Ric Edelman is looking to add a $1-billion RIA elephant even as he unveils an online consumer strategy aimed at the chipmunks

Already Barron's No. 1 with predominantly a mass-affluent game, the radio dynamo is ready to invest private equity to add a quick $1 billion of AUM

Monday 10.29.12 by Kelly O'Mara

Brooke’s Note: In football, once you establish a ground game then you can kill the opponent through the air. Ric Edelman seems to know that. After decades of working to establish himself as a top dog by building an $8-billion-plus-AUM practice based on clients with $50,000 to $1 million of assets, he is ready to use his field position to his advantage. His two new strategies borrow elements from the big strategic buyers such as Focus Financial Partners and United Capital Financial Advisers, and from the Betterments, Personal Capitals, Wealthfronts and Covestors of the world — the newfangled online players. In each case, he may start with some edges. In competing with the online crowd, he can offer up real people when they’re needed. In competing with roll-ups, Edelman has the advantage of a national brand that has a running start, not to mention plenty of referral flow and cash flow. It might have been easy to write Ric Edelman off as that radio guy five years ago. See: What Ric Edelman is like live on stage. Having essentially purchased Sanders Morris, which initially acquired his firm, the Fairfax, Va., entrepreneur seems to be running to daylight.

Ric Edelman has never been short on big plans, and right now he has two whoppers in the works that address the top and bottom ranges of investor dollars. The chief executive of Edelman Financial Services LLC is in the process of acquiring an unnamed $1 billion RIA in what some see as the start of an aggregation strategy, and, in the coming months, he will be rolling out a new mass-market program that will lower the firm’s minimum client balance by 90%. See: Encouraged by early success in New York, Edelman ramps up office openings.

While Edelman declines to disclose many details of the potential mammoth acquisition — even the name of the target firm — Philip Palaveev, chief executive of The Ensemble Practice, speculates that it’s a higher-end RIA. An acquisition of that size would be a first for Edelman.

Edelman — the aggregator?

Earlier this year Edelman reached a deal with Lee Equity Partners LLC that, he joked at the Tiburon CEO Summit, left him with cash burning a hole in his pocket, See: Ric Edelman strikes a private-equity deal that subtracts $2 million in expenses — now let the after-bidding begin.

He’s not kidding about this deal, though. What he will say about the unidentified target is that it is interested in being acquired by him because it has reached the limits of its own growth potential.“We can not only dramatically improve their office operations to allow them to work more efficiently, we can provide them with substantial numbers of new clients to help them grow,” says Edelman.

Edelman is known for his systematized and highly scalable processes. “Ric relies very heavily on process,” says Palaveev. “It’s much more efficient.”

What are you doing Saturday evening to expand your RIA? Edelman is getting in front of people.
What are you doing Saturday evening
to expand your RIA? Edelman is
getting in front of people.

“Acquiring a $1 billion firm could also play to Edelman’s strengths,” says David DeVoe, managing partner of DeVoe & Co.

If the acquisition goes through, the RIA will become an Edelman office and will be on Edelman’s current technology platform, which uses Orion Advisor Services LLC. The firm will also have access to Edelman’s back-office support and marketing and, most importantly, lead flow. See: Edelman expansion slows; back office 'overwhelmed’.

Edelman, for his part, says he’s interested in his first major buy because he likes the firm and it is like-minded, with a similar emphasis on the full spectrum of mass-market and mass-affluent clients. Making sure the two companies come into the deal with the same long-term goals is key to making it successful.

“If the goal is to help the acquired firm accelerate its growth through radio show leads, then the culture, the integration and the alignment of capabilities and goals will be critical to the future success. Changing organizational behavior is a challenge for any company,” says DeVoe.

Historic low

The new mass-market initiative is an online intake system — Edelman Online — that will bring in clients with as little as $5,000 per household. The website will ask potential clients a series of questions, use the answers to assign them a portfolio recommendations. From there, clients can choose to sign up online with those recommendations or can call an advisor with questions. The portfolio options are the same as the ones Edelman currently uses for existing clients. Anyone also welcome to use the online portal, which Edelman spent the last 18 months developing — $1 million clients or $10,000 clients.

Edelman Online will be rolled out in a test in November and December and go live in January.

“Essentially, what we’re doing is lowering our minimum,” says Edelman. “Everything else is the exact same.”

Edelman Financial, which added $4 billion in assets January of 2010, more than doubling its assets at the time, is propelled largely by leads from his TV and radio show, and hotel seminars. He focuses heavily on mass-affluent and mass-market investors, with a current minimum of $50,000, which he says, “is already the lowest in the industry to my knowledge.” Just over one-third of Edelman’s 18,200 clients have less than $250,000. See: The 10 most influential figures in the RIA business going into 2012, Part 2.

Philip Palaveev: It's the financial equivalent of Nordstrom's.
Philip Palaveev: It’s the financial equivalent
of Nordstrom’s.

Serving the 99%

Palaveev believes it makes sense for Edelman to pursue strategies that target different segments of the marketplace. And, he says, Edelman has been particularly good at branding himself with his radio show, so now he’ll have something for people from both ends of the spectrum who are attracted to his brand or come in from his radio show. See: Barron’s top advisor shares the secrets to his success with rapt RIAs at TD event.

DeVoe agrees. “Edelman’s scale provides the organization with the breadth of resources required to implement several strategies concurrently. Both of these strategies seem to capitalize on assets and core competencies of the company,” he says.

Not for everyone

The one part of the marketplace that’s very underserved right now, both Palaveev and Edelman say, is the bottom end. There simply aren’t many advisors who have been able to successfully serve the vast majority of Americans, most of whom have less than $50,000 to invest. See: 19-advisor firm in Santa Monica jumps to LPL with social media-fueled strategy for the underserved under-40 set.

“Somebody has to work with mass-market clients,” says Palaveev. “It’s a market most advisors stay away from.”

Ken Fisher: We're not doing tiny accounts and wouldn't consider it.
Ken Fisher: We’re not doing tiny
accounts and wouldn’t consider it.

Ken Fisher, CEO of Fisher Investments, with $42 billion in AUM, for example, says he doesn’t do anything with the small accounts that come to him, unless they’re members of existing account holders’ families. “We’re not doing tiny accounts and wouldn’t consider it,” he says. See: Ken Fisher keeps expanding his $42 billion RIA empire despite UHNW head winds.

DeVoe points out that even with Edelman’s success so far and his experience, “It is challenging for any organization to serve $5,000 investors directly in a profitable manner. Even the Schwabs and Fidelitys of the world struggle with making this market segment profitable.”

Edelman disagrees, arguing that not only do those very small accounts have potential, but the industry also has an obligation to serve those people who currently aren’t being served. “We need to serve the 99% that hate us,” says Edelman, “not just rich people.”


To that end, Edelman says he doesn’t plan to make a big profit on his new low-minimum program, which he’ll market through word-of-mouth, telling current clients to send along friends, family, children or grandchildren who didn’t meet the minimums before. He just wants the program to break even. If it doesn’t, he says, he will have to consider shutting it down. See: 19-advisor firm in Santa Monica jumps to LPL with social media-fueled strategy for the underserved under-40 set.

“We’re not necessarily trying to make a lot of money on this,” says Edelman. “It needs to pay its own way.”

There are plenty of other reasons to have a mass-market program like this, though. Those clients, most of whom are younger, could go on to make money down the road, and instead of parking it at a discount broker, they would likely be Edelman clients. It also can serve as a kind of service to family members whose children or friends may not have been able to meet the minimums before. And, of course, Edelman has a track record of making money with small accounts.

While Palaveev thinks it’s important for some advisors to target these mass-market, underserved clients, he has no illusions that it’s just out of the goodness of Edelman’s heart.

David DeVoe: It is challenging for any organization to serve $5,000 investors directly in a profitable manner.
David DeVoe: It is challenging for
any organization to serve $5,000 investors
directly in a profitable manner.

“It’s not to suggest that Ric’s starting a nonprofit,” says Palaveev. “He’s a very shrewd businessman.”

Kevin Costner syndrome

The fee structure will also be the same as for existing clients, meaning anyone under $150,000 pays 2% annually, or $100 a year if you have $5,000 in assets.

In turn, those clients get monthly statements, a client-only portal and tools online, and access to information from Edelman such as newsletters and books.

“Think of this as the discount brokerage option for wealth management,” says Palaveev, in that it’ll rely heavily on some automation and self-service tools. He compares it to buying clothes off the rack — they’re not custom-made, but they can be tailored to fit the wearer. “It’s the financial equivalent of Nordstrom’s,” says Palaveev.

Mostly, Edelman thinks (and Palaveev agrees), it will attract younger potential clients who are technology-savvy — an audience that a number of online tools — such as Betterment, Wealthfront and Personal Capital — are targeting. See: After outcry, Betterment 86’s (but not on purpose) a blog post inflaming advisors.

Jon Stein: In the long term, people are going to wise up.
Jon Stein: In the long term,
people are going to wise up.

But, how many of those clients it will attract Edelman has no idea.

Edelman says he’s suffering from “Kevin Costner syndrome” — a reference to the hit film Field of Dreams. “I’m building it, I don’t know if they will come,” says Edelman. “I have no idea how well this will be received.”

Advisors on tap

One big thing clients will also get — and what Edelman thinks really separates his offering from other technology-focused tools for the mass market — is unlimited access to an advisor. Clients can call or e-mail a team of advisors whenever they want without the limits that are common in many mass-market platforms. See: A $2.5 billion RIA makes its mass-market bid for thousands of new clients.

“We do have advisors that will be available to talk to them if they wish,” says Edelman. “The amount of money they have does not dictate whether they work with an advisor.”

Additionally, while the online intake is a key part of the program, it’s not required. A potential $8,000 client could just call up Edelman’s office, talk to an advisor on the team that will focus on the low-minimum clients, and sign up directly into that same portfolio.

“Some of those other sites, it’s strictly technology with no opportunity to talk to a human being,” says Edelman. “That’s not the case here.”

Lining up behind the competitors

Palaveev, though, argues that it’s hard to say those other sites are or aren’t successful, because they’re “very young.” Sites such as Wealthfront, Betterment and Personal Capital, which offer people the ability to manage their own money online in a series of tools aren’t well known yet by consumers and are “just starting to be offered,” says Palaveev.

Ric Edelman: We believe we're doing something that is currently lacking.
Ric Edelman: We believe we’re doing
something that is currently lacking.

Jon Stein, CEO of Betterment, an online investing tool and broker, argues that its platform delivers just as good results at one-tenth of the fees Edelman charges and with far less time commitment from the customer.

“In the long term, people are going to wise up,” he says.

Betterment has three financial advisors on staff to help clients with more than $100,000 on financial planning questions and goals. And, anyone can call customer services for assistance. The firm’s customer service gets “very high marks,” Stein says.

And, he argues, most people don’t really need or want all the handholding that an advisor like Edelman can provide. Most people, who don’t have complex financial issues, want to be able to go online and do it themselves with the sophisticated tools Betterment offers, he says. “You don’t want to call up a travel agent anymore, you want to go on Kayak,” he says.

Edelman, of course, disagrees and believes he’s offering something totally new that will serve a completely unserved population.

“We believe we’re doing something that is currently lacking,” says Edelman.

Ric Edelman | Philip Palaveev | David DeVoe | Ken Fisher | Jon Stein

Edelman Financial | Ensemble Practice | Fisher Investments | Betterment | Wealthfront | Personal Capital