Combating health and money crises
Financial adviser takes aim at Alzheimer’s disease and Social Security solvency.
Ric Edelman is one of the best-known personalities in personal finance, and he’s about to get an even bigger audience.
Last year Fairfax-based Edelman Financial Services, the personal-finance firm he founded in 1987 with his wife, Jean, merged with Palo Alto, Calif.-based Financial Engines, a robo-adviser that provides 401(k) plan services to employees of some of the country’s largest companies. Private equity firm Hellman & Friedman, which holds a majority share of Edelman Financial Services, acquired Financial Engines for $3.02 billion.
The combined firm now is the largest registered investment adviser (RIA) in the country with almost $200 billion in assets under management and 1.1 million clients.
The merged company gives Edelman a larger audience for the company’s books, newsletters, podcasts, webinars, seminars, TV shows and videos. “That will give us the ability to reach and impact millions of people more than we’ve been able to reach on our own,” Edelman says.
He serves as chairman of financial education and client experience of the combined company, now called Edelman Financial Engines.
“Ric is a visionary. The one skill that I think has been most relevant and most meaningful is his ability to explain things in a simplified fashion,” says Ed Moore, the company’s sixth employee who is now executive vice president of financial planning strategy. “His first mission, and his continual mission, is still that drive to help as many Americans as possible succeed financially.”
But Edelman also learns from his clients, an attribute that has driven much of his advocacy work. The Edelmans have pledged to donate up to $25 million to fund an Xprize Foundation competition to find potential treatments and cures for Alzheimer’s disease, which can be financially devastating to families. The money will support the competition infrastructure and provide prize money for innovative plans to eradicate the disease.
The Edelmans’ charitable endeavors also include $25 million to preserve and expand the Jean & Ric Edelman Fossil Park, owned by Rowan University, their Glassboro, N.J.-based alma mater. The park includes dinosaur fossils from the Cretaceous Period. In addition, the Edelmans have created the Inova Edelman Center for Nursing, which offers free personal-finance advice to nurses across the country.
Edelman, 60, is active with the Washington, D.C.-based think tank Bipartisan Policy Center and its efforts advocating Social Security reform. “This is the number one financial crisis facing our country, and everybody sees it coming, yet, nobody is doing anything about it,” Edelman says.
Virginia Business has named Edelman to its annual list of 50 Most Influential Virginians (Page 63). He also holds the top spot in the SHOOK Top Wealth Advisers in Virginia.
Virginia Business spoke with Edelman in phone conversations in January and February. Following is an edited transcript of those discussions.
Virginia Business: Edelman merged last year with Financial Engines. What’s the main benefit or the main drive behind the deal?
Edelman: This is a highly complementary merger, which is why it’s so exciting. Financial Engines is the nation’s oldest and largest robo-adviser and serves exclusively the workplace market. They provide 401(k) services to some of the biggest companies in America, about 150 of the Fortune 500. They have 1.1 million clients who are employees in those companies. The services they provide are exclusively focused on the 401(k), helping those employees join the plan, contribute to the plan, make investments and choose investments in the plan. Their services are automated, and they’re very high tech.
Edelman Financial, on the other hand, [is] very high touch. We provide comprehensive financial planning for individuals and families, and our advising services cover everything except the 401(k) world because of regulations.
For example, now we’re able to provide to our clients the technology that Financial Engines has developed and their robust investment management research team.
For them, they’re able to access the financial advisers that we have across the country, who can now provide personal financial advice to those million employees across their enterprise.
They’ve recognized that workers around the country need help beyond their 401(k) in other aspects of their personal finances. They are able to tap into the financial planning expertise and services that we have been providing for 33 years. We’re thrilled that we’re now able to reach them — although there are a million employees who [currently] use Engine Services, the companies [that use Financial Engines employ a total of 10 million workers.]
We can now provide our financial education materials to those 10 million employees: our books, our newsletters, our financial education content, our radio show, TV shows, and videos, webcasts, webinars and live seminars. That will give us the ability to reach and impact millions of people more than we’ve been able to reach on our own.
My radio show, [“The Ric Edelman Show”], for example, reaches a million people a week, but in the Engines’ system, they have 10 million employees at those 150 companies. Our ability to reach more people than ever is really exciting.
VB: Can you tell me about your efforts to combat Alzheimer’s disease?
Edelman: We have learned from our experience with our clients the devastation of Alzheimer’s. There are about 5 million Americans who currently have this disease. That number is projected to grow dramatically over the next 20 years, as the population ages.
Alzheimer’s is extraordinarily common. It’s [impacting] one out of 10 Americans of age 60. By age 80, it’s one in three. By age 90, it’s one in two. With advances in medical science, people are living longer than ever.
We have made no progress with Alzheimer’s. There have been, over the last 20 years, billions of dollars spent on research. There have been 500 clinical trials, and all of them have failed. Today, there is no diagnosis, no diagnostic tool. The only way to know that you have Alzheimer’s is through autopsy. There’s no treatment. There is no cure. There is no vaccine. It’s 100 percent fatal.
From onset of symptoms to death is an average of 12 years. It’s a very long, debilitating illness that is extraordinarily expensive to treat … because the patients are typically in good condition physiologically, which means they’re ambulatory.
These patients can move around, walk around just fine. That means they require 24/7 care. It is financially devastating to the family, therefore, and it is also emotionally and physically devastating for the caregiver because of the emotional toll and the physical requirements of providing care to Alzheimer’s patients.
This is the number one health crisis that our nation is facing. In fact, the entire world is facing this.
Jean and I are partnering with the Xprize Foundation, which was founded by Peter Diamandis, to create a global challenge to help lead to a solution to better eradicate the disease.
Xprize has had a number of prizes, all designed to tackle global grand challenges in unique and innovative ways through the concept of gamification, basically offering an incentive, in our case a $10 million prize, to encourage people around the world to develop innovative solutions that could lead to a biomarker that is a culprit in the development of Alzheimer’s.
That research, we are hopeful, will lead to diagnostics, treatments and ultimately, cures or vaccines.
VB: Another crisis that you’ve talked about, too, is the need for Social Security reform. Can you expand on that?
Edelman: Where Alzheimer’s is the number one medical crisis, Social Security is the number one financial crisis that our nation is facing. The Social Security system, when it was devised in the 1930s, was designed originally as a safety net. It was meant to prevent people from falling into the depths of poverty.
The system was designed to provide about 30 percent of your income. Today, average American retirees rely on Social Security for 60 percent of their income.
Americans are dependent on Social Security to a far greater extent than the government ever intended.
The average check is about $1,300 a month. The problem is that we aren’t collecting enough tax revenue to pay out all the benefits because people are living longer than ever before, so we’re tapping into the Social Security Trust Fund. At the moment, the trust fund is being depleted. If nothing changes, the trust fund will be depleted by 2032-2034.
When that happens, according to the law, all Social Security benefits will be cut 23 percent. That average check of $1,300, it’ll drop to about [$1,000]. If you’re counting on that money for 60 percent or 80 percent of your income, you’re suddenly homeless. We face the prospect of millions of Americans not able to afford their homes, not able to be able to buy medicine.
To solve it, they’re going to have to raise taxes on workers to provide the money needed to continue to pay benefits at their prior levels. That will require a 25 percent tax increase. You’re either going to face retirees with a 23 percent cut in income or workers with a 25 percent increase in taxes. Either of those or some combination of those will create an economic crisis bigger than anything we’ve seen since the Great Depression.
This is the number one financial crisis facing our country, and everybody sees it coming, yet nobody is doing anything about it. Congress knows of the problem, so does the White House. Yet, in the 2016 presidential campaign, no candidate from either party ever talked about this.
There have been a lot of proposals by think tanks, academics, organizations, economists, foundations, government agencies themselves, politicians, who have offered solutions to the crisis, and yet they’re going nowhere. The reason is that no member of Congress is willing to talk about it, because it’s the third rail of politics. If you proposed to reduce or delay benefits, or if you proposed to raise taxes, you get thrown out of office, so nobody wants to deal with it in Washington.
I created a solution about two years ago. I introduced what I call the Trust Fund for America, TFA, which is a very elegant, simple solution for solving America’s retirement security crisis. It got the attention of the Bipartisan Policy Center (BPC), which is a major think tank in D.C.
Our attitude is: We need to motivate Congress to deal with this. The only way to motivate Congress to deal with it is to get the voters engaged. With BPC, I’ve created the Funding Our Future coalition.
We’ve assembled the largest coalition in history focused on retirement security. You can go to our website at fundingourfuture.us. We have over three dozen organizations that have joined our coalition: academic organizations, nonprofits, think tanks, major corporations all coming together for the first time in history recognizing that we need to inform the American voter of what’s going on.
Once consumers become aware of the urgency … of the problem, we believe that they will demand conversation in Congress. Our goal is to have this issue become part of the national dialogue during the 2020 campaign season. If we can get this on the agenda in the debates as policy platforms by the presidential candidates in 2020, we can set the stage for congressional action in 2021, in 2022, which will give us the time we need to solve this problem before it becomes an economic crisis.
VB: With all your years of personal finance, what are the biggest mistakes you see that people make as far as planning for a secure future?
Edelman: The number one mistake people make is procrastination. They simply don’t begin to save as early as they should. Many people believe in their 20s: “I’ve got plenty of time. I’ll worry about it later, especially when I’m making more money later. By then I will have a house and a car.” That’s a huge mistake.
First, you’re always going to have major expenses. You want to buy a house, but later on you’re going to have children. You’re going to be dealing with college planning for them. You’re going to be dealing with elder care for aging parents. Although your income will rise, your expenses will rise as well. Assuming that you will be making more money and it will be easier to save in the future is simply incorrect.
Second, it ignores the power of compound growth. The most powerful weapon we have in creating wealth is time. The longer money stays invested, the greater it grows in value. Investing for 40 years allows you to generate substantially more money than if you invest for 20 years. It’s not merely two to one. That’s a mistake people make.
They think if you invest for twice as long, you end up with twice as much money. That’s simply not the case. If you invest for twice as long, you end up with eight or 10 times as much money, not just two times. Because of exponentiality, which is a financial concept that most Americans are simply not familiar with. Most of us are raised to think linearly …
The second-biggest mistake people make has to do with the amount of risk that they take with their investments. It is the opposite of what most people think. The biggest mistake people make with risk is they don’t take enough risk. It’s not that they’re taking too much. Because of exponentiality, if you put your money in super-safe investments, where you’re earning 1 percent or 2 percent, the exponentiality will never work for you.
You need to get your money earning 5 percent, 7 percent that can produce the exponential results that you need over 20, 30, 40, 50 years. So people aren’t saving enough. They’re not saving soon enough, and they’re not saving in the right places. That’s what’s preventing them from creating wealth.
VB: On your website, [I saw] “The Squirrel Manifesto.” After writing several books for adults, what inspired you to write one for children?
Edelman: Kids understand money issues at remarkably young ages, and it’s never too early to talk about the fact that you can’t have everything all at once. The importance of delayed gratification, the importance of working hard to achieve a goal. These are concepts that are universal, and they can be taught at remarkably young ages. That’s what “The Squirrel Manifesto” does. It teaches children the very basic concepts of developing a healthy relationship with money.
First, the joy of having money, the pleasure of spending money. At the same time, children need to learn that you can’t have everything all at once. Also, saving a little.
And recognizing that with the opportunity of having money comes the obligation of supporting others who are less fortunate than you.
Then finally, the most surprising notion in the book for a lot of parents is to tax a little. Helping children understand that you don’t get to keep everything that you get, that when you get an allowance or you get a birthday gift, mom and dad should withhold 30 percent of that to help the child understand the reality of taxes.
The book is designed to create opportunities for conversation between parents and children. Money seems to be the last taboo in American society. Our attitude is if we can get children at very young ages to grow up in a world surrounded by financial topics, they’ll grow up in a healthy relationship with money and not be afraid to talk about it and ask questions about it and to learn about it.