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Ric Edelman tells how he succeeds in advice's Death Valley -- online investing

For one thing the RIA maestro with $18 billion of advised asset charges full boat and people are an option

Friday, December 20, 2013 – 7:57 AM by Guest Columnist Steve Garmhausen
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Ric Edelman: Either they will die, or more likely, they will alter their business model.

Brooke’s Note: He puts us all to shame. Ric Edelman is out to be the best radio RIA, the best stand-up performing TV RIA, the biggest RIA, the first with a national footprint, a pioneer roll-up and — ta-dah — the unheralded rival of the upstart online crowd. It sounds like too much to be true — unless you know Ric and his energy and focus. Then it has more the ring of trouble for those he sets his sights on.

Ric Edelman’s got a big business, with, he says, $12 billion of assets and 22,000 clients. But he’s thinking bigger. (The somewhat dated ADV for Edelman Financial Services LLC lists $8.5 billion of discretionary assets for 17, 500 clients. There are multiple ADVs for various Edelman subsidiaries.)

Backed by private-equity firm Lee Equity Partners, which bought The Edelman Financial Group, Inc. in April of last year, Edelman wants more offices in more places, and he wants many more clients. See: Ric Edelman strikes a private-equity deal that subtracts $2 million in expenses — now let the after-bidding begin.

As we learned in our Q&A with Edelman, who famously reaches his mass-affluent audience through books, seminars, a radio show and, for the past three years, a show on PBS, the growth of his firm may not be exclusively organic.

Last year, Edelman revealed that he was pursuing an unidentified, $1-billion RIA, in what was seen as the possible start of an aggregation push. The deal never happened, but as you’ll read, that doesn’t mean it won’t. See: Ric Edelman is looking to add a $1-billion RIA elephant even as he unveils an online consumer strategy aimed at the chipmunks.

Edelman also gave us an update on his year-old online investing service, and his opinion of upstart competitors Betterment and Wealthfront . Guess who’s got the better model?

Finally, we asked our interviewee what Edelman would be without … Edelman.

All-ways expansion

Steve Garmhausen: What’s the growth strategy going forward with Lee Equity?

Ric Edelman: Lee Equity has depth of talent and financial resources that we are able to take advantage of. We share the same goal, which is to grow the organization dramatically, making our services available to a larger number of consumers across the country who are in need of our help.

SG: So where exactly have you been investing?

RE: So far, most of it has been in our infrastructure. We are positioning the company to be able to handle the increased volume that we anticipate will be coming beginning next year and in future years. So we have been adding dramatically to our staff and facilities, technology, and laying the foundation for the growth that we are expecting to enjoy over the next several years.

SG: How much growth do you anticipate, and where will it come from?

RE: It’ll be similar to our success to date. We are not expanding into new businesses; we are going to continue doing what we’ve been doing, simply on a larger scale. So we will be adding advisors and offices throughout the country and increasing our footprint so that more and more consumers are aware of us and have access to us.

SG: When you say increasing your footprint do you mean geographically?

RE: Correct. We have 34 offices now, in 15 markets, and we’ll be dramatically increasing both of those numbers.

SG: Which particular regions of the country?

RE: There are a number of cities we are specifically looking at. We haven’t yet gone public with where they are, but it will be increased activity both in the cities where we already operate, as well as new markets. See: Edelman expansion slows; back office 'overwhelmed’.

SG: Can you put a number on your growth projections?

RE: Not something we’re willing to do publicly yet, other than to say it will be substantial.

Full freight for online advice

SG: Let’s talk about your online service, aptly named Edelman Online. What’s the value proposition there, and how’s the business doing?

RE: We’re very happy with Edelman Online. We have more than 500 clients and about $25 million invested. See: Ric Edelman is looking to add a $1-billion RIA elephant even as he unveils an online consumer strategy aimed at the chipmunks. There are an increasing number of consumers who are willing to handle all of their finances digitally, without the need to talk to a human being, and Edelman Online enables them to do exactly that. The technology has evolved to the point where we can effectively deliver our investment management services electronically for those who don’t feel the need for broader financial planning advice or who don’t want to talk to an advisor but want the services that we provide. Edelman Online is designed for those kinds of people and it’s working very well.

SG: Does Edelman Online have a discounted pricing model?

RE: It does not. It has the same pricing model because all of the same services are available. Even though people who use Edelman Online don’t have to talk to an advisor, most of them, we have found, prefer to do so at some point. So our advisors remain available to our online clients just as all our other clients have, so the same pricing schedule applies. See: Marty Bicknell jumps into the mass market with no 'robo-advisors’ and a missionary zeal.

$18 billion head start

SG: Speaking of online advisors, what’s your evaluation of Betterment and Wealthfront?

RE: I don’t believe that online-only services have a sustainable business model. Based on published data, it does not appear that they are generating sufficient revenues to support their infrastructure. It is also becoming increasingly apparent that their own customers want interaction with advisors, which is not something that their business models were originally contemplating. That’s an additional overhead expense and it does not appear their pricing structure can afford it. See: Online RIAs will mostly fail — and here are 10 reasons why.

There is no indication yet that their current business models are sustainable, which only means one of two things: Either they will die, or more likely, they will alter their business model to one that is more sustainable. And I expect the latter because these are smart people backed by smart people and I believe that they will figure out a way to be sustainable for their benefit, their shareholders’ benefit and their customers’ benefit. But the current, initial product that has been developed is not what will prove to be the eventual product. And either they or their successors will figure that out. See: Betterment’s Jon Stein talks human-RIA coopetition but breathes fire about fellow online RIAs.

SG: Betterment is now doing what looks like a beta test with advisors using their service for the investment part of the equation.

RE: Yeah, you will begin to see these kinds of evolutionary changes. There’s no question that the Internet will play a very important role in the delivery of financial services. This is one of the reasons I created Edelman Online when I did, because I want us to be at the forefront of technological innovation. And the Internet will play a very important role. The key is to do so with a sustainable business model.

The advantage I have over Betterment and Wealthfront and LearnVest and all the others is that [Edelman Financial Services] already has $18 billion in assets and a complete infrastructure of personnel, expertise and technology. So we aren’t trying to create it from scratch. And that gives me a significant advantage in terms of making our model sustainable. Others will have to figure out an alternative way to making their models sustainable, and I would expect that they’ll succeed.

The Ric brand

SG: In the deal with Lee, the valuation was lower than some expected. David DeVoe, managing partner of DeVoe & Company, told an interviewer “The only downside with Edelman is that it’s really tied up in the personality of Ric.” Do you agree, and how will the business continue to thrive after you’ve gone?

RE: There’s no question that my firm is a personality-based firm, and key-man risk historically has been both a blessing and a curse. We have taken a great number of steps to reduce key-man risk and to reduce the firm’s dependency on me. And we have accomplished that to a very large degree today. One small example is that we now have six full-time speakers providing seminars, and this past year we presented more than 500 seminars around the country; I presented only five personally. And the seminars were highly successful. That’s one small example of how we are reducing the firm’s emphasis and dependence on me yet maintaining the personality that the firm is well known for. See: Barron’s top advisor shares the secrets to his success with rapt RIAs at TD event.

I introduced co-hosts to my radio show. We have a team of writers working in our firm; although I continue to write my books, I have an editor for my newsletter, for example. There’s no question that the machine we’ve built is running independently of me and will survive me. But as Mark Twain once said, the reports of my demise are premature. See: Edelman joins ranks of TV RIAs with PBS show that will reach 20 million.

Ignoring the 99%

SG: What have you figured out about serving the mass-affluent market that others haven’t?

RE: It’s not that I have figured out anything special. It’s that I have demonstrated an interest in them and a willingness to serve them. I don’t think I’m smarter than Merrill Lynch or Goldman Sachs. I think I simply made a decision that they have chosen not to make. If they put their minds to it, everyone else in the financial services industry could also serve the mass affluent successfully. They have simply chosen not to because they don’t believe doing so is as profitable. And they have placed profit ahead of community responsibility. We believe that we can serve this audience both effectively from the consumer’s perspective, and profitably from our investors’ perspective. And I continue to be disappointed that the rest of the industry continues to turn away from the 99% of the country who desperately needs their help. See: How RIAs are becoming as complacent as wirehouses — and what it’ll take to snap out of it.

SG: Isn’t a key differentiator your willingness to charge enough to make it feasible to serve this part of the market? You charge fees upwards of 2%, which seems to be a leap that many advisors are uncomfortable with.

RE: I don’t know if other advisors are uncomfortable doing it and I don’t think that’s the key point. The total fee our clients pay is no more, and in fact is usually less, than what they were paying at other firms. Because, although another advisor’s fee might be 1%, that advisor might also be placing them into investments that cost 11/2%. So the client’s total fee, at 21/2%, is more than the total fee they pay with me, which might be 2.3%. And that’s the worst-case scenario for a client: When clients’ assets go up our fee goes down. Most of our clients are not paying 2.3%, of course.

So I’m not sure if that’s the total basis. I think the reason is that the advisor says, 'For a million-dollar client at 1%, I make more money than a $50,000 client at 2%.’ And it’s because of that that they are unwilling to serve the mass affluent. You must serve larger numbers of people in the mass-affluent space to earn as much as you would earn with the high-net-worth space. And if I’m going to have twice as many clients, I’m going to have twice as much work. And for that reason advisors say no, if I were to speculate. Advisors don’t want to have to manage 500 clients; they only want to manage 100 clients. And if they can make as much money doing it that way then that’s what they’ll chose to do.

SG: But you saw that you could do it, using a McDonald’s-type approach.

RE: Correct. We’ve built an organization that has scale. And that takes a significant amount of time and effort and risk, and many advisors prefer not to work that hard.

SG: You just finished your third season of the PBS television show, The Truth About Money, and I’m curious about whether that generates a different kind of business than the radio show generates. Does it bring you more-affluent clients?

RE: No. It is a similar clientele. And the primary focus of that show, as it is with all of our other activities, is consumer education and brand awareness. The public television audience is a difference audience from my radio show audience, so it works very well for brand extension and for executing our education, which is a primary goal that we have.

Competing with Suze

SG: I’ve heard advisors complain that they’re at a disadvantage to someone like Suze Orman because she isn’t an advisor and doesn’t have to look over her shoulder at regulators. You’ve been on radio and TV for many years dispensing advice, why haven’t regulatory concerns stopped you?

RE: Because I’m careful at what I say. The regulators aren’t saying don’t be in public. They aren’t saying don’t do radio, TV, books and seminars. They’re saying make sure that your comments are fair and balanced and that you comply with advertising guidelines. If you are a responsible, professional advisor, it’s easy to provide the education that consumers need while conforming to the rules set by the SEC and FINRA. See: With SEC coming down hard, TV and radio star RIA principal in San Diego makes his case to listeners.

SG: We haven’t heard as much about you opening new offices over the past couple of years, have you slowed down and why?

RE: In 2013 we focused our energies on adding additional advisors to our current offices rather than adding additional offices. We’ve had such strong demand in our current offices that that’s where we had to focus our energy.

SG: You had a big acquisition in the works last year that ended up not happening. Are you still in the market for a major acquisition?

RE: We are still in conversation and that’s all I have to say at the moment.

SG: You’re still in conversation with that same entity?

RE: And others.

SG: One of your charitable interests involves the nursing profession. Can you talk about that?

RE: We’ve tied in our philanthropy with our financial planning. For example, we provide free financial planning services for nurses all over the country. Anyone who’s a nurse, and their family, we will provide free financial planning services. We created the Center for Nursing at Inova Hospital, in northern Virginia. Nurses are overworked and underpaid, and too-often underappreciated. Unlike schoolteachers and firefighters and police officers, nurses typically don’t have a pension. They typically don’t have very good employee benefits. And yet they are on the front lines just like teachers and police and firefighters. And so we wanted to particularly reach out to nurses to help them achieve financial security.

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See more related moves

Mentioned in this article:

Portfolio Management System
Top Executive: Andy Rachleff

Betterment, LLC
Financial Planning Software
Top Executive: Jon Stein

Robert Boslego

Robert Boslego

December 21, 2013 — 4:09 AM

But the Edelman investment approach is buy-and-hold, which is out-of-touch with 85% of all investors, who want some form of downside protection.

The Wealthfront and Betterment business models can’t compete with Vanguard.

I think this may be Wealthfront’s third pivot, but a with new name, more VC money and an old investment approach from the1970s, disproved by Shiller (2013 Nobel Prize winner).

I don’t know what Betterment’s investment strategy is, beyond buy-and-hold.

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