Thursday, April 17, 2008

Ric Edelman’s “Lies about Money”

Ric Edelman runs a financial planning firm and has authored several books including “The Lies about Money.” I also reviewed his audio book “Building Wealth” (see the review here) and I was interested to see if he would be giving more self-serving advice.

It’s obvious that Edelman is very knowledgeable about financial matters. He has the ability to analyze various financial products and options and make sound choices. What is difficult to determine is when his advice is sound and when it serves the interests of his financial planning firm.

The biggest change from “Building Wealth” to “The Lies About Money” is that he is no longer a supporter of the actively-managed mutual fund industry. His firm has switched to recommending institutional funds rather than traditional mutual funds.

To justify this switch, Edelman goes through a litany of sins committed by the mutual fund industry. This part of the book is excellent. I wasn’t aware of some of the abuses, and his explanations are easy to follow.

The troubling part of this for me is his complete reversal from the earlier book. The mutual fund industry didn’t just start committing these abuses yesterday. Most of the abuses have been going on for a long time. Surely Edelman was aware of all this before now. Once his firm had made the switch to institutional funds, it became safe (and profitable) to run down the mutual fund industry.

This book contains a healthy amount of promoting his firm’s services. Here is how I would paraphrase one part of the book discussing investing:

You can’t do this alone. It’s very complicated and you don’t know enough. Even if you know enough, you don’t have the time. Even if you have the time, you probably want to do something else. Even if you want to manage your own money, what happens when you die and you’re spouse doesn’t know what to do? Even if you decide to go it alone using ETFs, be careful – there are subtle, complicated issues that must be understood to choose ETFs correctly.

Of course, there is some truth in all this, but it is designed to scare you more than it is designed to educate you.

When choosing between an advisor and investing on your own with ETFs, an important issue is the advisor’s fees. An advisor may provide some benefit, but is this benefit greater than the cost of fees the advisor charges? Edelman doesn’t discuss his firm’s fees except to hint that the loads on institutional funds are between 0.5% and 2%. Presumably, his firm charges yearly fees as well, but he doesn’t discuss this.

Edelman discusses many other subjects expertly. But, I wonder when he says that we shouldn’t count on social security and that we’ll need more income during retirement that we realize, is he educating us or is he pumping up the total assets his firm manages?

At one point, Edelman asks the question “has this entire program been nothing but a sales pitch?” Despite the fact that I learned a few useful things, I would have to answer yes.

4 comments:

  1. Here is the fee schedule
    for Edelman Financial. I couldn't remember where I saw the 2 percent before, but I found it again.

    I am currently following the approach outlined in "Lies about Money" myself, using ETFs.
    I have a spreadsheet that I update about once a day to see if the percentage of the asset class goes out of range (indicating a buy or sell).
    It provides a little entertainment value and gives me the feeling I know what is going on with my life savings.

    The long term, average likely annual return for my portfolio is 9 percent (note: an estimate). So lopping 2 percent off that is a hard pill for me to swallow.

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  2. Anonymous: You're right to compare the 2% fee to your estimated yearly return of 9%. This is a big bite. An ETF-based strategy should be much cheaper. Thanks for the link to the fee schedule.

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  3. besides 2%, there seems to be other fees involved with specific mutual fund management fees, etc. But the bottom line is if you want others to manage your money, you must pick the best one. I am now torn between 1 man shop like Edelman's and big but maybe problematic names like Morgan Stanley, Fidelity, T Roweprice, etc.

    Any further advice on which advisor will be among the best?

    Thanks.

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  4. @Anonymous: If you want an advisor, one way to go is find someone who just charges you to make a plan and gets no commissions from trades nor a percentage of your assets. I'd go even further and say that I'd prefer to just pay an advisor $200 or $300 per hour to sit with me for 2 or 3 hours and go over everything and have me walk away with some notes on changes I can make myself.

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