The industry is shifting toward fee-only planning, but many of the top firms aren’t even going to attempt a transition, says Ric Edelman, chairman of Edelman Financial Services.
After 30 years and a monster merger with Financial Engines, his firm announced it did away with its commission-based products earlier in the year, in favor of an assets-under-management structure that draws a more positive perception from clients.
“Clearly, clients have it better today,” Edelman says. “There are better disclosures, better products and better outcomes, which has forced many in the industry to frankly quit.”
The combination of Edelman Financial and Financial Engines has already produced a giant among financial service providers overseeing about $200 billion in assets. Edelman says he will add a significant amount of new advisors to the firm, which already serves ten million clients, including in its 401(k) business.
However, many of the large institutions won’t be able to make the shift and many won’t even bother to make a change at all, he says. Especially the largest institutions. “These organizations may have some of the smartest people on the planet working and have virtually unlimited resources, but they will ultimately fail because of a lack of commitment.”
For example, Edelman cites the long-term time horizons needed to serve a 20-year-old client in debt with student loans. Large institutions will likely be unable to wait 20 years to turn a profit, which means they will continue to rely on other fee modes that are better served for the short term.
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Tradition, trust and Google all factor into the choice.
February 4 -
The founder of Edelman Financial Services says his critiques of automated advice have been proven right, and that the merger with Financial Engines sets his firm to reach new industry heights.
September 12 -
Edelman expects to see a wave of similar RIA-robo pairings, pushed by consumer demand for cheaper, unconflicted online services.
May 2
“Will they change their compensation plan to stop incentivizing commissions and selling product?” Edelman says. “Many organizations will just simply poke at it.”
While many firms are going fee-only, Edelman says he doesn’t see a fundamental change in the nature of fees taking place anytime soon. “That’s not a value statement,” he says, adding that advisors inherited a fee schedule and compensation program based on assets that was built over the past 250 years.
“If I was starting this industry today, it would be designed to fit the way the industry currently exists,” he says. “But, that’s both academic and moot.”
Read what Edelman has to say about the current changes taking place in wealth management and the one thing advisors are missing about the client relationship.
Will we see any seismic changes to fee structures soon?
This is the compensation structure we have, based on assets, and it’s not going to change. Consumers are comfortable with it and I don’t see a demand for alterations. It’s not broken, it’s just weird. Movie theaters charge you for the bucket, but give you the popcorn for free. Nobody seems to complain.
How has the advisor value proposition changed?
The value of the advisor is higher than it used to be. There is an incredible amount of information available thanks to technology, but that often just creates more confusion. Advisors are having a shift in their function. Advisors are turning into analyst-evaluators. Here’s what this content means and here’s what you should do as a result. Advisors are not going to continue to make money by promising higher returns and lower fees. We tell our advisors, if in a two-hour client meeting, you’re spending more than 10 minutes talking about a portfolio, you’re making a mistake.
How has that changed the industry?
Clearly, clients have it better today. There are better disclosures, better products and better outcomes which has forced many in the industry to frankly quit. That’s what’s great about this business. The ones that probably shouldn’t be there are going to go — and there are a lot more that have to go — replaced by new players who are redefining what’s possible.
What are advisors missing?
To recognize the life cycle of the client is radically different form the traditional client. It used to be very linear: you go to school, go to work, retire and die. You’re retired at 65 and dead at 85. That’s not the way it’s going to be in the future. The linear lifestyle is being replaced by a cyclic one. It’s not womb to tomb employment anymore. Clients are not going to retire at 65 or be dead at 85. Because of innovation in nanotechnology, big data and neuroscience, clients could be healthier at 105 than they were at 85. And, the odds are very high that clients are going to have to change careers or employers, which has massive implications on their income needs. They may have to retrain which is another expense — maintaining a lifestyle while spending on education. Advisors have to get their arms around those topics and add value beyond portfolio management.
