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Exclusive Interview: Ric Edelman Answers Child IRA Question and Reveals Today’s Investors’ Biggest Question

May 20
00:03 2014

Earlier this year, FiduciaryNews.com Chief Contributing Editor ran a series of articles in this and other publications that, collectively, (referenced below) created a theoretical concept called a “Child IRA.” The response was off the Edelman Financial Portraitscharts, and, after so many readers wanted to know how to take advantage of a “Child IRA” right now, a special letter was sent subscribers explaining the “Child IRA” was not real at this time. Under current law, it was only possible if the child had income from the day they were born, limiting its use to child models and actors. A few readers mentioned well-known financial adviser and personality Ric Edelman had patent a special form of a Crummey Trust called a “RIC-E Trust.” Readers asked FiduciaryNews.com to obtain Mr. Edelman’s views on the Child IRA in relation to the RIC-E Trust.

Well, you asked, and Mr. Edelman was happy to deliver.

Ric Edelman is chairman and CEO of Edelman Financial Services, a registered investment adviser (as of March 31, 2014) with 34 offices coast-to-coast. His firm manages more than $12.75 billion for more than 24,000 individuals and families. Ric has three times been ranked the #1 Independent Financial Advisor in the nation by Barron’s. According to Barron’s, “The formula [used] to rank advisors has three major components: assets managed, revenue produced and quality of the advisor’s practice. Investment returns are not a component of the rankings because an advisor’s returns are dictated largely by each client’s risk tolerance. The quality-of-practice component includes an evaluation of each advisor’s regulatory record.” The rankings are based on the universe of applications submitted to Barron’s. The selection process begins with a nomination and application provided to Barron’s. Principals of Edelman Financial Services LLC self-nominated the firm and submitted quantitative and qualitative information to Barron’s as requested. Barron’s reviewed and considered this information which resulted in the rankings on Aug. 27, 2012/Aug. 28, 2010/Aug. 31, 2009.

Ric is also a #1 New York Times best-selling author and host of award-winning radio and TV shows, Ric speaks frequently on personal finance, writes a 16-page monthly newsletter and offers free educational resources at RicEdelman.com.

FN: Ric, thank you very much for taking the time to share your thoughts with our readers. Quite a few have asked specifically that we get your take on a series of articles that appeared both in our publication and others. Before we get to that, tell us a little bit about yourself. How did you get from Cum Laude at Rowan University to where you are today?
Edelman: My degree is in Communications. I interned with a congressman; upon graduation, I went to Capitol Hill to work in politics. Didn’t like it, so became Director of Communications for an association in the medical field. Left there after 2.5 years to become editor of a medical magazine. My publisher also owned some financial pubs, so I started writing for those as needed. That was my entree to the field.

FN: What first attracted you to the field of financial planning?
Edelman: After interviewing people in the field for those pubs, my interest was piqued. So my wife (Jean) and I went to an advisor and got really bad advice. (He told me to lie on my mortgage application). So I decided I could do what he does better than him – and earn more than journalists earn (sorry, Chris). So I joined a small local broker/dealer and got licensed; Jean went to work for Paine Webber, working in their back office. We figured I’d do the client part and she would do all the rest and we’d eventually start our own firm – which we did a year later, in 1987.

FN: You work with and talk to a lot of investors. What do they say is their biggest question in today’s economic environment?
Edelman: “Will I ever be able to retire?”

FN: Our readers tend to be financial service providers and their regulators. What do you think is the most important challenge facing financial service providers today?
Edelman: Our field has become far more complex. Technology, regulation, competition, uncertain public policy, new product introduction, and consumers who are far more educated and experienced than in the past – all these all creating massive revenue pressure and demands that are raising questions about the ability of individual advisors to operate the way they once did.

FN: As you are no doubt aware, the SEC is considering whether or not to make the fiduciary standard apply to brokers who provide investment advice. Currently, only investment advisers work under the fiduciary standard. What’s your opinion on this issue?
Edelman: It is inevitable that the standard will eventually apply to all those who give advice. In the future, people will look back on today’s era with wonder and astonishment, finding it hard to believe there once was a time when the standard was not applied – just as people today look back at racial segregation, women’s suffrage and similar eras.

FN: Should the fiduciary standard apply equally to all who provide investment advice, no matter what their business model?
Edelman:
Yes – with a caveat. Some participants in the field, such as traders, and some investors, such as institutions, don’t need to be considered germane to this conversation. As SIFMA and others have eloquently explained, the application of the fiduciary standard could actually hurt the markets and the economy rather than help. Therefore, thoughtful consideration by very smart people is required. It is too simplistic to think that a single sentence or policy can or should be applied throughout this incredibly diverse and complex industry.

FN: You work with both IRA Rollovers and 401k plans. Currently, only the latter is subject to DOL fiduciary oversight. The DOL is expected to offer a new Fiduciary Rule later this year that might bring IRA’s in the fold. Even if the DOL does this, it’s expected they would leave unchanged current exemptions that allow service providers to engage in what would normally be defined as prohibited self-dealing transactions (i.e., transaction-based fees). What are your thoughts on this?
Edelman: I strongly support all efforts to improve disclosure and fairness.

FN: Recently, we published an article (“What Every 401k Plan Sponsor and Fiduciary Should Disclose to Employees: How to Retire a Millionaire (Hint: It’s Easier Than You Think),” FiduciaryNews.com, February 25, 2014) the led to this article (“This idea will solve the retirement crisis, guaranteed!BenefitsPro, February 26, 2014) that introduced the concept of a “Child IRA.” The concept and its benefits were later spelled out in greater detail in an article published in Benefits Selling Magazine (“It’s time we create a Child IRA,” April 2014 issue). Many readers responded to the idea of a “Child IRA” with enthusiasm (some even thought it was a real thing). A few mentioned your RIC-Trust as a potential real-life alternative to the theoretical “Child IRA.” First, can you briefly describe how a RIC-E Trust works?
Edelman:
I smiled while reading the articles, because they are calling for something that already exists – the RIC-E Trust, which I invented more than 15 years ago. [Here’s how it works:] A grantor establishes the trust, paying a one-time set-up fee of $400. The grantor makes a gift to the trust ($5,000 or more). Future gifts are permitted but not required (most don’t). The grantor names a beneficiary (usually a child or grandchild, but can be anyone). The beneficiary can be of any age, even a newborn. The grantor also names a trustee (usually a family member, such as the beneficiary’s parent, aunt or uncle).

That’s it! Once created, the money is invested into a variable annuity, where it remains until the beneficiary reaches retirement age (set by the grantor) – usually 62 or 65. At that time, the trust is dissolved and the money is available to the beneficiary. He/she can take it anytime and any way he/she wishes – lump sum, monthly income, occasional distributions, whatever. The only way to receive money prior to retirement is death or disability.

The trust operates as a Crummey Trust. I have received 2 U.S. Patents for this – it is truly unique. More than 4,000 trusts have been established so far, and I’ve testified before Congress twice on this topic. (Some view my idea as a solution for the Social Security crisis.) Any financial advisor can provide a RIC-E Trust to any client.

FN: What are some important differences between a RIC-E Trust and a “Child IRA”?
Edelman: You can’t establish an IRA unless you have earned income, which most children lack. IRA rules also limit the amount you can contribute; there is no limit for the RIC-E Trust. And most importantly, the “Child IRA” does not prevent the child from accessing the money prior to retirement. This is the most important element of my design: the RIC-E Trust is an irrevocable trust, meaning the child cannot touch the money. All financial advisors know that if the child is permitted to have access to the account, he or she will do so. The money will thus be spent long before retirement – on college, homes, cars, medical expenses, or just plain squandered away on vacations or beer. The RIC-E Trust prevents this; the “Child IRA” does not.

FN: What’s the most important message you can give to financial service professionals serving the retirement market?
Edelman: Be proud of the work you are doing, for you are impacting people’s lives in a profound way. Make sure others are equally proud, therefore, of the way you conduct yourself. The more you help people and the more you place their interests first, the more success you will enjoy for yourself.

FN: Ric, on behalf of FiduciaryNews.com and our readers, thank you for taking the time to share with us your thoughts on the fiduciary issue and especially for letting us know how the RIC-E Trust works. If this helps even some readers who were interested in the theoretical “Child IRA,” then at least a few young people can someday look back at this article as the source of a major portion of their wealth.  

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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