Edelman CEO: Firm Owes Growth to Standardization
Most of the advisory firms that make it to the top of the AUM ladder – or other ranking measures – tend to cater mostly to investors with more than $1 million in their accounts, citing economies of scale as one key reason they avoid the smaller retail accounts.
But Edelman Financial Services – which has been named one the Financial Times’ top 300 registered financial advisors every year since the list was launched in 2014 – is among the few that are very active in this client segment. While the FT 300 advisors had an average of 19% of client assets coming from those with less than $1 million in their accounts as of the end of 2016, Edelman sourced 47% of its client assets from this group. While the FT 300 advisors had an average of around 1,400 clients in the same period, Edelman had nearly 32,000.
The minimum required to open an account at Edelman is $5,000. Most of its accounts range from the minimum to $300,000, but the firm has up to $20 billion in client accounts, amounting to an average client account of $550,000.
Ryan Parker, CEO of Edelman, which now has around $19.5 billion in client assets from more than 33,000 clients, says the firm’s current mix of clients has a lot to do with its founding 30 years ago. He notes Ric Edelman and his wife Jean Edelman “started the practice by basically educating teachers about their 403(b) plans. Those weren’t people who had a lot of money … but they needed advice to meet their goals.” He says the firm still believes everyone must have access to investment advice.
Edelman can cater to a wide breadth of clientele because of its “very standardized way of delivering advice” which the firm achieves through its “mindset and technology,” according to Parker. First came the standardization of financial planning and centralization of investments across all of Edelman’s offices; then came the technology that made the processes more efficient and effective, he says.
Parker says many advisors “spend an inordinate amount of time doing prospecting, portfolio reallocation and portfolio reports.” None of those tasks are done by the advisors at Edelman – and that frees up their time to “meet with clients, educate them, and work on their financial plans.”
Edelman’s advisors apparently have 120 “flavors” or varieties of portfolios to choose from for their clients, he says.
He insists many of the big players in the financial advisory industry “have the size but not the scale” because they are “catering to fragmented ways of running money.”
Parker is speaking from experience, having spent three years at advisory firm LPL Financial and before that at asset managers Russell Investments, Franklin Templeton Investments, and Putnam Investments. He was the managing director for investment and planning solutions at LPL before joining Edelman as CEO in June 2016.
“The challenge others have is they haven’t standardized everything. I came from LPL – which has 14,000 advisors – and 85% of those are mixing their own portfolios. Less than half of them are doing financial planning as an entry point to building the portfolio. That’s just a snapshot of a big industry player,” he says, recalling his time at the firm.
New client onboarding is an example of how standardization works for Edelman, Parker says. Edelman, which has 160 advisors, works with its custodian TD Ameritrade to centralize its client onboarding processes and paperwork into a single hub that interfaces between the two firms, Parker says.
Edelman Financial Services
“Most folks [in the industry] use 135 ways to Sunday trying to get things done,” Parker says. “We use our scale to work with a partner, narrow down the error rates, and have a model where people are focused on execution and client service.”
Edelman is similar to robo-advisors in taking on smaller accounts, but Parker believes the similarities end there, insisting he doesn’t consider the likes of Betterment a direct competitor. Parker notes that Edelman online is essentially a robo-advisor but that isn't the firm's focus and “people who entered into Edelman that way wanted to move into the full-service model right away.”
Betterment’s fees start at 25 basis points annually for digital accounts – or those that use solely robo-advising, depending on the account amount. Investors with at least $100,000 who opt for premium accounts get unlimited access to CFP professionals for guidance and are charged 40 bps annually.
By contrast, Edelman’s clients are charged an annual wrap fee based on account size. The clients' first $150,000 is assessed at 200 bps while the next $250,000 is at 165 bps and the next $350,000 at 125 bps. Fees continue to drop as account amounts increase, with a $15 million account assessed at 50 bps. Fees for accounts of more than $25 million are negotiable.
The standard fee for services charged by advisors with a wealth management model averages around 100 bps, regardless of what services are provided – from planning and advice to implementation, monitoring and rebalancing, according to SEI Advisor Network, a wealth management service provider.
Parker says Edelman has identified 6.5 million households among the more than 100 million in the U.S. as potential targets. “They look like our clients today,” he says, referring to their demographics and need for financial planning advice.
He declines to share Edelman’s client assets growth target but notes the firm has seen a 20% growth in client assets over the past decade.
“We look at that AUM growth but we don’t manage to it,” he says. “Putting lofty number goals out there tends to cause some people to mortgage the short term to get there. The reality is the long term is what’s important.”
Edelman’s main challenges to achieving sustainable growth are “focus and execution,” Parker says. “We have a really compelling message about personal finance. We need to make more people hear it to increase the awareness of who we are and what we do, not necessarily just about Ric Edelman.”
But it’s tough to argue the man is not the firm’s principal brand. The firms’ contact number is “Call (888) PLAN-RIC,” and the website's "About Us" section highlights Ric Edelman’s 2,000-word bio above a 300-word description of the firm.
Ric Edelman has been the firm's driving force since founding it in 1987. He gave up his CEO role last year but has stayed on as executive chairman. With "The Ric Edelman Show" on radio for the past 25 years, nine books on personal finance, and a monthly personal financial newsletter online, he has long been considered the face of the firm.
Edelman plans to add more advisors to its 43 offices across 16 states, particularly where demand for financial planning advice is stronger in what Parker refers to as a “depth vs. breadth” strategy. Parker declines to say how many new advisors the firm plans to hire but notes it hired 65 new advisors over the past three years, bringing its total to 160.
The firm’s advisors have an average of 19 years of experience in financial planning, Parker says. A new advisor hire must have a minimum of 10 years of financial planning experience and a CFP credential before they are even considered, and an internal hire will usually spend about five to seven years in the firm before becoming an advisor, he says.
Among the locations Edelman has expanded to over the years are Washington D.C., St. Louis, and San Diego and Orange County in California.
“We’re adding more advisors in the markets we are in now, before we go into new markets,” he says. “For example, we added more advisors in St. Louis because demand was high there, versus going to Kansas City.”