Transcription
Rick Edelman started a small advisory practice with his wife and grew it into one of the largest independent RAs in the US. It manages over 250 billion in assets right now. And today, he's going to share some of the secrets he used to help us get to the point where he is today. So, if you're an advisor, here's what we're going to do.
What would he do differently if he was starting from scratch today in 2024? Second, we're going to talk about overcoming early challenges as an advisor. And then third, how to scale in 2024. And then also, how are advisors using AI in their practice and what to look out for for the next three to five years and all the shifts that are going to happen over that time period.
So, let me know too in the comments, do you like these kinds of videos? If you've been on the channel before, you've seen some other videos from me, usually one-on-one. But if you like this sort of interview style, let me know. It's really, this whole channel is for you. It's, uh, something I created years ago because, uh, started in 2009 and I was looking for other advisors to learn from. Not a lot of people were sharing what worked, what didn't work. So that's why I started this in 2016. So anyways, if you're an advisor, subscribe and I'll have more videos each week. But let's get into the video for today with Rick Edelman.
Okay, Rick, so you and your wife, Jean, you started and you built one of the most successful RAs in the country. It's at levels where, you know, I can't even comprehend it right now. But I'm asking, if you can remember the early days of being an advisor, maybe the first five, the first 10 years as you're figuring it all out, starting from zero, right? You started from with nothing with the firm. Do you, can you remember any big, uh, breakthroughs or moments or things that happened in the early years that actually you remember moving the needle more than the other things you were doing or things that kind of stuck out as like, oh, this was a pivotal point?
Well, we began my wife and I in this business because of a bad experience we'd had personally. Uh, we were young, newly married, neither of us were in the financial field. Uh, and we, uh, went to a financial advisor for advice. We wanted to buy a house, like any newly would. And that advisor ended up giving us very bad advice. In fact, he told us to commit a felony. He told us to lie on our mortgage application in order to qualify for the loan. And that incensed us. We could not believe that he would tell us to do something like that. And that's when we said, you know, if this guy's going to give us that kind of advice, that's just, forget that. Why don't we just learn on our own, teach ourselves this topic, let's figure it out ourselves, and then let's teach others what we've learned to help others avoid the experience we had. And that was the impetus for our starting our own little financial planning firm in 1986. And the key for us was to do two things, uh, which I didn't know at the time, but in hindsight, made a huge world of difference and I think is responsible for why we ended up creating the largest RAA in America.
You mentioned the numbers are kind of hard to digest. Uh, they do kind of blow people away. 300 billion in AUM, um, 1.4 million households, uh, as clients. Um, on our, uh, we're the largest advice provider to 401ks now. We serve about 40% of the Fortune 500. Um, so yeah, the numbers are kind of astonishing. Um, what set the stage for all of this is that we did two things that we now realize are different from everybody else. The first thing we did was that we targeted people who Wall Street generally ignores: the mass affluent. We targeted people who didn't have a lot of money. Most financial advisors want to go after the high net worth or the ultra high net worth market. They want people with, you know, millions of dollars to invest. They don't want to talk to people with a hundred grand. We were happy to. In fact, our account minimum was $5,000. And if you didn't have the $5,000, we would talk to you anyway and help you out as a pro bono case. Um, our attitude was, we will help anyone willing to receive our help. Uh, and we specifically went after, uh, that, that group. And in fact, the very first way we did this was by doing seminars for elementary school PTAs. We went to parents in their 20s and 30s who had young children. We're talking about people with not a lot of money, right? Because they're young in their lives and spending all their money on child rearing. So, uh, we were willing to help people who weren't getting help from anybody else. And we did it this way because we wanted to make an impact in their lives. I mean, you help rich people, you know, somebody who's a multi-millionaire, all you're going to do is help them become even richer. So what, um, but you help somebody who doesn't have a lot of money, now you're making the difference as to whether their kid gets to go to college, uh, and they get to retire in comfort. It's a much more impactful business. So that was the first thing we did.
And the second thing, relevant to my comment on seminars, we recognized that what we didn't want to do is only help a handful of people. And that we also discovered is different. Most financial advisors only want 100, maybe 150 clients. We wanted to help thousands, tens of thousands from the beginning. Yeah, my, my, my, the admonition I gave my staff as we were growing and developing was always, don't do anything for any client that you can't also do for a thousand clients. It was always all about scale. Um, every process, every procedure, every policy, uh, everything you do has to be replicable. Something you can replicate. You've got to be able to do this at scale, or it will collapse under its own weight. So, yeah, serve the client, just figure out how to do it in a way that you can repeat without a lot of effort so that we can serve more clients. And that's why we did seminars. We realized we had to get our knowledge, our content, our education, our information out to the marketplace to be able to help as many people as possible. And so we began by doing seminars. We did those college planning seminars for pretty much every elementary school in the Washington DC area over a couple of years. That got, you know, word spread, that got me invited onto the radio. Uh, I was eventually offered my own radio show. I was the pretty much the first financial advisor in the country on radio. I, I basically created that entire, um, career path for advisors. I, um, was on the air 32 years. Um, my show was in the top 100, uh, radio shows in the country. Uh, the only, I think the only financial talk show host in the top 100 by Talkers Magazine. Uh, that got me onto television, where I've hosted several TV shows. I was on Oprah five times. Uh, that led to my writing books. Uh, and my 13 books have all been national bestsellers, including number one New York Times bestseller and published in eight or nine languages. Um, and it was all about trying to reach as many as possible through mass media, um, and broadcasting in a way that no one else had ever attempted before, because it was all part of scale. How do we? I don't want to help one person, I want to help as many people as possible the way I help one person. Uh, and we discovered with the benefit of hindsight that nobody else on Wall Street was doing this. Nobody was targeting the mass affluent, and nobody was trying to build a business at scale. Uh, and they're still not, quite frankly. Um, there have been some improvements over the years. I've been trying for decades to get the financial services industry to do this because it will be beneficial to them, but it'll be impactful for American society to uplift so many families from lower economic strata to the middle class and the middle class to the upper class. Um, but it falls on deaf ears because it's complicated, it's cumbersome, it's expensive, it's time-consuming, there's a limited ROI, relatively speaking. And so not very many organizations have expressed interest in doing this. Technology has made it a lot easier with the development of the internet and, uh, your mobile, uh, apps and such. It's made it a lot easier. And we now see robo-advisors and we see apps like Acorns and, uh, and stuff like that, which has improved access for lots of people in a great way. Look at Robinhood, for example. Um, so it's gotten a lot better. Um, but we were pretty much pioneering it way back when.
How far off do you think AI is from helping mass affluent and actually having conversations to fit that market if advisors have, if it's been this long where that we're not able to do it or don't want to do it, when do you think technology will come in and actually do it?
It's coming fast. Within five years, I would expect by the end of the decade, we will see this. The AI use of the financial planning environment is going to be the last element that Wall Street adopts. We're already seeing AI in security analysis. It's being used to help, uh, asset managers, man, you know, pick stocks and and do trading. That's easy because it's pure numbers. What's harder is the, uh, analytical behind, uh, the advice you give a client because now you're dealing with human emotion, you're dealing with bias, you're dealing with, uh, personality, you're dealing with childhood. You know, here's how my mommy and daddy taught me about money or didn't teach me about money. So, uh, and, and the human dynamic between husband and wife or partners. So it's a, it's much more challenging for AI to get there. Uh, so that'll be the last element of AI. But we're already seeing firms using AI for scale, for efficiency. We're seeing AI being used to write client newsletters, uh, or market update letters. We're seeing AI being used to respond to client emails. Uh, we have automated chatbots that are able to answer basic, ordinary, routine questions from clients, such as, send me a check from my account, or, you know, what's my market value today, or what have you. So we're already seeing AI being used, and it's going to grow at an exponential rate. Many people in the industry fear that they're going to lose their job to AI. They're not. You are, you as a financial advisor will not lose your job to artificial intelligence. You will lose your job to a competing financial advisor who's using artificial intelligence. So you need to learn how this works, you need to adopt it and incorporate it into your practice, or you will be obsolete.
So when it comes to service and client service and thinking about who, how many, and how we help people, do you just, would you imagine right now at our firm, we've got a few advisors, we've got about a cap of about 100 advisors per, or 100 clients per per advisor. Do you see that number just growing in a big way? How many clients we can help as individuals because of AI?
Sure, no question about it. I mean, at Edelman Financial, advisors routinely have 400 clients or more, because we have systems that we've been put into place over decades that dramatically improve the advisor's productivity. So that's been the case without AI. Now, you add AI to this, and you can clearly automate a lot of the grunt work that frees the advisor up to spending time with their clients. So, if we've seen all the industry surveys, the typical advisor spends a third of their time on back office administration, operations, trading, compliance, etc. They spend a third of their time on marketing, looking for the next client. And they only spend a third with their existing clients. If your current client knew that you only spent a third of their time thinking about them, they'd be unhappy. So if you can automate the back office work and if you can delegate the marketing, you've just tripled your capacity. You can now go from 100 clients to 300 clients and nobody suffers in in customer service. So AI is a tremendous timesaver that advisors are going to use to their benefit.
I'll give you just a couple of examples. You're in a client meeting, you have an AI assistant sitting in on the call, taking notes, recording what's being said and summarizing it for you and automatically populating your CRM. And then automatically putting into the calendar the to-do work, the next steps of things that you are promising the client you're going to do next. And reminding you three months later, oh, their CD is coming due, you need to get a hold of the client. And writing the email to the client about that maturing CD and giving you the analysis on what you ought to be doing with the proceeds and how it ought to fit into the portfolio allocation. All of this automated basis. All you got to do is click a button saying confirm, and boom, it's done. So you don't have to do the grunt work of administratively operating your practice. Let technology do that so you can do what the client's truly paying you for, which is thinking about their life, thinking about the strategies to improve their life. That is where it's priceless. What you're worth to that client. And AI will just allow you to do it faster, easier, cheaper, safer, more accurately, and in total compliance with regulation. It'll be wonderful.
And that's simply, I know you don't need to keep up with this, this stuff, but are there, I know there's a lot, well, not a lot, but there's a few notable firms out there that are geared towards advisors and doing exactly what you just said. Um, do you, uh, what you just said is that happening now, or is that soon to happen?
Oh, it's already in place. It's already underway. This technology is already doing a lot of what I've just described. Um, and, um, and even more so. You really simply have to get, uh, up to date on the software providers that are available. I mean, we've gone through the decades where we added, uh, CRM, where we've added portfolio management systems like Orion, uh, where we added rebalancing software like iRebal. I mean, you go to Schwab, and they give all that software to you for free, you know, if you custody with them. I mean, this is now just table stakes. This is routine. AI is simply going to be the next layer. Uh, and there are dozens of software vendors that are already making those products available for you to plug and play into your CRM and Orion platforms. So, and you'll find Orion adding it to as an offering into their platform, just like they added rebalancing software, um, and tax, uh, calculations, um, you know, for tax loss harvesting and and tax reporting software. Um, so it's going to be table stakes. It's going to, you're not going to find a financial planning firm that isn't using this. Go, go find me a tax preparer who doesn't use tax software. Impossible. That's where you're going to find financial planning firms and AI in the future, and not very distant future.
Yeah. Now, this is a thought exercise. Imagine, so let's pretend you're 30 today in 2024, and you're, you're two years in the business, you've got an assistant, and that's it, so solo advisor. And you want to grow, you want to scale, you got enough to provide for your family. How would you, you said seminars and then radio and it kind of grew from there, speaking to the masses. What do you think you'd do differently today if you were in that position?
Yeah, uh, I would, uh, you can't do what I did. You can, and I'm not saying that out of arrogance or obnoxiousness, that you're not as good as me, although frankly, you're not. Um, the real, the real issue is that the, what I did and the way I did it simply doesn't exist anymore. When I started in radio in the 1980s, um, they actually paid me. I was, uh, I'm a card-carrying union member. I'm a member of SAG-AFTRA, the American Federation of Radio and Television Artists, which merged with SAG, the Screen Actors Guild, some years ago. Because to be on radio, you had to be employed by the radio station. And I, I have a pension. I've started receiving my SAG-AFTRA pension last year. Um, and, uh, it's like a whopping $350 a month. Woof. Um, after 32 years on the radio, I get $350. Um, the, uh, the notion of it was that I was an employee of the radio station. I was a member of their casting team, conforming with all FCC rules. That doesn't exist anymore today. If you're a financial advisor and you want to, you know, get on a radio show, you've got to buy the time. They're going to sell you the time and treat you like an advertiser. Uh, the SEC now treats those shows as advertisements, requiring them to be compliance, uh, compliant, uh, to be able to produce. Uh, it's just very different. So you literally can't do what I did back in the day. It doesn't exist. More importantly, more fundamentally, what I did isn't something I would recommend that you do. I would recommend you do it very differently. In fact, I'd recommend Dave that you do the exact opposite of what I did. If I were starting out today, I would not attempt to be a broadcaster. I would instead be a narrowcaster. In other words, when I go on the radio, and I had an audience of a half a million people every week on my radio show, my podcast has 100,000 listeners. It's in the top 1% of all podcasts in the world. But I don't know who these people are. Um, and I didn't know who the half a million listeners were. And think about it, you know, this is a radio broadcast going out to the entire city. Uh, I was in every city in the country, which is why I had a big audience. But in each city, you know, there I'm going to capture some people who are in my target or a lot of people that are not in my target. And you don't really know who they are, and you don't really know how to reach them. What I would do today, thanks to the internet, thanks to social media, thanks to the incredible targeting we can now do technologically, I would narrowcast. If I want to, instead of trying to be the financial advisor to the masses through mass media and mass marketing and broadcasting, I would now narrowcast. I would decide, for example, the only people I want to serve are plumbers. And I would go target the plumbing conventions and the plumbing magazines and the plumbing websites and chat rooms, and I would make myself known as the plumbers' advisor. There are advisors already doing this. I know one advisor who only serves pilots of, uh, Delta Airlines. That's it. If you're not a pilot at Delta, not just pilot, pilot at Delta, right? He won't serve you. I know another guy who has his office across the street from Marriott's World Headquarters. He only works with Marriott employees. He's an expert in Marriott's, uh, stock options program for executives because that's who he targets. And by narrowly doing this, as you pointed out, your advisors have 100 clients a piece, maybe they'll get to 300 clients a piece. How many Marriott employees do you need to have as clients? Marriott's got probably 100,000 employees. You think you can find a hundred of them? So by narrowly targeting who you want to serve, maybe it's divorcees, maybe it's retired widows, maybe it's Fortune 500 executives, maybe it's high school soccer coaches. Pick your affinity. If you're a golfer and you love to hang around with golfers, then just, you're only going to serve golf pros, or you're only going to serve people who work in the pro shop at a country club, or you're only going to serve chefs because you're really into cooking, or you're only going to serve artists because you love art. Pick your cohort. Decide who you're going to, who you're going to serve, and just do that. And I think you can build a very effective practice. And if you're trying to build a big practice, then you get a hundred advisors, each having their narrow niche. Separate narrow niches, not okay.
Yeah, just like a medical practice has a bunch of docs in it, and they, you know, you've got an oncologist, and you've got a geriatric, and you've got a pediatric, and you've got a this and a that. And dentists, you've got the, you know, orthodontist, and you've got the periodontist, and you've got the this and the that. You've got lawyers in a given law firm, someone's in environmental law, somebody else does tax law, somebody else does whatever law. They're all in one practice. You could do the same thing. And now you can cross-refer to each other because you know, I only serve this kind of a client, but their brother is that kind of a client. And now there's a way to build the business, each of us being experts in our own little area. I like that.
Now, thinking back to or forward to the future of the industry related to business models, do you think the AUM model is going to shrink as Baby Boomers get older or then die off eventually, and more subscription model or retainer model is going to be more popular? Any thoughts around that?
I think the AUM model is safe. Uh, I keep seeing these industry pundits talking about the death of the AUM model in favor of flat fee, retainer fee, subscription fee. I think they're all crazy. And I note that pretty much all of them who are saying that the AUM model is dead are themselves not practicing financial advisors. They are pundits, they're columnists and journalists writing in the field. They're standing back, looking at the field. They're trying to apply the technology marketplace, which is a subscription model, look at Netflix and, you know, and everybody else that charges a subscription fee, and they're trying to apply that to the financial services industry. They're wrong. They're crazy. They're they're not going to win, uh, long term for one simple reason. Consumers are happy with the AUM model. Consumers don't like to write checks for an hourly rate or an annual retainer. They don't want to write a check for a subscription. They are happy to have the fee debited by the advisor on a quarterly basis based on the size of the account. It is a model that works and has worked, and they're very happy with it. And I see, I don't see any fee pressure either. I don't see investors clamoring for the fee to come down. Uh, and I, I think this is just, uh, a bunch of conversation within the trade that no consumers really care about. Now, as you move up the chain of net worth, when you get to the ultra high net worth people with, you know, $100 million to invest or whatever, yes, for them, it's going to be a flat fee or a retainer because they're not going to pay you an AUM model, or the AUM fee would be so low, you know, 10 basis points, that it's the equivalent of, oh, write me a check for $100,000 and I'll, you know, we'll call it a day. So for the ultra high net worth, a family office model, that's different. But for the typical investor who's got a million, three million, five million, or let alone $100,000, uh, I think that the AUM model is safe. I think it is effective. Uh, I think it serves the client's best interest. Uh, and I think it provides an effective revenue stream for the advisor to be able to operate their business sustainably and profitably. So, I, I'm, I'm not at all concerned about the AUM model.
Okay, couple minutes left. Uh, I wanted to get your take on, do you think PE firms are going to continue this? It seems like aggressive acquisition strategy of these RAs out there. Do you think it'll be more and more consolidation into massive firms?
Yes. Uh, my firm was the first to engage in the PE marketplace. I did my first deal back in 2005. I have now sold my company six times. Uh, there will, there will be a seventh, uh, and final transaction for me in the next, I don't know when, certainly by the end of the decade, I would guess. Um, the nature of that transaction, TBD. Um, so I've done a lot of this. Uh, we've also done a lot on the buy side where we've bought, uh, other firms. And now it's, you know, we kind of open the doors to everybody in the PE world to help them realize, wow, what an opportunity this is. The RA market is massive, it's huge, and it is incredibly profitable. And the PE marketplace has, PE firms have a ton of capital, and they're always looking for great opportunities. And they have woken up to the recognition that this is a target-rich environment. Uh, you add to the fact that the RA marketplace is largely, uh, founder-driven. You know, I was first-gen. So you look at people like me and Ken Fisher and others, we invented this industry. The financial planning industry did not exist in the 1980s when I got started. We kind of invented it. We're all now beginning to age out. Uh, and, uh, starting to look at selling or retiring or stepping aside or doing whatever. You know, and I'm kind of there. I'm on the board at Edelman Financial, but that's it. I'm not involved in management any longer. Still a shareholder, but that'll, you know, go away soon. Um, and that creates opportunity for PE to come in, because, you know, as a founder, I'm looking for liquidity, and PE's got the cash to do it. And so we also have another issue related to this all at the same time, which is conspiring to contribute, Dave, and that is that when I started in my business back in the '80s, it's safe to say that every client of my firm, I was their very first financial advisor because nobody grew up ever needing one. You know, if you were going to retire at 62 and be dead at 65, you didn't need a financial advisor to help with your financial future because you weren't going to have one. You'd be dead. But as people began to live longer, and their lives got more complicated with employee compensation, and divorce became more common, and that creates an issue, longevity becomes an issue. Now I got aging parents and so on, and more likely that my kids are going to college. That didn't happen very much in the '50s and '60s, but it did in the '70s and '80s. Life gets more complicated, and I need a financial advisor. The advent of mutual funds created a complexity. Tax law changed in 1986 that created a complexity. So the need for advisors grew. And I was the first advisor for my clients. That was true for every advisor. We were the first you ever hired. But today, in the, in the 21st century, know, here in 2024, it's safe to say that every advisor, every client in the country who wants an advisor has one. You might be on your second or third at this point. Which means it's harder to grow organically because if I'm going to win a new client today, I'm going to be taking one from somebody else. It's now become a zero-sum game. It's like Coke vs. Pepsi. Everybody who wants a soda is getting it. And the only way Coke increases their market share is for Pepsi to go down in market share. So it's a mature industry. And that means that if I want to grow my business, I'm not going to grow it organically. I'm going to grow it through acquisition. I'm going to buy, not just, I'm not going to just recruit a client, I'm going to buy a firm that has a thousand clients. And M&A becomes a big deal. But M&A requires capital. And who's got the capital? PE. So at the very moment that the founders are aging out, looking for liquidity, and firms seeking to maintain their growth trajectory need to do it strategically rather than organically, along comes PE, white knight on the horse, saying, we've got the money, and we've also got the know-how to do the deals. These folks are smart. I've dealt with a lot of PE firms. These folks are smart, and they know how to do things that the RA founder doesn't necessarily know how to do, to the benefit of everybody. So, uh, yeah, you're going to see a lot more M&A, a lot more consolidation in the industry over the next decade. But at the same time, interestingly, this M&A activity does create opportunity for solo advisors to remain independent by themselves. So you will see some continuing to be doing their own thing by themselves the way they've always done it. But I think the bigger firms are going to get bigger through M&A. And I continue with the prediction I made 10 years ago, you're going to see a trillion-dollar RA. And chances are, the first one is going to be Edelman Financial. I mean, we're already almost a third of the way there. Um, so yeah, M&A is going to be huge, and PEs are going to be the drivers behind it.
Interesting. Do you have time for the certification program? We're talking about the future of the industry, and we didn't even, I didn't ask a question about, uh, investment specifics, specifically the investments that not everybody thinks about, meaning crypto and Bitcoin. Can you share a little bit about that?
Yeah, I, I've been involved in the crypto space since 2012. You know, I am a futurist. That's why I wrote "The Truth About Your Future," uh, which was a New York Times bestseller. And the key is for us to always be looking forward to the next opportunity, the next technological innovation. Crypto is it. Blockchain and digital assets represent the biggest investment opportunity of a decade. Um, it is, uh, Internet 3.0. We all wish we'd invested in the internet back in the '90s. We missed it. We blew that. This is an opportunity to capture it. And that's why I wrote "The Truth About Crypto," which explains all of this. Why we offer the CBDA, the Certified in Blockchain and Digital Assets Professional designation. It's listed on the FINRA database of designations. Uh, it's a, uh, the CBDA is an online self-study course. You can blow through it in a weekend. The average is 10 days to completion. It has a world-class faculty. You get 18 CE credits. And it teaches you to understand what this technology is, why it matters, why you need to be paying attention to this, and why this is one of the best client business building opportunities you're going to come across this decade. An opportunity for you to find new referrals, new clients, new AUM, and in many cases, doing this without ever recommending Bitcoin. I'm not out there saying you really got to buy Bitcoin. What I'm really saying is you've got to understand this asset class because 50 million Americans already own it, including a lot of your clients. I'm willing to bet that 10, 20, 30% of your clients already own Bitcoin. And now that the Bitcoin ETFs and the Ethereum ETFs are available, it's never been easier to add this to a diversified portfolio. And if you truly believe in modern portfolio theory, there is no reason not to add crypto to that portfolio. Uh, and you really need to learn about this technology to fully understand all of this and to be able to answer your clients' questions. Advisors who are ignoring crypto are going to be embarrassed as their clients ask them questions that they can't answer. And the clients are now expecting you to be able to answer these questions. Like, you don't have to sell annuities to realize you need to understand them. And the same thing is true with Bitcoin. You need to understand it so you don't look silly in front of your client. You can't just dismiss it as a fad or a fraud. Those days are long gone. Uh, and so, uh, I built, um, our crypto education company, uh, back in 2015 to help financial advisors learn about this. And our CBDA designation is now held by thousands of financial advisors from 37 countries. So yeah, I encourage you to go to dfpc.cfpc to learn more about this. Uh, and, uh, it's, I think one of the best investment opportunities of the decade, and I don't think you want to dismiss it or ignore it any longer.
Yeah, so don't ignore learning about AI. Don't ignore learning about crypto and Bitcoin and talking to clients about it. Two big pieces to the future of the industry and advisors. So this has been great, Rick. Thanks for sharing your wisdom. Thanks for helping us as advisors as we're planning things out and figuring it out. It's, it's fantastic. So thanks so much.
My pleasure, Dave. Thanks for the opportunity to chat with you.