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

by Kelly O’Mara

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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