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Financial Planning > Tax Planning

The One Big Question Ric Edelman Is Hearing Now

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Advisors know that financial decisions must be arrived at detached from their emotions. But that doesn’t mean disregarding clients’ emotions of anxiety, if not fear, amid the fast-spreading coronavirus pandemic.

Yet many FAs “ignoring or dismissing” clients’ angst are likely setting them up for big losses if they ultimately “panic and sell at the wrong time,” Ric Edelman, founder of Edelman Financial Engines, tells ThinkAdvisor in an interview.

Rather than reflexively say “Stay the course,” FAs instead might well advise clients to take some risk off the table, says the veteran advisor and host of a weekly financial call-in radio show for nearly three decades.

On the program, the most prevalent question asked nowadays is: “Do I need to make changes” in my portfolio? In the interview, Edelman discusses how he replies.

He also pointedly opines on several other issues critical to advisors, including 401(k) rollovers, the SEC’s Regulation Best Interest, the Labor Department’s proposed new rule, President Donald Trump’s performance and the proliferation of FA podcasts (Don’t expect 5-star ratings.).

In 2018, Edelman merged the jumbo practice that he and wife Jean Edelman launched in 1987 with Financial Engines.

He remains the largest individual stockholder of America’s largest independent advisory, which manages more than $200 billion in assets, boasts 1.2 million clients and has about 350 FAs in 180 offices nationwide.

Though no longer overseeing the firm’s day-to-day business, he coordinates all financial planning strategies and personally advises several longtime clients of his own. Plus, together with or on behalf of other advisors in the firm, he communicates daily with additional clients.

ThinkAdvisor interviewed Edelman, speaking by phone from his base in Fairfax, Virginia, on July 20. The New York Times bestselling author of 10 personal finance books, including “The Truth About Your Future” (2017), discussed a hot new development in exponential technology due to debut in about a decade.

Those comments came after pointing to client worries that the stock market may suddenly plunge disastrously.

Here are highlights of our conversation:

THINKADVISOR:  Do you have a sense of investors’ emotional state when they call in to your radio show?

RIC EDELMAN: Over the past several weeks, we’ve noticed an increase in anxiety, and I think it’s going to get worse in August and September as we approach the reopening of schools and the restart of sports, and then as we get closer to the election.

How is client anxiety affecting advisor-client interaction?

My concern is that many very experienced and classically trained financial advisors are either ignoring or dismissing their clients’ emotional state. When they call and say, “Should we reduce my risk?”, out of a knee-jerk reaction, the advisors are saying, “No, don’t worry about it. In the long run, it will be fine.”

What’s wrong with saying that?

They could be setting up the clients for significant losses if they end up panicking and selling at the wrong time.

What’s a possible scenario?

At the moment, there’s significant optimism that a coronavirus vaccine will be developed by the end of the year. But if one of the trials fails, the stock market could react very negatively because no one is expecting news of a [significant] delay.

Also when there’s finally a safe, effective vaccine, a certain portion of people will refuse to get it, correct? That will certainly be a negative.

Right. In surveys, 30% to 50% of [respondents] say they’ll [refuse to] be vaccinated. So, then, what good is having a vaccine?

You’re saying, though, that investors need to protect their assets in case an event causes a market nosedive? 

That’s exactly correct.

What are the main reasons for the client anxiety?

One is the question of whether students will return to the classroom this fall. If they do, even on a part-time basis, the medical community is widely anticipating that will dramatically increase the coronavirus infection rate, ultimately leading to hospitalizations and death. If parents don’t send their children to school and have to stay home to care for them, they can’t go to work. This will slow the economic recovery.

What other reasons?

The absence of professional sports is a huge economic loss; it’s a multibillion-dollar business. If we can’t have sports, there’s an enormous domino effect [extending to severely lower sales] of peanuts and beer.

And the third reason?

The election. At this point, Trump is projected to lose, and [many] investors are concerned about Joe Biden’s tax proposals. He’s talking about massive tax increases for people who have investments and who are in high-income tax [brackets]. Their concern is that his proposals could weaken the stock market.

What are callers to your show — who are affluent investors, typically age 45 and older and who have a financial plan — asking about most?

The fundamental theme is: Do I need to make changes? [Such as]: Should I refinance now that interest rates shave dropped? Should I continue contributing to my 401(k)? They’re scared about the market — that it’s too high and is going to fall. So they want to know, for example, if they should lower their equity exposure and move to bonds.

Do you have a general answer to these questions?

Yes, and it depends on [two considerations]. One is: How much do you have in cash reserves? It’s increasingly likely that people are going to lose their jobs and that those who do will remain unemployed for years. We’re telling clients they need to have up to two years’ worth of spending in cash. If you don’t have that, you might need to sell some investments. Better to sell at the current level before they fall in value, than when you suddenly might need money.

What’s the second consideration?

Time horizon. How long will it be before you plan to spend the money [accrued from investments]? If the risk exists that you might sell, then perhaps you should reduce your equity exposure from, say, 60%/40% [stocks to bonds] to 40%/60% or even to 20%/80%, depending on your situation.

My understanding is that, broadly, you’re not in favor of 401(k) rollovers. Is that so?

You should be very careful and cautious before you do one. Rolling money over to an IRA could be subjecting you to significantly larger fees or higher risks than you have in your 401(k).

Why is caution necessary?

There’s an inherent conflict of interest in rollovers: The mutual fund, brokerage and advisory industries all make money by managing assets. So there’s an incentive to encourage you to move the money to the IRA they’re managing, thereby enabling them to earn compensation. That well may be in your interest, but we find that many times it’s in the client’s best interest to leave it in their 401(k).

Speaking of best interest, what are your thoughts about the SEC’s Regulation Best Interest and the proposed new DOL rule?

We’re very disappointed in Regulation BI and the DOL proposal. We’re submitting a comment letter to the DOL. We share the concerns raised by many that, rather than protecting the consumer, Reg BI creates a great deal of confusion and allows people who aren’t serving the client’s best interest to claim that they are. It’s a significant step backward in consumer protection.

What’s your take on robo-advisors right now?

There is really no such thing anymore. The robo-advisors learned that they can’t generate enough revenue based on the very limited services they provided. So they’ve hired financial planners and are providing human advice. At the same time, the brick-and-mortar advisors have recognized there are significant technological benefits that clients demand, like the ability to automate a great many functions. So brick-and-mortar and robo have morphed, as I predicted years ago.

What’s your role at Edelman Financial Engines? I know that, since the merger, you’re no longer involved in day-to-day operations.

I’m still on the board. I’m heavily involved in the strategic direction of the firm. I’m the public face of the firm and coordinate all the financial planning strategies, as well as the investment management approach.

Do the advisors still use your systematized financial planning strategy?

We have one fundamental philosophy and methodology for financial planning and investment management, and all the advisors follow it. So every advisor is providing the same approach, but the advice is very specific to each client.

In the last couple of years, there’s been an explosion of podcasts — including those produced by FAs. As a long-time broadcaster, what do you think of them?

The good news is that technology democratizes access. The bad news is that most financial advisors are terrible at podcasting. They don’t know how to do it well and are unable to generate an audience or a material beneficial impact to their practices. Because of that, most quit after a pretty short time period.

Is it that they don’t have a winning format or that their delivery is subpar?

Both. And their content isn’t worth listening to. Being a broadcaster requires a very different skill set from being a talented financial advisor. Just because you have a microphone doesn’t mean you’re worth listening to.

Has President Trump met your expectations regarding the economy and the stock market?

Prior to the pandemic, yes. People who look at tax law, regulation, interest rates, fiscal policy, the stock and bond markets, and the real estate market would find it very difficult to see anything to complain about. The average American investor has benefited in the years since Donald Trump was elected. That, of course, has radically changed as a result of COVID-19. Whether he’s adopting the correct policies and taking the correct positions regarding the pandemic is a totally different conversation.

Going back to consumer anxiety, what long-term impact is that likely to have? 

People aren’t going to the doctor, including not getting mammograms and colonoscopies, because they’re afraid of being infected with the coronavirus at [a medical facility]. Therefore, the medical community is projecting a significant increase in the cancer rate over the next decade because people aren’t being screened [and diagnosed] today, as they might have been [ordinarily]. And children aren’t being inoculated because moms are afraid to take them to pediatricians.

Are you still enthusiastic about BlackRock’s iShares XT, an ETF that invests in exponential technology developers and users, the creation of which you initiated? You told me in a March 30, 2017, interview that 90% of your clients owned it.

Ninety-percent or more now have it in their portfolios. It’s been producing above-average returns at below-average risk. Its success has led to the creation of more than two dozen ETFs in the exponential technology space, and we’re using many of them. The pandemic is accelerating the development and use of exponential technologies.

What’s the next big thing in that area?

One is 4-D printing, which not only creates an object but does so upon a particular trigger, like light, heat, humidity or time: If you need it, you have it; if you don’t, then it retracts. It’s still under development but will probably be on the market within 10 years.

What’s an example?

It could be something as small as medication that travels in your bloodstream and expands a blood vessel if it becomes clogged. Or it could be as big as a roof over your house — if it detects rain, it will expand the awning.

Sounds magical.

Yes, it’s a very magical time.

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