No Longer Just for the Moneyed, Financial Advisors Are Coming After All of Us

Ric Edelman has been named the number one independent financial advisor in the country by Barron’s three different times. He heads up a $10 billion practice, with 20,000 clients, that manages more money than nearly any other financial advisor in the industry. And, he hosts a popular syndicated radio show and a TV show on PBS. Among independent financial advisors—known as Registered Investment Advisors (RIAs)—Edelman’s a legend for his ability to attract “the mass market,” or those of us who wouldn’t consider ourselves wealthy enough to afford a financial advisor.

The only problem? You’ve probably never heard of Ric Edelman.

“We’re an open secret,” joked Edelman, though he acknowledged that lacking the marketing or name recognition of a Schwab or Fidelity or eTrade makes reaching the average American a challenge.

Until this past January, Edelman’s client minimum was $50,000—still lower than most minimums in the industry. In January, he launched Edelman Online, which allowed him to reach more of the mass market by scaling with a higher degree of efficiency. Anyone with $5,000 can now be a client, paying a 2 percent fee up to $150,000 in assets (or $100 a year for $5,000 in assets), with the fee decreasing above $150,000 in assets.

The retail wealth market in the U.S.—meaning all the money managed by professionals—is an $11 trillion business spread out across thousands of advisors and brokers and banks and mutual fund firms. RIAs are the fastest growing segment of that industry, largely because in the wake of the 2008 financial crisis many people lost trust in Wall Street and brokers. RIAs aren’t paid by commissions and typically earn a flat fee, usually one percent, on all the money they manage. They also are held by government regulations to a fiduciary standard that requires them to put their client’s interest first. (Obviously, many don’t, but the fact that the regulation exists at all has encouraged more money to pour into that sector.) There will soon be 30,000 RIAs nationwide competing for a portion of your money.

But, most of those advisors require a minimum of $500,000, some even require a client to have $1 million, before they’ll manage your money or offer financial planning advice.

Nationwide, there are just over $30 trillion in investable assets and another $13 trillion in retirement assets. Most of that money, though, is held by people with less than $500,000. The average consumer has around $8,000 in personal assets. With more advisors competing for a piece of the pie, they’re increasingly beginning to turn their attention to the rest of us.

“A big part of the market is people like you and me,” says Betterment CEO Jon Stein. Betterment, an online RIA, is part of a growing push from new internet-based financial advisors to offer a viable solution for the mass market.

Edelman argues that it’s important for the industry to reach people they’ve traditionally ignored. Often those people need more help than those who are already wealthy.

“It’s much more important to help people become wealthy,” said Edelman. And, even if you can’t make as much money serving the lower-end of the market, it may pay off as those customers go on to earn more or refer you to friends, he said.

It’s not that no one’s ever tried this before, but with a handful of exceptions (The Mutual Fund Store being one) they’ve generally failed. The reason financial advisors typically haven’t been able to crack into the mass-market space, reaching all those hundreds of thousands of us with $8,000, is that they haven’t been able to make money doing it. Charging 1 percent on assets means that even $50,000 would earn an advisor just $500/year. That’s not enough to make it worth their time to talk for too long with you about your financial problems.

At $500, an advisor has to take on a lot of $50,000 clients to pay for offices and staff and overhead. Often, that requires an unmanageable number of clients, requiring more staff and infrastructure. Those things typically haven’t scaled well. Adding a financial planner to the staff, earning $100,000, would require 200 $50,000 clients to just cover their salary—much less anything else.

“Most advisors are not interested in the mass market for exactly that reason,” said Edelman.

Traditionally, advisors have gotten around these problems a couple ways: charging more or cutting the costs, by sending clients to a call center or implementing standardized intake surveys that shuttle a new customer off to one of several recommended model portfolios based on their preferences and goals.

That’s all become a lot easier now with the help of technology. A half-dozen new “online RIAs,” many based in the bustling Silicon Valley start-up scene, are aiming to solve this problem and provide financial advice to Middle America—and make money doing it.

“It’s the future,” said Stein of using internet-based technology to cut down on costs and provide wealth management advice to wider audiences.

Among the most well-known of these offerings are Betterment, Wealthfront and LearnVest, which all offer variations on the same idea. They each use a smaller number of financial experts and a high number of engineers to create a tech-based wealth management system or offer financial planning. By cutting down on costs, these firms all are able to offer financial advice to the masses.

Any of us can log into their websites, set up an account, use the online tools they have to pinpoint our financial goals, receive investment recommendations, and allocate money to portfolios following the recommendations or changing them to suit our needs—all without talking to anyone. You then get updates, reports, and notifications of any changes via email or internet alerts. Often, you can call up the company and get an advisor on the phone if you have any problems with the system. But, most people don’t.

Your money is then managed, just as if you were wealthy. Sort of.

“We’ve built advice that’s appropriate for the wealthiest investors, but made it accessible to all,” said Stein.

Betterment charges between .15 percent and .35 percent annually depending on the amount of assets you have on the platform. They have no minimum and until recently an average client size of around $5,000. (Their average client size is closer to $10,000-$12,000 now, with $200 million on the platform.) Wealthfront charges .25% annually on assets over $10,000, with a minimum of $5,000. The average client size is closer to $80,000 and it has $170 million. Both also use ETFs (electronically traded funds), which also charge a .2 percent fee. LearnVest charges $19/month, with a start-up fee for a planning meeting. All are awash in venture capital money.

[Note: The differences between the various online RIAs are difficult to lay out or to follow. If you want a thoroughly entertaining take, read this Quora thread between the CEOs of Wealthfront and Betterment arguing over which is better.]

Even traditional RIAs, like Edelman, are using these kinds of online intake tools and cost-cutting technology to streamline the advice process and expand into the mass market. The biggest broker-dealer in the country, LPL Financial, last year also launched an arm, named NestWise, aimed at the lower-end of the market and relying heavily on similar technology.

“It allows us to serve more people without additional costs,” said Edelman.

The (probably fair) assumption inherent in all this is that the average person’s financial problems are not that complicated. Most people don’t require nuanced estate planning or corporate tax advice. Most people can have all their needs met with basic financial planning and standardized model portfolios diversified across the market, which can be provided more easily than ever.

To date, most people without lots of money have set up a Fidelity IRA, stuck it in a savings account, or tried to invest themselves using eTrade.

The one thing RIAs and the new online RIAs can agree on is that all those options aren’t giving you the best bang for your buck, because they don’t tell you what you need to do to achieve your goals or pick funds for you and rebalance the returns or offer any kind of planning advice.

“It’s a totally different kind of experience,” said Stein.

“Fidelity will recommend funds, but they won’t give advice on if you should buy life insurance or what to do with your will,” said Edelman.

The online RIAs have been popular with young, tech crowds—even those who could afford a regular financial advisor—because these people want more than what an IRA or 401(k) might offer, but they don’t want the hassle of meeting with a live advisor. Wealthfront has attracted a large number of Silicon Valley hotshots, for example, who aren’t interested in traditional advisors. The companies are now focused on using their venture capital to expand across the country.

But, not everyone’s sure they’re going to be able to.

“I question the economic viability of some of these sites,” said Edelman.

Edelman also designed Edelman Online to attract young people with very little in assets. His theory was that these people needed financial advice more than anyone. The adage goes that if you wait until you’re 40 to start saving for retirement, then it’s too late. But, instead, his average online client so far is 54 years old and has $25,000 in assets. Where are all the young people with no money?

“I worry about people in their 20s and 30s,” said Edelman.

 

Kelly O’Mara writes for a living, mostly for places you’ve never heard of.

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44 Comments / Post A Comment

CL (#3,590)

What a profoundly irresponsible article/ad. 2% fee? Are you insane? Even Betterment & Wealthfront are stupid, trendy choices.

Hope you’re getting lots of referral $$$ to make up for sacrificing your integrity.

Mike Dang (#2)

@CL This is simply a news story about why financial advisors are going after people on the lower end of the market, and how they’re going about doing it. It’s by no way an endorsement. And no, we aren’t getting any money for mentioning any of these services. We don’t even link out to them. We aren’t that kind of website.

CL (#3,590)

@Mike Dang OK, then how about the part where the author (who works for RIABiz, an industry news site that is funded by RIA advertisements) tries to make us feel sorry for advisors who “only” make 2% a year, which in reality is an exorbitant and unnecessary fee for a young person without any complex financial or tax-related issues?
You may not be making any money off of this, but this is an ad, and that is sad.

Mike Dang (#2)

@CL The only section that mentions a 2 percent fee is this one: “Anyone with $5,000 can now be a client, paying a 2 percent fee up to $150,000 in assets (or $100 a year for $5,000 in assets), with the fee decreasing above $150,000 in assets.” Which does not make me feel any sympathy for these advisors. Does anyone here feel sympathy for these advisors?

@CL You’re right I do work for different publications for a living, including financial industry ones, which was how I knew that financial advisors are trying to get into the larger market. That seemed like something Billfold readers would care about, since that push is aimed at them. I’m not trying to make you feel bad for anyone; just explaining the economics of why this hasn’t happened before on a wide scale. Certainly not telling you to use any of these things. I don’t.

CL (#3,590)

@Kelly Dunleavy OMara@twitter Then why didn’t you fact-check your source’s claims about non-advisory investment options? I mean, you remember the time that Edelman told his radio listeners that Vanguard charges a (non-existent) 1.4% annual fee, right?

@CL I don’t think anyone in the article made any claims about Vangaurd or other funds.

CL (#3,590)

@Kelly Dunleavy OMara@twitter I don’t think that’s what I said. The point is, if someone is notorious for lying about something, why wouldn’t any responsible journalist fact-check the next time they talk about that thing?

limenotapple (#1,748)

(Edited the first part of this comment because Mike already addressed it above by the time I posted)

Is there a difference between an RIA and other people who give you advice on what to do with your money? Because we meet with a nice lady 3-4 times a year who helps us invest and we don’t have Big Money. So I’m not sure if I’m missing something.

@limenotapple There is a difference between different types of advisors depending on the types of advice they give you, but if you’re paying some nice lady a fee and getting investment advice and that works for you, then that’s good for you. It just hasn’t happened on widespread scale until now, so that’s what the story was about.

CL (#3,590)

@limenotapple Um, if you don’t have tons of money and you need to change your investments 3-4 times a year and don’t know exactly why, then you’re doing it wrong.

limenotapple (#1,748)

@CL I don’t necessarily make changes 3-4 times a year, but I like touching base and having someone go through all my statements on all my investments with me. I’m not sure why that would be wrong.

CL (#3,590)

@limenotapple Well, you’re probably losing money by paying to have someone hold your hand. But I’m sure you know that already.

limenotapple (#1,748)

@CL I guess I don’t understand the snark? She doesn’t charge me for individual meetings. I pay her the same whether I meet with her weekly or annually or never. Why in the world would you be condescending about it?

@fo (#839)

@limenotapple

I agree, seems really misplaced. Are people “losing money” by spending it in any fashion that CL does not approve of?

Perhaps, lime, you *might* be spending more than you need to, to get the advice/direction/comfort you receive/desire/need, but there is nothing to base that conclusion on from “having 3 or 4 meetings a year”. Comes across like axe-grinding from CL.

CL (#3,590)

@@fo No snark intended. But paying for financial advice is, by definition, losing money, unless your advisor can consistently beat a simple portfolio of index funds by a greater percentage than whatever they’re charging you. Countless studies have proven that this is not going to happen, not over the long run. And while 1% or 2% might not seem like a lot, that’s cutting into your return of 7% or whatever, so it actually is quite a lot.

@fo (#839)

@CL “unless your advisor can consistently beat a simple portfolio of index funds by a greater percentage than whatever they’re charging you.”

Sure, BUT (1) lime gave no indication of the charge, so assuming 2% (as you noted a *huge* number) is off base, and (2) if a person’s financial paralysis is such that the realistic alternative to a “simple” portfolio of mutual funds is laddered CDs, then 100 bps is a clear winner, AND (3) is darn easy to, without advice, get into funds that are charging 100 bps more than a similar, better fund would, so if you’re getting good direction (yeahyeah, poor assumption) on that and a cup of (bad office) coffee a couple times a year, that’s going to be worth it to MANY MANY people. Not the right thing for you, maybe not the right thing for any given person, but the right thing for lots of people.

*Especially* if it is an adviser who won’t try to sell you a whole-life product.

@fo (#839)

@CL “paying for financial advice is, by definition, losing money”

ALSO:

Paying more than you have to for *anything* is ‘losing money’ by the same definition. Yes, one can invest on one’s own, but not everyone wants to, or is going to without assistance. One also *can* cut one’s own hair, but that doesn’t make paying for a haircut “losing” money.

Yes, 2% is too much, no matter how much Edelman wants to paint it as not enough to fund a good advisory firm. BUT, there is a limit to how cheap good guidance can possibly be–you aren’t going to find someone willing to do it for 10 bps on $15,000 (ie, $15). If you aren’t getting something more than really baseline advice, you’re probably better off just walking into Fidelity or Schwab or whatever and asking to put $$ into a (or two or three) low-cost index fund. They’ll get you into something that costs very little in fund fees, and will accept your $1000 starting investment.

CL (#3,590)

@@fo @@fo Sure. My main concern is that if you’re paying someone to give you really straightforward financial advice, then you probably don’t have the skills to evaluate the quality of that advice. Which is what could really cost you. My idea of “paying for advice” is spending maybe $50 on a few books, getting into index funds or ETFs at Schwab or Vanguard, then asking the people at Bogleheads to review your portfolio. End result: a portfolio that is probably more “individually-tailored” than advice from any low-cost financial advisor’s algorithm.

@fo (#839)

@CL “if you’re paying someone to give you really straightforward financial advice, then you probably don’t have the skills to evaluate the quality of that advice”

BUT (and don’t fight the hypo): for your ‘unskilled’ person, the options are probably: get ‘free’ advice at the bank, or pay ‘too much’ (but not an objectively large amount) to someone to hold their hand thru the process of getting into bona fide investing. The delta in the likely rewards is *probably* worth it for that ‘typical’ ‘unskilled’ person.

It is certainly likely enough to be the better course to not dismiss it out of hand.

On the algorithm point, *that* is a possibly major problem, as it can put a lot of momentum into the market from trades made based on changes dictated by the algorithm.

Caitlin with a C (#3,578)

I do not have any huge beefs with the content, but c’mon, guys.

This post would look at least 50% less shady if instead of saying “Kelly O’Mara writes for a living, mostly for places you’ve never heard of” at the bottom, The Billfold said something like “Kelly O’Mara writes for a living at RIABiz, as well as for a number of running, cycling and triathlon magazines”. Just sayin’.

Mike Dang (#2)

@Caitlin with a C Kelly has written for us before (which apparently also turned out to be a controversial story). We reused her bio from her last story about not having children. Nearly all of the writers who contribute more than one story reuse their bios. It wasn’t like it was done intentionally to hide anything.

Yes, we usually run essays. This was pretty much a news story written in a straight news way. And why not try running a news story instead of an essay? See this New York Times story—it reads in a similar way. Writing about a financial product doesn’t mean an endorsement of a financial product. There is nowhere in Kelly’s story where she says, “You should absolutely be getting on this and should sign up with all these people.”

CL (#3,590)

@Mike Dang There are a lot of problems with those types of stories. I thought that the Billfold understood that.

Caitlin with a C (#3,578)

@Mike Dang Not complaining about the content or style or suggesting that this is some kind of push article. However, if I wrote an article here on the topic of the thing I do for a living, I as the writer wouldn’t feel comfortable without announcing my affiliation. That’s because no matter how I tried, I would at least partially be writing as “Caitlin with a C, Professional ___” or “Caitlin with a C, Expert on ____” instead of just writing as “Caitlin with a C, Billfold Debbie Downer/DC resident/specific service I wrote about user/whatever”. Maybe a good practice going forward?

Mike Dang (#2)

@Caitlin with a C Most definitely. I just wanted to make it clear that it wasn’t done intentionally.

@CL And what is your issue with the NYT story exactly? It certainly doesn’t make me want to run off and sign up for Betterment.

j a y (#3,935)

@Mike Dang I didn’t think the article was particularly pushy – but the focus on EdOnline/single source was a bit heavy. And contextualizing fees would be important (2% is significant, but to the uneducated, might not seem like it).

Perhaps an article that was more generalized (“What options are available to small-portfolio investors?”) might be more useful to this audience.

The difference is that NYT etc has tons of stories on all different options, whereas Billfold seems to be more limited in scope and personal in nature – so when ONE option is focussed on in an article of this nature absent of other articles… it feels like a recommendation, though that may not have been the intent.

j a y (#3,935)

@j a y I’d like to point out where the language of the article can be misleading:
“Edelman’s a legend” (despite the context of the entire sentence)
“The only problem? You’ve probably never heard of ”
“We’re an open secret,”

Language like this creates an atmosphere of “best kept secret”. The intent was probably just to create reader interest but…

@j a y The language was trying to create the idea that there’s these financial advisors most of the market has never heard of who are now trying to sell themselves to that same market. But, I can see how it created that atmosphere.

And, it’s probably fair that the Billfold hasn’t done articles on lots of different investment options, so this stood out. I hadn’t conceived of it as: here’s this investment option. I had conceived of the story as: here’s this interesting piece of news, ie. that people are trying to target those who haven’t been targeted before.

j a y (#3,935)

@Kelly Dunleavy OMara@twitter Since interactive feedback with readers and authors is available on the article, context and opposing opinions are provided (in abundance!)

It’s interesting to note the negative reaction toward fee-based advisors. That level of vehemence usually reserved for commission-based advisors. Skeptical/DIY crowd here, I guess – me included in the latter. DIY is always going to be the cheapest, honesty-guaranteed option, but some people do not want (aren’t capable?) to learn the basics themselves.

Perhaps an article comparing commission/fee/DIY options would’ve been a good lead-in.

Ret Marut (#3,476)

I’m just glad no one has uncovered my shady secret agenda of tricking Billfold readers into reading about Karl Marx and thinking about duck penises.

@fo (#839)

@Ret Marut

I bet if you ask nicely, Mike will delete that, and hopefully everyone will forget.

@fo (#839)

Jumping directly in the fray:

While I don’t share the … strident … reaction of others, I do have to admit that it reads a bit more like ‘sponsored content’ than seems to have been the goal.

MissMushkila (#1,044)

What do we call acquaintances from high school who after college call and ask you to get a cup of coffee, and you say “hell, why not?” but when you get there they are wearing a suit and want to talk about your investment options and get the numbers of everyone you know now.

Are those not financial advisors? They definitely wanted to advise me about my money (and everyone else). And I am a teacher so I’m not exactly in the half million income sphere…

@MissMushkila This one is easy: assholes.

@fo (#839)

@MissMushkila “Are those not financial advisors?”

Aren’t most of them trying to sell life insurance? Many of them are genuinely (or genuinely working toward becoming) ‘financial advisers’, but most of them, at that stage of the game, are trying to score the ‘whole-life’ policy sale.

MissMushkila (#1,044)

@@fo I really have tried not to hang around long enough to find out. My boyfriend has used their services before though, and while he did get a life insurance policy they also advised him about student loan possibilities and other investment options. And made him a lot of financial graphs.

(actually, the graphs were sort of cool, but I can’t handle the part where they want me to give them the numbers of everyone else I know)

j a y (#3,935)

@MissMushkila Oh hell no. If they’re willing to bait and switch you about coffee, they’ll probably be unethical with your money too. At best, they’re well-meaning dupes: “Um, yeah, I think we can get you a guaranteed 8% return on your investment/Primerica”… Sure, send me the details in writing.

I like all these passionate comments, when my only qualm with the article was that it was too dry and too long and I didn’t even finish it.

lalaland (#437)

Question – I’m sure the Billfold doesn’t get $ for this guy, and it’s possible Kate O’Mara wrote this for the Billfold, for free. But did Ric Edelman pay her to write this?

Because he’s really the only one interviewed here, and a quick Google search on him kind of depicts him as the modern day sleazy insurance guy.

Just wondering.

In any case, I agree with everyone here – this was poor writing. I’ll manage my own money, you know you can buy ETFs on your own, right?

@lalaland No, Ric Edelman did not pay me to write this. The Billfold pays, though not much since they don’t have much money of course. He was just a source, since he’s trying to make money off expanding financial advice to more people.

Of course you can buy ETFs on your own and stocks and mutual funds and indexes and whatever you want for the most part.

lalaland (#437)

@Kelly Dunleavy OMara@twitter Thank you for clarifying.

theballgirl (#1,546)

Interesting read. My parents have had a RIA/Financial Advisor for probably 15 years. They are absolutely not wealthy. They paid him a flat fee at the beginning, (something horribly small, like $500-700) and now meet with him 2-3x a year to review their retirement portfolio and discuss, among other things, how much those damn kids cost them. They also – sometimes – call him when they want to make a big financial decision. His fave line is “my answer is never yes/no. It’s ‘how can we do this’?’. They say it was easily the best money decision they’ve ever made and have referred him to several friends, including my mom’s office. He supported a close family friend when her husband died – financially and as a friend. They push me to use him, but now he does some sort of .5 – 1% charge as he’s with a big bank (my parents were grandfathered in), which, boo.

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