The business of financial advice does not create too many celebrities. Ric Edelman may be the exception.
The co-founder and chairman of Virginia-based Edelman Financial Services has hosted his own radio show for decades, hit the New York Times bestsellers list and schmoozed with Oprah.
And at 60 years old, Edelman shows no signs of shrinking from the limelight. In May, his firm announced that it would be merging with 401(k) managed account specialist Financial Engines as part of a $3.02 billion deal put together by Edelman’s private equity backers Hellman & Friedman.
The combined RIA – the name of which has yet to be determined – will become the biggest in the US, controlling $191 billion in assets. Edelman will serve on the board of the combined company and is all-in on the merger. He will be the new company’s largest individual shareholder, and he’s even increasing his own personal investment.
‘I’ve been predicting for some time that one day we will see a trillion-dollar RIA,’ he says. ‘If this merger goes through with Financial Engines, we’ll be a fifth of the way there.
‘We’ve seen big box brokerage firms: Merrill Lynch and Wells Fargo. They already manage trillions of dollars in assets. We see mutual fund companies manage trillions of dollars in assets. You’re going to see an RIA with trillions of dollars in assets too.’
That’s a bold claim, but Edelman has built his empire on making and delivering on such statements. Edelman Financial Services has more than 35,000 clients and $21.7 billion in assets under management across 43 locations in 16 states. He achieved this all while keeping an open door to his clients.
Although some of his firm’s offices are located in traditionally affluent areas, such as Short Hills, New Jersey and Tysons Corner, Virginia, Edelman does not set a minimum net worth requirement to open an account.
‘I consider it extraordinarily arrogant and rude that other financial advisors will only serve people who have substantial amounts of wealth – $500,000 minimum or $1 million minimum. That would be like a physician saying he only works with rich, healthy people because poor, sick people are too much trouble,’ he says.
‘I have long challenged the advisory community to change its attitude and to provide services to the people who need the help. I mean, let’s face it, if you’re dealing with high-net-worth clients exclusively, the work you’re doing for them determines whether their children go to Harvard or Yale. The work that we do for our clients determines whether or not their children go to college at all.’
To find the sparks that first kindled Edelman’s fiery streak, you have to go back to the ’80s, at a time when he was beginning his career as a reporter for a trade publication not too dissimilar from the one in your hands right now. Edelman and his wife Jean were dumbfounded when an advisor told them to lie on a mortgage application when they were looking to buy a home.
‘It just infuriated us that the industry seemed to be filled with people that had no ethical regard, that were only interested in their own self-interest and yet they were charging a lot of money to consumers and investors for the privilege,’ Edelman says. ‘So we decided to teach ourselves how money works and then share what we learned with others. That was the basis for starting our practice back in 1986.’
The Edelmans endured some pretty lean years before their business got going. They ran into credit card debt, selling off all their possessions save for their bedroom furniture and a kitchen table as they moved from the three-bedroom townhouse they were renting to a one-bedroom basement apartment.
‘We had no furniture and no television for four years,’ he recalls. ‘We sat on the floor, except for when we were sitting at the kitchen table. Not having a TV was actually a huge benefit, because we weren’t constantly bombarded by advertising with sales pitches to buy, buy, buy and get further into debt.’
All those early struggles have given Edelman valuable perspective as he reflects on the business he has built, aided by a steady diet of media exposure. His first call-in to Washington DC radio station WMAL in 1991 launched a radio career that continues to this day on airwaves across the nation in the form of a weekly show, called the The Ric Edelman Show.
‘I’m good on stage and I’m good at broadcasting and I’m a good writer. So I was able to transfer my communications training to covering the content of personal finance,’ says Edelman, a former communications major at Rowan University and the son of a newspaper publisher. ‘I’ve since learned that most financial advisors don’t have that skill at communicating. They spend most of their time talking to each other, so they tend to talk shop. They talk in jargon.’
Edelman prides himself on simplifying investment advice for the mass-market consumer, and the Financial Engines merger will give him access to a potential customer base of unprecedented scale. Financial Engines, one of the world’s first robo-advisors, manages the 401(k) plans for large-cap companies such as IBM, Microsoft, Alcoa and Comcast-NBCUniversal.
‘We’re very complementary to Financial Engines,’ Edelman says. ‘Whereas they work in an institutional space, the 401(K) world, we work in a retail space, with individuals. Whereas they focus on retirement plans, we focus on comprehensive financial planning. We have the same philosophy and approach to investment management. This makes a great deal of sense.’
Informal talks about the merger started seven years ago, Edelman says. In 2015, when Financial Engines made its first foray into in-person advice with its purchase of The Mutual Fund Store and when Hellman & Friedman took over a majority stake in Edelman Financial Services from Lee Equity Partners, Edelman urged his new private equity backers to consider a deal.
‘When we initially began talking about this, Financial Engines’ stock price was very high. It made doing a transaction economically challenging,’ Edelman recalls. ‘We were able to persist and thanks to changes in market conditions over the past couple of years, the opportunity presented itself this spring. Hellman & Friedman showed tremendous leadership and great skill and were able to strike a deal satisfactory to Financial Engines.’
The merger will take out Financial Engines’ stockholders at $45 per share. The deal is expected to close in the third quarter of 2018 and is contingent on Financial Engines’ shareholders’ approval, Edelman notes.
Financial Engines’ robo-advice architecture will likely fit in well with Edelman Financial Services’ existing investment proposition. The firm already has its own in-house robo-advisor, Edelman Online. The platform allows potential customers to take a free seven-question survey detailing their pre-existing financial knowledge and risk tolerance. The program then generates an asset allocation model. A customer can then use that model allocation to either sign up for an account online or take it with them to a meeting with an Edelman advisor.
‘While the planner-led process is a goals-based approach to financial planning, the automated robo version is a risk-based approach,’ Edelman says.
Edelman Financial Services manages all client portfolios in-house and generally populates these with passive funds. Vanguard, State Street Global Advisors, Dimensional Fund Advisors and BlackRock’s iShares are among the firm’s most-used providers.
‘We begin with our philosophical approach, which is that we believe in passive investing. We believe in broad, global diversification. We believe in a very long-term time horizon and we believe in controlling costs,’ Edelman says.
‘When we filter the available universe of investments, we begin with what it is we are trying to accomplish, what asset classes we are focusing on and then we scan through the universe of available investments to identify the best candidates that will achieve the goals we have for that particular asset class.’
Edelman estimates that the firm has more than 100 portfolios available to its clients, tailored to different asset class exposure levels and risk tolerances. The company says that each portfolio contains between six and 26 funds.
‘It’s not a cookie cutter,’ Edelman says. ‘We are not car manufacturers creating an SUV, telling everybody who wants an SUV that’s the one they have to buy.’
You would expect nothing less from Edelman, who seems to have made his career from speaking his mind. ‘Our advice is often very different from what you hear from others,’ he says. ‘And it’s because I am not simply parroting the company line. I’m not saying things that have become truisms in Americana but instead evaluating very carefully the legitimacy of these so-called rules of thumb. And we’ve learned that Wall Street promotes an awful lot of nonsense.’
After chatting with Edelman about his firm’s investment proposition and robo-advisor, the Guide to Portfolio Selection (GPS), I decided to take it for a whirl myself.
The seven-step questionnaire is pretty simple. First, it asks how much pre-existing knowledge you have about the markets. Perhaps giving myself a little bit too much credit, I checked option D: ‘I have extensive knowledge about investing and the markets.’
Next, it asks you how you would react if an investment you owned declined 25% in a single month, to gauge your risk tolerance (I said I would hold) and how much fluctuation you’re willing to tolerate in your investments (I said ‘a bit’).
After asking my age (25), investment objective (growth and income), planned investment duration (more than six years) and initial investment ($10,000), the GPS spat out an asset allocation model of 46% US equities, 34% bonds, 12% international equities, 4% real estate and 4% natural resources. Within US equities, it suggested 19% in large-cap value stocks and 14% in large-cap growth.
I ran my sample allocation past Edelman to ask how he’d then populate it. He says the firm would recommend passive funds, even for the natural resources and real estate allocations.
Edelman’s stance on passive investing shifted in 2003, after employees of Putnam Investment Management were found to have made illicit short-term trades to benefit certain investors ahead of others. ‘Quickly, we realized that these practices would be found to be occurring at many mutual funds, and we concluded we could no longer recommend these products in good faith to our clients,’ Edelman says. He cites a list of 25 business practices in the retail mutual fund industry that range from the aforementioned market-timing and hidden fees to misleading fund names, confusing share classes and a lack of discounts for larger investors.
‘This led us to re-evaluate the notion of passive investing,’ he says. ‘We discovered a great many passive funds were now available, covering a wide array of asset classes and market sectors. They avoided all of these 25 deceptive practices. And academic research had emerged showing the actively managed funds were no longer generally performing better than their benchmarks. Instead, they were generally producing higher risks, higher fees and lower returns than their passive counterparts.’
By 2005, Edelman Financial Services had launched its first portfolios that were constructed purely using passive funds and ETFs.