After 3 decades, Edelman goes fee-only
Ric Edelman has never had a problem taking commissions for financial advice, but after 30 years in business, he decided to drop all commission income at his large and newly reconstituted RIA anyway.
"We are now fee-only," says Edelman, adding that the change became official for Edelman Financial Engines on Nov. 1. "We decided that in this environment, in the evolution of this industry, it was important to be able to say to consumers that we are fee-only – not that there is anything wrong with the commission world, but there is a negative perception of the industry."
Put more vividly, he added, "We said, 'Even though we are drinking water in the bar, there are too many drunks so let's not go into the bar.'"
Selling investment products on commission creates an ever-present risk that advisors will place their own financial enrichment ahead of clients.
However, a regulatory and cultural shift in the financial services industry toward fiduciary client care — in which advisors are legally bound to place clients' best interests before their own – has been growing, in fits and starts, for years. Many firms have dropped or significantly reduced their commission-based business, in favor of charging only fees for service, a change intended to more closely align advisors' interests with those of their clients.
From his early days in the industry, Edelman says commissions have represented a "de minimus" amount of his firm's business, recently accounting for about 1% of revenue.
However, following Edelman Financial Services merger with 401(k) giant Financial Engines this year — which gave rise to a new name for the firm's retail arm, Edelman Financial Engines — Edelman decided it was time to eliminate commissions for good.
Although the firm's 320-some advisors still recommend insurance, they use an outside firm that obtains the policies.
"We remain involved for quality-assurance and a happy client experience," Edelman says, "but the planners receive no compensation when clients purchase policies, nor is there any quota for planners regarding insurance — or anything else, for that matter."
The change means that Edelman's firm is now eligible for inclusion on Financial Planning's Top RIAs list, which ranks the largest verifiably independent firms in the nation by assets under management. Only fee-only firms make the cut. With nearly $200 billion in AUM, Edelman Financial Engines could occupy the top spot.
It also means, at least theoretically, that Edelman's 320 advisors are suddenly available for membership in NAPFA, the elite industry membership organization whose members must be fee only. Given that there are currently 3,506 NAPFA members nationwide, adding members of Edelman's team could provide the organization with a bump in its ranks of nearly 10% overnight.
So is Edelman himself or any of his advisors planning sign up?
"Not to my knowledge," he says.