Caren Chesler - Resume and Articles

April 2012 issue

The Truth About Ric Edelman

Ric Edelman might irk some people, but his aggressive style has made him one of the country’s top advisors.

By CAREN CHESLER

At the end of 2008, a man called in to the radio show The Truth About Money to complain to the host that his financial advisor had lost about 24% of his portfolio. He was upset and wondered whether he should fire the advisor. The host, independent financial planner Ric Edelman, told the caller he should be doing jumping jacks if his advisor lost only 24% at a time when the S&P 500 was down 40%. It was a wise response because, as it turns out, the caller’s advisor was Edelman himself.

Edelman, 54, dodged a bullet, but it’s an example of the kind of potshots people like to take at him. He’s one of those guys people love to disparage, largely because of his amazing success and endless capacity for self-promotion. With a radio show, six books, a column, conferences and nearly half a dozen appearances on Oprah, he’s everywhere. His books (The Truth About Money; Ordinary People, Extraordinary Wealth; and his latest, The Lies About Money) and his radio program, “The Ric Edelman Show,” which allows people to call in for advice, have made him into a personal finance guru rivaling Suze Orman, offering practical advice on how to navigate the sometimes byzantine world of finance. As one longtime industry observer put it, he was Suze Orman before there was a Suze Orman.

But even Edelman’s detractors have to admit he is one of the most successful financial advisors, ever. He turned the concept of the independent financial advisor on its head, showing that just because you forgo working for a brokerage firm and go out on your own it doesn’t mean you’ll always be alone. His advisory firm, Edelman Financial Services LLC, employs 502 people in 42 offices in 13 states. With clients in all 50 states, the firm gradually plans to grow its national network.

EFS, which largely serves mass affluent people with $1 million to $2 million in net worth, manages about $7.3 billion for 16,200 clients. It added more than 2,000 new clients last year and brings in about 200 new clients a month.

Barron’s ranked Edelman the No. 1 independent financial advisor in the nation for 2009 and 2010, and he was No. 2 for 2011, edged out by Los Angeles-based Steve Lockshin, who scored 100 while Edelman scored 99.99 (the scores are based on an advisor’s assets under management, the revenue the firm produces, its regulatory record, the quality of its practice and the advisor’s philanthropic work).

“Ric Edelman is one of the most successful financial advisors as a businessman,” says Charles “Chip” Roame, managing partner at Tiburon Strategic Partners, a consulting firm specializing in the financial services industry.

Roame attributes it to Edelman’s personality, his energy, and his marketing abilities. “Many financial advisors, especially independent advisors, are introverts and customer-service-minded individuals. Ric has a big personality, has energy and is strong at marketing,” Roame says.

Edelman doesn’t like being compared to people like Suze Orman. Not only does she serve different clients—hers, he says, are largely in debt while his are wealthy enough to be concerned about college and retirement savings—but she’s not a financial advisor.

“Jean Chatzky and the Dolans. Dave Ramsey and David Bach. The list goes on and on of people who are very well known for their books and radio or TV shows and seminars, but the difference between all of them and me is that I’m the only one who is an actual practicing financial advisor,” Edelman says. “There’s a lot of advice that sounds good in a book but doesn’t work in the real world. And you can only know that by having long-term relationships with clients.”

He’s not just an advisor. He rewrote the playbook for independent advisors seeking to create a business with real value. When he sold half his firm in 2005 for more than $100 million to Sanders Morris Harris Group, the Houston-based financial services firm founded by George Ball (onetime boss of both Prudential-Bache and E.F. Hutton)—Edelman showed one could build a firm of independent advisors that would have equity beyond the fees it earned. Up to that point, that model was only associated with broker-dealers and a handful of large RIAs specializing in asset management.

“When Ric monetized the equity he had in his practice in 2005, it was really a seminal event in the independent financial advisor business,” says Mark Goldberg, president of Carey Financial and the former CEO of AIG-Royal Alliance, which was once Edelman’s broker-dealer. “It set in motion an incredible discussion in the industry that included valuation methodologies, succession planning and ultimately a shift in relationship between the financial advisor and broker-dealer.”

So why would people like to take potshots at him? In part because of his success. “People who accomplish big things generally engender both admiration and envy, and I think Ric Edelman has accomplished great things,” Goldberg says.

“I can remember when people would say the reason he’s been successful is because somehow he got on Oprah. Or the only reason he’s successful is because of X, Y and Z,” Goldberg says. “At the end of the day, the reason he’s successful is because he’s talented, he’s extraordinarily driven, and he works very hard.”

But it’s not just his success that ticks people off. It’s that he takes aim at some long-standing industry standards, like the amount investors are charged to buy mutual funds and how open the funds are about the extent of those fees.

“Anytime someone is critical of something, it creates resentment,” says Ball, who is now co-CEO of The Edelman Financial Group, the name that Sanders Morris Harris converted to last year. “And there are people that resent the fact that Ric is openly saying the king has no clothes. On the other hand, I think there are many more people within the industry who admire Ric for his candor.”

When he was a financial journalist reporting on some of the limited partnerships of the early 1980s, Edelman would interview the general partners, who would brag about how much money they were raising, and yet few would talk about how much money they were making for their limited partners. As a youngster with an idealistic streak, Edelman says he was appalled.

“I looked at the money these guys were making by giving bad advice. I thought, imagine how much money you could make giving good advice,” Edelman says.

He went to work for a broker-dealer in Virginia, and his wife, Jean, went to work for PaineWebber, the theory being that she would learn the back-office operations, and he would learn the front office, and they would form a firm of their own in three to five years. But then came the stock market crash of 1987, and the broker-dealer firm went bust, forcing the Edelmans to accelerate their plans. They launched Financial Partners Limited with three other reps from the broker-dealer, but within six months, two of the three left. The last one left in 1991, and Edelman, then 31, launched with his wife a firm of their own, Edelman Financial Services.

“The reason we wanted to help people was because we went looking for financial advice, and we couldn’t find it,” Edelman says. “The only resources out there were Louis Rukeyser and Money magazine. And the only advice people got was from stockbrokers and insurance agents, who were trying to sell them stuff.”

They went on a mission to educate people, and they began by doing college planning seminars for elementary school PTA groups. Edelman says the parents would always say, “Why are you talking to us? You should be talking to the PTA for the high school. They’re the ones sending their kids to college.” He had to explain that you can’t begin saving for your children’s college education when they’re 16.

He became known as an educator and was interviewed on a radio show about money. That led to another interview and, eventually, his own show, which he still does almost 20 years later.

“He likes to educate people and help them make the right decisions against a lot of these crooked, self-serving people in the financial services industry,” says Luke Chung, president of FMS Inc., a Vienna, Va.-based software company. “He’s gone against a lot of people in the industry about the fees or hidden fees or conflicts of interest people in the industry have that are not in the best interest of the investor.”

Chung, who met Edelman through a D.C.-based business owners association, says that Edelman, as an early advocate of ETFs over mutual funds, has helped people of modest means, much more so than others in the profession. The greater Washington, D.C., with its bevy of well-paid, federal government employees enjoying generous benefit packages, provided a perfect market for a firm targeting the middle class and mass affluent.

On his radio show last February, Edelman accused mutual fund giant Vanguard of hiding fees of as much as 1.4% annually. The comment sent investors on the Bogleheads forum, a group of nearly 20,000 investors inspired by Vanguard founder John “Jack” Bogle, into a tizzy. Some on the site went as far as to call Edelman dishonest and self-serving.

Edelman’s beef was that Vanguard claimed its total expenses were 0.06% annually, a figure he called “a little disingenuous.” He noted that funds incur other costs for trading stocks, such as brokerage costs and soft costs for product placement. And they pay so-called “market impact costs” when their volumes are large, paying a higher price when they buy and a lower price when they sell. These costs can be as high as 1.4% annually, Edelman says.

Vanguard disputed his claim, and Edelman wound up apologizing for his comment in his broadcast the following week. He wasn’t saying Vanguard’s fees themselves were high, he claimed, but emphasizing the industry average for the hidden costs, a problem inherent in mutual funds.

“I’ve got almost a billion dollars of client assets with Vanguard. If I was trying to be critical, why would I have so much of my client assets there?” Edelman asked.

Commenters on the Bogleheads forum didn’t buy it. One commenter called “davebo” says Edelman is a smart salesman and promoter and knew exactly what he was doing when he made his statements.

“Instead of just flat out admitting that Vanguard fees are low, he tried to cast doubt in people’s minds by quoting an industry average,” davebo posted on the forum.

A Vanguard spokeswoman says the firm’s average fund expense ratio is just 0.21%, or $2.10 for every $1,000 invested. That’s far lower than the industry average, which is 1.15%, or $11.50 on every $1,000 invested.

“I would have thought that the Bogleheads would have jumped for joy that one of their best adversaries had seen it their way,” Edelman says. “Instead, did you see their site? They were saying things like, ‘Did you see how Edelman changed his mind? What a hypocrite.’ Some folks just want to criticize. That’s fine.”

It wasn’t the first time Edelman has publicly taken aim at mutual fund fees. At a conference last year sponsored by Tiburon Strategic Advisors, Edelman, who shared a panel with Vanguard’s Bogle and Morningstar’s head of fund research, Don Phillips, took both to task for not doing more to improve the disclosure or transparency of mutual fund fees.

Edelman’s beef is that mutual fund fees are not disclosed on the mutual fund statements themselves. The fees are disclosed in the prospectus, but there are additional fees listed in a document called the Statement of Additional Information or SAI. Wading through the 200-page document to find all those fees can be laborious, and mutual fund companies aren’t even required to send it to investors. Fund companies are only required to send a prospectus.

A heated exchange ensued and he and Phillips got into it a bit during a Q and A session of the conference, Edelman says. “Ask Don Phillips, but their opinion is that Morningstar does a great job at disclosing fees, that their ratings do reflect fees and that what they’re doing is sufficient,” Edelman says. “I wish they’d do more.”

Phillips declined to respond to several requests for comment. A spokeswoman for Vanguard says the firm is an active advocate for greater cost disclosure and in fact recently wrote the Securities and Exchange Commission to encourage improvement in disclosure and transparency. Moreover, the firm has a cost calculator on its Web site that enables investors to enter any Vanguard fund and any other mutual fund to see the impact that fund costs have on returns.

Edelman’s critics, in fact, say his all-in costs to investors are relatively high, for an advisor. Investors are charged a one-time fee of $800 for a financial plan, if they need one. They are then charged investment fees that are tiered, based on the dollar amount of assets they have with the firm. While a client with $1 million would pay 1.5%, those with less than $450,000 are charged 2%. The average account size at his firm is $440,000. And then there are the embedded costs for the portfolio.

Edelman claims his all-in costs are cheaper than those of his competitors because his portfolio costs are so low. Composed largely of ETFs and Dimensional Funds Advisors funds, they cost just 30 to 40 basis points. Mutual funds can cost three to five times that, he says.

But even Edelman’s close friends acknowledge he ruffles a lot of feathers with his personality. When he was interviewed for this article, Gary Perlin, the CFO of Capital One, used the word “impatient” five times to describe Edelman. “He’s goal-oriented and has a heart of gold, but he doesn’t suffer fools gladly,” Perlin says.

But Edelman’s impatience is a virtue, Perlin says. He saw it firsthand when they both sat on the board of United Way’s greater-Washington, D.C. chapter back in 2003, after a financial scandal rocked the chapter and slashed its annual fund-raising revenues from $100 million to about $30 million to $40 million. The two men sat on a commission brought in to review operations and make recommendations and then sat on the new board created to help right the ship.

“He adjusts his degree of urgency and political correctness to the task at hand. I think it’s one of the reasons he’s been successful,” Perlin says. “The particular situation he and I were involved in, if you waited for all of the niceties of governance and socializing ideas, we just didn’t have time. And so his impatience was actually part of the secret of the success of the venture.”

If Edelman felt it was clear someone at the chapter wasn’t doing a good job, for instance, he wanted to make the tough call early on to get rid of that person rather than waiting to see if things would improve, Perlin says. He was also first to see that it benefited the organization if people made contributions without designating where their money would go. That way, the charity could put the money where it was most needed. When he was campaign chairman, it was customary to have six meetings of the campaign committee before actually soliciting contributions. Rather than wasting time talking about how to meet potential donors, Edelman wanted to just get out there and meet them, Perlin says.

“The last thing you want to tell Ric Edelman is to hold his punches. He’s not good at that. But that doesn’t mean he’s constantly punching,” Perlin says. “But when he feels you’ve reached the point of decision, or when urgent action is required, he’s not going to sit back quietly and let things take their course.”

It’s not hard to see where Edelman got his promotional skills. His dad, Norm, started the Kegler Bowling Club in the 1960s and went on to become one of the biggest bowling tournament promoters in the country. He published newsletters each week promoting his tournaments, and wrote all the copy, laid out the pages, and took all the photos himself. Edelman remembers spending many Wednesdays bundling copies of it together to be delivered to the local post office. It was a time when bowling was a huge, lucrative sport and pro bowler Don Carter became the first athlete to sign a $1 million endorsement deal while athletes like Arnold Palmer and Joe Namath were getting less than $10,000, Edelman says.

Norm Edelman may also be where Ric Edelman got his fighting spirit. The elder Edelman was the first to offer first place prizes of $1,000, a practice that led to his battle with the Professional Bowlers Association, who saw him as a competitive threat. The association began prohibiting its members from bowling in non-PBA tournaments offering prizes of $1,000 or more. Norm Edelman’s response? He lowered his top prize to $999, his son says.

Most advisors are either salesmen or market timers or they are simply seeking out the very largest clients, says Ball. What differentiates Ric Edelman is that he’s a superb communicator, he’s extremely intellectual in his approach to the financial business, and he’s, at heart, a populist. He wants to help all investors, both large and small.

“Wirehouse advisors have no choice but to seek out only the wealthiest clients,” Ball says. “If you look at Merrill Lynch, they said recently that they won’t pay commissions to brokers on accounts with less than a quarter of a million dollars. That highlights what I’m talking about. If my father were alive and he saw that headline, he wouldn’t believe it.”

But if you’re going to be a populist and deal with a lot of people, it’s not practical to reinvent the wheel every time. So Edelman created a uniform planning and investment system that could be applied to lots of people and was therefore replicable, Ball says.

The motto of the firm is actually “One Face, One Voice,” and everyone within the company is taught the same things so that they react identically to a given situation. At most other firms, including the wirehouses, advisors and brokers will improvise or innovate rather than offer a single message, Ball says.

“The flaw with most independent advisors is that they’re actually very good with a prospect client one-on-one and on a one-time basis. But they haven’t created a mechanism that lets them efficiently apply the same methodology to thousands of investors,” Ball says.

For instance, Edelman’s firm has a committee of investment experts and planners that have rigorously designed about 125 investment portfolios for different situations. They then determine which portfolio or group of portfolios is best for which client. Of course if none of them fit, a new portfolio is created. In fact, the firm started with just nine portfolios back in 2005, and that figure grew to 125 precisely because the firm kept encountering cases in which the existing portfolios didn’t meet a client’s needs. Some portfolios are used by just one client.

“We don’t want any client to be dependent on any one advisor,” Edelman says. “We believe very much in the Starbucks and McDonald’s models. We are, indeed, the Starbucks/McDonald’s of the financial planning and investment management field.”

Not everyone would say that’s a virtue. Some think Starbucks’ coffee is too strong and that the company charges too much for it. There are those who would say the same about Edelman. But while he’ll always have his detractors, few can deny his success.

“He’s an outspoken guy,” says Goldberg. “He’s on the radio. The sum total of hours he’s been on the airwaves making public comments, I don’t know if everything he says is right or wrong or boneheaded, but I’m sure if you want to find something wrong, you can.”

And people do. On New Year’s weekend, a caller into Edelman’s radio show blasted him for saying postal workers shouldn’t ask for tips. Edelman had taken his mail carrier to task for putting an envelope in his mailbox during the holidays, despite the fact that mailmen earn an average salary of $52,000, Edelman says. “This guy is asking me for a tip for doing his job,” he says.

In response, a woman left him two voice mails saying she and her husband, who is an attorney, had been listening to Edelman’s show and they thought his annoyance at his mailman was over the top, and that he needs psychiatric help to manage his anger. She then left a second message saying she was a psychologist, that she and three other people had been listening to the show—and that two out of the four of them were lawyers—and they thought it was highly unprofessional that Edelman would spend so much time talking about how annoyed he was with his mailman. She again suggested he get help.

“My favorite line is, ‘My husband is an attorney,’” Edelman says.

After listening to the second voice mail, Edelman gave his response. He pressed a button in the studio and on came the Beatles song: “Help. I need somebody. Help. Not just anybody. Help. You know I need someone. H-e-e-e-l-p.” And with that, he fended off yet another naysayer trying to rain on his parade..

Sidebar: Leapfrogging Wall Street
Twenty-five years ago Ric Edelman was a struggling young financial advisor and George Ball was CEO of Wall Street giant Prudential-Bache Securities. In what is a sign of the changing balance of power in financial services from Wall Street to the independent space, Edelman will succeed Ball as CEO of The Edelman Financial Group next month. Ball plans to remain chairman for a few years.
If the golden rule in real estate investing is location, location, location, the secret to Ric Edelman’s success could probably be summed up in three words: education, education, education. The independent advisor says he was able to build a firm from nothing in 1986 into a virtual empire today, with 73 advisors, 16,200 clients and $7.3 billion in assets under management, by teaching people, in every possible medium, how to manage their finances.
He started off with college planning seminars for elementary school PTAs, but broadened his scope and audience by doing seminars on all kinds of financial planning topics. He began writing a newsletter and soon began appearing on the radio and television. He then wrote a book, and then another six. “By giving our knowledge away for free, we were hopeful that some listeners, viewers, readers or attendees would contact us with interest in hiring us,” Edelman says. (In a video interview last month, Edelman discussed how investors have changed over the last two decades. See http://www.fa-mag.com/ricedelman.)
Many consultants say the advisory business has limited scalability potential. “I proved that wrong with 16,000 clients,” Edelman says.
How did he do it? “In a word, delegation,” he explains. “Most advisors try to do it all. As a result, they hit a wall. Everyone thinks I have a really big ego. The fact is I am willing to hire people who are better at their job than I am.”
In 2003, while his firm was growing—at that point he had 19 advisors, 5,000 clients and $2.5 billion in assets under management—he realized he needed a partner to provide capital and open additional offices. He and his wife Jean also wanted to pull some money out of the firm because at that point nearly all of their net worth was tied up in it. He decided to sell a majority stake.
They hired an investment bank and, as Edelman puts it, “went shopping” for an acquirer. Over the next two years, they talked to banks, brokerage firms, insurance companies and private equity and venture capital firms, and they wound up meeting with more than a dozen. They received six offers, narrowed it down to two, and a bidding war ensued. They wound up choosing Sanders Morris Harris Group (SMH)—even though the other offer was higher—because the firm offered capital, expertise and Ball promised to stay out of the way of Edelman, who retains executive control over Edelman Financial Services (EFS).
The deal was the largest ever done by an independent advisor at the time, and may still be. “It was quite a bombshell when announced in 2005,” Edelman says.
In 2011, the parent firm changed its name from Sanders Morris Harris to The Edelman Financial Group (NASDAQ: EF) which now owns 76% of EFS. Edelman himself owns 11% of TEFG and 24% of EFS, which gives him effective ownerhip of about 33% of EFS. Ball and original founders Don Sanders and Ben Morris own a combined total of 17% of EF shares; other insiders own an additional 5%.
Other major shareholders include Royce & Associates and the T. Rowe Price Small-Cap Value Fund.
For now, Edelman continues to grow the firm and says he will be adding another 20 advisors by the end of the year. “Our growth is based solely on demand: As long as people call us for help, we will grow in order to accommodate them,” Edelman says. “When they stop calling, I’ll stop growing.”
As for the parent firm, Edelman says TEFG owns stakes of 50.1% to 100% in many different affiliates, though EFS generates about 50% of the parent’s revenues and profits. EFS itself converted to fee-only in 2005, but TEFG purchases interests in firms with different business models. He says TEFG continues to look for acquisitions and currently is in negotiations with a firm managing $1.1 billion in assets that could close this spring.