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Exclusive Interview: Ric Edelman Says Reg BI “Unlikely to be Implemented”

Exclusive Interview: Ric Edelman Says Reg BI “Unlikely to be Implemented”
September 17
00:03 2019

Ric Edelman is perhaps best known is chairman and co-founder of Edelman Financial Services, which merged with Financial Engines to become Edelman Financial Engines. As of June 30, 2019, the new firm has more than $200 billion in assets.  He’s the author of several books on personal finance and has been ranked as a #1 New York Times best-selling author. The host of award-winning radio and TV shows, Ric speaks frequently on personal finance and has been a vocal advocate for fiduciary issues.

FN: You’re in a unique position to read how the concept of “fiduciary” has propagated out from the world of ERISA and the DOL into the realm of the retail investor and the SEC. What can you tell us from the front lines? How have retail investors taken what they’ve learned about “fiduciary” from their 401k plans and applied it to their non-retirement investment accounts?
Edelman: The notion of fiduciary has indeed migrated from 401k plans to general consumer investing. Nearly 90 percent of those surveyed in 2018 by Edelman Financial Engines said all financial advisors who provide advice on retirement assets should be required to put their clients’ interests first. And I can tell you, as the founder of the nation’s largest independent advisory firm, people contacting us for the first time increasingly ask if we are fiduciary. That question never came up a decade ago. This is a wonderful trend.

FN: The SEC has now issued its Reg BI. What’s your take on it? Will it perform as delivered or will it come up short? In what ways can regulators improve on it?
Edelman: The SEC’s Regulation BI is terribly disappointing. It not only fails to protect consumers; it actually makes the situation worse. Under the proposed rule, stockbrokers – who are prohibited from calling themselves fiduciaries – would be allowed to say they serve their clients’ “best interests” which is a phrase widely associated with being a fiduciary. The confusion that will ensue will be very damaging to investors nationwide. But the rule is unlikely to be implemented; it’s being challenged not only by financial advisors who are fiduciaries, seven states and the District of Columbia have filed lawsuits against the SEC. And dozens of states are drafting their own regulations and legislation to do what the SEC has so far failed to do. I’m hopeful that the SEC will create a rule that truly protects investors.

FN: Being active in the marketplace, how much has “fiduciary” been driven by market demands and by marketing, as opposed to by regulatory actions?
Edelman: Both, and that’s what makes our economic system so wonderful. Consumers control the economy, not the government, and they vote with their wallets – giving their business to firms that meet their needs. Since consumers are increasingly demanding that their advisors act as fiduciaries, firms are racing to accommodate them. And other firms, already fiduciaries like Edelman Financial Engines, are happy to promote that fact. We’re finding that being a fiduciary, something that clients never fully understood or appreciated decades ago, is now a differentiator in the marketplace. It helps us win clients who prefer to choose us over banks, brokerage firms and insurance companies – because we’re fiduciaries and they are not.

FN: What’s the biggest challenged faced by fiduciaries today?
Edelman: The biggest challenge is the lack of a level playing field. As a fiduciary, everything we do is in each client’s best interests. As a result, there are many things we can’t say or do that other competitors can. We often find brokers, insurance agents, banks, mutual fund companies, annuity promoters and others making claims and distributing products that are clearly not in the client’s best interests. They can make public statements we aren’t allowed to make, and our silence hurts our ability to compete. Everyone in the financial services industry should be required to adhere to the same rules, because consumers don’t realize that different organizations are subject to different sets of rules.

FN: On a different note, let’s talk about younger (as in teenager or college aged adult) investors. There was an article from the Harvard Business Review a few years ago that reported 70% of “Gen Z” (for want of a better label) are self-employed and only 12% have “traditional” teen jobs. How have you seen this zest for teen entrepreneurial activity translate into their interest and manners when it comes to investing? Do you see teens buying individual investments (whether they be stocks or bitcoin) or have they followed their older brothers and sisters and gone the mutual fund/ETF route?
Edelman: The younger and less experienced a person is, the easier they think investing is and the more likely they seek “get rich quick” schemes. As they gain experience, they learn to avoid such notions, and most of them eventually adopt the more effective, established approaches to investing.

FN: In the same vein, how have these many self-employed teens done when it comes to setting up retirement plans? Are they self-starters here, too, or do they require a lot of hand-holding on the part of professionals?
Edelman: I have never seen a teenage business owner establish a retirement account. That’s too bad! In their 50s, they will discover that they wasted a huge opportunity.

FN: It won’t take much for them to retire as multi-millionaires of they start a Child IRA as a teenager. What do you see happening that might encourage more teenagers to do this?
Edelman: Increased financial education is the key. Showing young people the power of compounding – a 10 minute lesson – is all it takes to instill a lifetime habit of saving and investing.

FN: What role have the parents played in guiding their children in terms of beginning their financial journey? Are the parents proactive and encouraging, or have they remained short-sighted and pessimistic? To what extent have these teens begun to seek an independent path without relying on their parents?
Edelman: Most parents don’t discuss money with their children. And most have poor financial habits themselves, so they clearly have little to teach, other than the “don’t do as I have done” story. Every survey says the same thing: parents don’t talk about money, and children wish they would.

FN: Some have written that teen entrepreneurialism offers the kind of differentiation that can help them get accepted into elite colleges. How might their entrepreneurial success impact their desire – and their need – to obtain a traditional college education?
Edelman: College is overrated. A third of freshmen drop out, and less than half of students graduate within 6 years. A large portion of graduates are working in fields that don’t require a college degree, and millions – graduates and dropouts alike – are saddled with massive student loan debt. Teens who start businesses quickly discover that they’re getting an education no school could ever provide.

FN: Where do you see Gen-Z getting its financial and business learning from?
Edelman: Experience. It’s the best teacher, but it’s also the most time-consuming and expensive.

FN: Finally, what will financial professionals need to do to remain credible with this skeptical do-it-yourself generation? How might they need to change their strategies that have been so successful with Baby Boomers?
Edelman: Wait. Youth is always distrustful of older generations – until they become older themselves. So while it’s fine (and fun) to manage your affairs yourself when you’re young, with no spouse, house, kids or money, you’re likely to discover in your 40s and 50s that you now are married or have a partner, you’re a homeowner, you have children – and you have a lot of assets. You also have a lot less time – you’re closer to retirement than ever. Thus, your willingness to “go for it” and take risk is greatly diminished. You’ve also discovered, through your experiences, that you’re not as good at managing your finances as you once thought. All this encourages you to change your view, shifting from a do-it-yourselfer to one willing to hire a financial advisor. Our strategy, as advisers, is thus simple: we keep doing what do, and we keep reassuring younger people that we’re here when they’re ready for us.

FN: Ric, once again it’s been a pleasure “talking shop” with you. No doubt many of our readers enjoy that you’ve reaffirmed what they’ve either experienced themselves or believe themselves. As the fiduciary world evolves, it will be interested to see what more you discover! 

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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