary.
ETF.com: Let’s get into retirement. I know you talk about it in the book, too. The idea is now that the return expectation is lower going forward. People are living longer. Is the idea of retiring at 62 antiquated?
Edelman: Yes. If you’re 62, this matters a lot more than if you're 32, so it depends on your circumstances in life. But generally speaking, the notion of retirement is antiquated. I wrote about this in my very first book, in “The Truth About Money,” in 1997, 20 years ago. I said that retirement was a 20th-century innovation that won't exist in the 21st century. And we're beginning to see that now.
Because people are not only living longer, they're living healthier longer, the ability to continue working into your 60s and 70s is unprecedented, and it’s only going to continue to grow. So the notion of retiring at 62 or 65 is fast becoming antiquated. People should anticipate not merely that they're going to work, but that they're going to want to.
It's not that they'll necessarily need the money, but they're going to want to stay active, they're going to want to continue contributing. Because I don't care how much you like playing golf, that's going to get pretty old after a while. And you're going to want to find something more meaningful to do for your family, for your community.
Besides, if you’re going to live to age 100 or 105 or 110, which is increasingly likely, you are going to need more money.
ETF.com: On the opposite side, what investing advice would you give somebody in their 20s coming out of college?
Edelman: We believe they should do their 401(k) first. They should max that out first. It's painless, because the money comes out of their paycheck without their noticing. It's tax deductible. And many will qualify for an employer match, which is literally free money.
Then, they should build cash reserves. After that, they should begin to build an investment portfolio in a taxable account. Whether they choose to use a robo advisor or construct their own portfolio with a discount broker, or work with the services of a financial advisor like us, it's entirely up to them.
I believe that by the time they're in their 40s and 50s, they’ll choose to use an advisor, because doing it yourself is very limited, or using a robo advisor is very limited. All you get is investment management; you're not getting any help with mortgages, buying versus leasing cars, insurance, taxes, employee benefits, wills and trusts.
As you get older, your life becomes more complicated. You begin to accumulate more assets. You also tend to get married and buy a home and have children. Your career changes. Family members begin to develop needs, such as aging parents. And life gets complicated. You're not going to have your needs met by an online service that constructs a portfolio for you that doesn't allow you to ask any questions.
Contact Drew Voros at firstname.lastname@example.org