Ric Edelman: Crypto, Retirement Planning, the Advice Business, and More
The financial expert and founder of DACFP, discusses the role of digital assets in today's market, as well as the importance of financial education starting at an early age.
Our guest today is Ric Edelman, the founder of the Digital Assets Council of Financial Professionals, or DACFP, an organization he formed in 2018. DACFP aims to advance financial professionals' knowledge of blockchain and digital assets. Prior to forming DACFP, Edelman and his wife Jean founded Edelman Financial Services, which grew to become one of the largest Registered Investment Advisors in the United States before it acquired Financial Engines to form Edelman Financial Engines in 2018. Edelman is a fixture in financial media where he is known for his radio show and frequent print and television appearances and has authored numerous books, including his latest, The Truth About Crypto: A Practical, Easy-to-Understand Guide to Bitcoin, Blockchain, NFTs, and Other Digital Assets. Edelman began his career as a journalist after graduating from Rowan University with a degree in communications.
"Crypto Attitudes Around the World," by Ric Edelman, dacfp.com, April 25, 2022.
"Ric Edelman Expects the SEC Will Approve a Bitcoin ETF," by Bernice Napach, benefitspro.com, July 2, 2021.
"A Bitcoin ETF Could Be a Game-Changer for Advisors. Not Everyone's Buying It," by Avi Salzman, Barron's, Oct. 19, 2021.
"Ric Edelman's '22 Predictions for 2022," by Brian Anderson, 401kspecialistmag.com, Dec. 29, 2021.
"Here's the Best Time to Buy Bitcoin, According to Yale Data,” by Ali Montag, cnbc.com, Aug. 8, 2018.
"Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals," by Matt Hougan and David Lawant, CFA Institute, 2021.
"What's Coming Next in This Technological and Investment Revolution," YouTube, April 13, 2022.
"Laura Carstensen: 'I'm Suggesting We Change the Way We Work,'" The Long View podcast, Morningstar.com, Sept. 14, 2021.
"Ric Edelman on the Future of Retirement," YouTube, Nov. 1, 2021.
"U.S. Is Facing 'a Real Retirement Crisis,' Top Investor Says—His Plan for Doubling Savings and Reducing Income Inequality," by Lizzy Gurdus, cnbc.com, June 22, 2021.
"More Americans Could Outlive Their Savings. How Advisors Can Protect Them," by Amey Stone, Barron's, July 21, 2021.
"This Chart Perfectly Sums Up Why It’s Important to Have a Diverse Investment Portfolio," by Kathleen Elkins, cnbc.com, Jan. 12, 2021.
Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.
Christine Benz: And I'm Christine Benz, director of personal finance and retirement planning for Morningstar.
Ptak: Our guest today is Ric Edelman. Ric is founder of the Digital Assets Council of Financial Professionals, or DACFP, an organization he formed in 2018. DACFP aims to advance financial professionals' knowledge of blockchain and digital assets. Prior to forming DACFP, Ric and his wife Jean founded Edelman Financial Services, which grew to become one of the largest registered investment advisors in the U.S. before it acquired Financial Engines to form Edelman Financial Engines in 2018. Ric is a fixture in financial media where he is known for his radio show and frequent print and television appearances and has authored numerous books including his latest, which is called The Truth About Crypto: A Practical, Easy-to-Understand Guide to Bitcoin, Blockchain, NFTs, and Other Digital Assets. Ric began his career as a journalist after graduating from Rowan University with a degree in communications.
Ric, welcome to The Long View.
Ric Edelman: It's great to be with you both. Thanks so much for the invitation.
Ptak: It's our pleasure. Thanks so much for being with us. So, a logical place to start is crypto. You are about to publish a book on the topic. It's called The Truth About Crypto: A Practical, Easy-to-Understand Guide to Bitcoin, Blockchain, NFTs, and Other Digital Assets. I wanted to go to a recent interview that you gave in which you said that “Digital assets like bitcoin are the future and will have the most profound impact on global commerce since the invention of the internet itself.” Can you explain how you came to have such conviction in this area?
Edelman: Like everybody else who first stumbles upon bitcoin, the immediate reaction is, “Huh?” it's such a foreign concept. It is totally new and different. The first new asset class in 150 years. The last one was oil, discovered in the 1850s. And look at the incredible impact that has had on the global economy. This is going to be similar, and it is as different to the world as oil was.
The reason it's so profound is because it is essentially internet 3.0. And this is what I've begun to learn in my journey down the rabbit hole of crypto. I first was introduced to this back in 2012. And it made no sense to me like it does to anybody when they first encounter it. But rather than just dismissing it out of hand, I realized there must be a there, there. And if there isn't, let's figure that out, too. So, I began doing a lot of research through 2013, began investing in early 2014, and really have never looked back. And what I've come to discover through my research is exactly as you said, Jeff, this is the most profound innovation for global commerce since the internet itself. And that's simply because this is the next iteration of the internet.
The first internet, back in the 1990s, essentially was the internet of people. The internet connected us. We were able to send emails, instantaneous messages for free anywhere in the world. We didn't have to go to the post office or FedEx. That was revolutionary. And that was quickly followed by Facebook, the ultimate social connector. That was internet 1.0 in essence, the connection of people. Next, we had the Internet of Things, the internet 2.0. This is where your car talks to your phone, your coffee pot talks to your phone, and your refrigerator talks to your milk carton. The Internet of Things is growing, and it's massive. And Bluetooth technology is allowing us to do incredible things faster, safer, more efficiently than ever before.
Now we have the Internet of Money, and that's what blockchain technology allows us to do. We can now move money over the internet as easily as we've been moving messaging, emails, and texts over the internet. It's hard to overstate the incredible impact on commerce that this will allow us to have.
Benz: Sometimes innovations come along, but it isn't immediately clear how they can be applied in a practical sense. Do you think that's a fair way to characterize crypto right now? And if so, how do you reconcile the trillions invested in cryptocurrency with crypto's limited practical applications to this point?
Edelman: Very valid observation, Christine. You're absolutely right. It takes a while for a new innovation to gain traction and acceptance and implementation, deployment into the marketplace. And that's what we've been witnessing over the past 12 years, 13 years that crypto has been around since the invention of bitcoin in 2009. It takes a while. Thanks to exponential technologies, we are seeing rapid deployment and development much faster than we used to have. If you go back to the invention of the lightbulb, radio, television, automobiles, it took decades for those inventions to be permeated throughout society. Thanks to computers, we can innovate and deploy with incredible speed unlike ever before. It's only been 12 years since bitcoin was invented and already 300 million people worldwide own it. It took decades for 50 million Americans to get electricity, or a radio, or a television, or a telephone into their homes. So, one perfect, wonderful illustration—when Pokémon was introduced, it took a week to get 50 million people online using Pokémon.
So, it's just the fact that the technology is able to be deployed so rapidly through the internet onto our smartphones that allows the adoption to occur really fast. And we're beginning to see that snowballing effect at an exponential rate. Although commerce is just now beginning to get with it in that regard, users and investors have been able to anticipate this, and that's why you've got $2 trillion market cap for bitcoin and other digital assets, because the investment community, the research community, are all moving in anticipation of that commercial adoption. And that's how money gets made. And that's why there's so much wealth being created in this space even advance of the widespread commercial availability of the innovations themselves.
Ptak: When it comes to things like stocks and bonds, we use cash flows to try to estimate intrinsic value. But that's not possible with bitcoin as there are no future cash flows. Given that, what confers bitcoin's value, especially considering its volatility currently makes it hard to use as a medium of exchange?
Edelman: This is where people's heads explode. I've been managing money for 40 years. I built the largest RIA in the country managing $300 billion in assets. We serve at Edelman Financial Engines 1.4 million people around the country. And so, yeah, I've been working with individuals on managing assets for a long time. And when you try to value bitcoin and other digital assets, your head explodes. What I have found is that as I've trained thousands of financial advisors over the past six, seven years in this area of crypto, I found that the more knowledge and experience you have as an advisor, the more experience as an investor, the more training, designations, college degrees you have in managing money, the more your head explodes, because all of that traditional training and all of that knowledge from Wall Street does not have any applicability in the crypto space. They are totally separate conversations. But most in the crypto world, or those in the Wall Street world, are trying to apply their knowledge to the crypto world. This is why you get people like Jamie Dimon, very bright guy, saying crypto has no value; why Warren Buffett calls it rat poison squared. These are brilliant Wall Streeters who are trying to apply their world to the crypto world. It is a non sequitur. It simply doesn't work. And here's why.
When you apply, as you said, Jeff, traditional valuation models, you're looking at the company, you're looking at the employees, you're looking at the product, the revenues, and the profits. And you look at other companies in the same industry that have been sold to determine relative valuations. And all of that helps you determine what the value of your company is that you're examining to establish the price of that company. Well, that works fine when you're evaluating a stock. But it doesn't work with bitcoin for the simple reason that bitcoin is not a company. It has no employees, there's no product, there are no revenues, and there are no profits. All of those numbers are zeros, leading Jamie Dimon and Warren Buffett to say, therefore, bitcoin's value is zero. What they don't understand, very simply, is that bitcoin's value may not be something that we can clearly understand, but it certainly has a price. And that's the real key. We have to understand that the marketplace of investors—buyers and sellers—have ascribed a price to bitcoin—as we record this, about $40,000. That's all that really matters. It's a supply/demand equation. It isn't a stock valuation equation. And until you’ve begun to accept that fact, your head will continue to explode.
Benz: We've heard you advocate for allocating 1% to 2% of a portfolio to crypto, and we're hoping to drill down on that. What types of investors would such a recommendation be appropriate for? I would think people with long time horizons because of the volatility. Also, how does crypto fit within a portfolio? Does it take the place of stocks, making it worthwhile to think of the opportunity cost for crypto as the difference between expected stock returns and crypto returns?
Edelman: You've got three good questions in there, Christine. First, yes, it would. Instead of a 60/40 portfolio, I would argue that it's a 59/40 and 1 portfolio. So, this isn't ownership asset. Stocks are ownership. Bonds are loanership. You're lending money to earn an interest rate. So, I would consider digital assets as a sleeve within an equity ownership position. So, I would use this as a replacement for or a reduction from your equity exposure, meaning stock market, real estate market, gold, oil, commodities, and so on. I would take it out of that sleeve. So, instead of a 60% allocation, for example, I'd have a 59/1 or a 58/2 allocation using 1% or 2% in digital assets.
And yes, long term. This is clearly a long-term play. We are looking at this as a transformative technological innovation in the world of commerce. This is going to take the next several years, the decade, to get implemented in global commerce. So, this is a long-term investment strategy. It is not a get rich quick, although clearly, a lot of people have gotten rich quick. That's a nice happenstance. That's not the point of it all. This is a transformational, technological innovation, just like investing in automobiles in the 1920s, airlines in the 1950s, and the internet in the 1990s. This is a long-term play. So, yes, you have a long-term outlook for this. Don't try to get rich quick. Consider yourself lucky, not smart, if you do.
And third, who should own this? It should be part of, and I believe it will be part over the next several years, of every routinely diversified portfolio. If you believe in diversification, and you believe in owning a wide variety of asset classes—stocks, bonds, government securities, real estate, oil, commodities, foreign securities, and so on—then you want to own as many diversified asset classes as you can. And crypto has proven itself to be the first noncorrelated asset class. And that's what you want in a diversified portfolio. It allows you to rebalance more efficiently. It allows you to capitalize on the volatility. And believe me, as you know, there's a lot of volatility here. It's wonderful for dollar-cost averaging and tax-planned investing such as tax-loss harvesting at year-end. There's a lot of advantages that this brings to the portfolio. And for that reason, any long-term investor who believes in diversification should routinely have a 1% or 2% allocation.
But that's worth an elaboration—why only 1% or 2%? If the growth pattern is so strong, if the projections are so widespread, so many people arguing that the price is going to rise so substantially over the next several years, why only 1% or 2%? There are two reasons. First, it could go south. There's still a lot of newness to this. There's still a lot of regulatory uncertainty. We've got competitive pressures. We don't know what consumer interests will be in the future. We don't know what market demand may be. There could be technological obsolescence. There's a lot of unknowns. It's still new and different. So, let's not take an undue risk in our portfolios. Let's not risk our future financial security on this.
Second, there's no reason to. The price history of digital assets has demonstrated that you can have a material impact on your portfolio with a very low 1% or 2% or a 5% allocation. You don't have to put 30% or 50% of your money into this in order to have it materially improve your life. So, all the academic data shows us, not just my research that I've been talking about with a 1% allocation. If you look at Yale, the study they came out with in 2018 said the same thing. They argued for a 3% allocation. Bitwise's research, which they did in conjunction with the CFA Institute, said, a 2.5% to 5% allocation. Pretty much everybody is in agreement. Low single digits is all you need to have the benefit of the risk/reward improvement to your portfolio.
Benz: Well, that was definitely one of my follow-up questions—why just 1% to 2%—and you answered that really well. Another question, though, is on correlations. You made the point that correlations have been low relative to traditional assets. They seem to be rising though, at least, with the equity market. What's your take on that?
Edelman: This is an important observation. We did notice from October of 2021 through February of 2022 that correlations between crypto and stocks grew dramatically. That has ended as we went through the month of March of 2022, at our recording now, those correlations went away, and bitcoin has returned to its more historic pace or pattern of low correlation. In other words, the jury's out. Is that correlation that existed for a few months late last year, was that an unusual thing? Or will that become more common and become a trend? Why did it happen? And will it persist? That's the key set of questions we've got to answer.
The reason that it began to occur and never did before is a reflection of bitcoin's mainstreaming. Throughout most of the life of crypto, it has been individual investors, often fringe investors, those that are avant-garde truly doing something new and different. And that's a relatively small community. Suddenly, finally, many of us would argue, over the past year, institutional investors have gotten engaged. In fact, in 2021, institutional trading of bitcoin was twice as much as retail trading. We now have pension funds, endowments, major corporations, like MassMutual, last year, they bought $100 million worth of crypto. MicroStrategy owns $5 billion worth of crypto. We have Tesla. You can do this through PayPal and Square. There are hedge funds, family offices, all engaging finally for the first time by buying this and adding it to their portfolios, recognizing that this asset class has added values for both diversification purposes and return potential.
Well, when institutional investors add crypto to their portfolios, what we're discovering is that they're considering it another sleeve of their equity assets. And when they decide to sell off those equity assets, like we experienced in January and February of 2022, they sold off their crypto just like they sold off their stocks. So, they're treating crypto more like an equity asset than they are a noncorrelated asset. And the question is, are institutional investors going to persist in that behavior? If so, we will probably see higher correlations of crypto to stocks than we did over the past decade. Jury's out. We're going to have to wait and watch, but your observation is important because this could have an impact on one of the benefits of owning crypto, meaning the noncorrelation element.
Ptak: For those that maybe would take a devil's advocate position and ask what's wrong with assuming that, like the internet, the technology behind crypto will come to permeate industry and finance to an extent that investors can exploit the trend by holding the stocks of firms that eventually exploit that technology? That's kind of what happened with tech and internet, which investors have come to own in a big way as they become a larger part of the market. But do you think that's the wrong way to be thinking about crypto? That you need to have the direct investment in that area in order to fully reap the benefits? That you can't necessarily count on it seeping into these other places where they're more accustomed to investing?
Edelman: No, I don't think it's wrong at all. That's a very good approach. And in fact, it's the difference between those who are inventing the tech and those who are deploying the tech in their business. Look at Amazon, what a wonderful example in the world of robotics. Amazon is known as a retailer; that's what they do. They sell us whatever product we want to buy; they'll deliver it in a day. But what a lot of folks don't realize is that Amazon is one of the biggest users of robotics. They have 350,000 robots in their warehouses. They're not developing the tech. They're buying robotic technology from robotics companies. And they've been making investment into robotics companies for exactly that purpose, because they're such a big user of the technology. Or the automotive industry is a big user of robotics technology, obviously, but they're not inventing that tech. They're buying it from those who are building it.
So, rather than arguing, which is the better way to go about it: do you buy the stock of the company that's building robots, or do you buy the stock of companies that are using robots? I don't think it's an either/or question. I think as part of a diversified portfolio, you do both. You invest in both, the companies that are inventing the tech as well as the companies that are deploying it. You're going to win in both directions. So, yes, you can invest in Amazon to get a robotics play while you can also invest in Boston Dynamics as a robotics play. So, I don't see why we need to argue over which course of action is better. I think your fundamental premise, Jeff, is accurate. No matter whether you invest in blockchain or digital assets, you are going to have ownership in them because every company in the world will be using these technologies to help them build or run their businesses.
Benz: You formed the Digital Assets Council of Financial Professionals in 2018. Can you talk about what that council aims to do and how it goes about it?
Edelman: I was really frustrated as a financial advisor. And I have a reputation of being a thought leader. I tend to try to pay attention to where the world of personal finance and Wall Street and investment management are going. I've written 10 books, and I spend a lot of time trying to figure out the future so that the advice we give our clients is the advice they need for where they're headed, not where they've been. Too many people I find in the financial-services industry merely recommend to clients things that have been successful in the past. And we all know that past performance doesn't guarantee future results. That's stamped on every front page of every prospectus that nobody ever reads.
And my journey into crypto starting in 2012 made me realize over the next several years that this is a profound innovation that has huge investment, wealth-creation opportunity, but most in the financial community don't realize it. And since most consumers turned to the financial community for investment advice—we manage two thirds of all the investment money in America—if the advisors don't know about it, then they can't tell their clients about it, their clients won't invest in it and their clients will miss out on this wealth-creation opportunity. This is a huge opportunity for creating wealth for all of America. And frankly, all around the world— this is widely regarded in the crypto community as the best way to eliminate poverty on a global scale. The democratization of wealth has never been made more available than the Internet of Money, which is what blockchain technology is.
Recognizing that advisors didn't know anything about this, and there were no resources for them to learn, I created four years ago DACFP—the Digital Assets Council of Financial Professionals—to teach advisors and their firms, their legal and compliance staffs, their home office staff, their HR and training, their operations and their sales and marketing teams what this technology is, how does it work, why do they need to care, how can they incorporate this into client portfolios, what are the investment options, what's the investment thesis, how do you construct a portfolio and dealing with regulation, taxation, compliance and how do you message to clients about all of this.
And so, we began this effort separate four years ago, and frankly, I thought it was going to be a short-lived part-time hobby. It's just crypto; it's just something that a few geeky people on the side play with here and there. Well, crypto has grown up a lot in the last couple of years. And we are now inundated with demand for our services from the financial-services industry. I now have 23 employees in the company, and we're adding more as I speak, because so many advisors and so many financial-services firms realize this thing ain't going away. It's got massive investment potential. Clients are demanding to understand how it works. Every advisor in the country reports that they're getting client questions, but there's no training anywhere because there's no expertise anywhere in the financial industry.
That's all we do at DACFP. We're an educational organization. We don't have any products to sell. I don't really care whether you like bitcoin or not. I'm not trying to persuade you to like bitcoin. I'm trying to persuade you that you need to understand it so you can be conversational about it with your client. The best analogy that I give advisors is about annuities. Every advisor in the country has a very strong opinion about annuities—some love them, some hate them. Whether you love them or hate them, advisors are able to explain why they feel the way they feel, and why they would argue that a client should or should not buy an annuity. And that's all I'm saying advisors need to do with bitcoin. I don't care whether you like it. You need to understand what it is so you can talk intelligently with your client about it. And that's all we do.
And so, in addition to our webinars and materials on our website, we've created the certificate in blockchain and digital assets. It's an 11-module online self-study self-paced course, 13 CE credits, with a world-class faculty. Scott Stornetta, who is the co-inventor of blockchain, is on our faculty; Shawnna Hoffman, who ran IBM's blockchain division; Anders Brownworth with the Boston Fed, and a lot of others on our faculty to just teach people what is this stuff? How does it work? How do I explain it to people? And we've had over 2,000 advisors and others from seven countries enroll in the program so far, and it's super popular. And there's really no resource like it anywhere, which is why we're getting such demand. We're striking relationships with major Wall Street firms to teach their advisors about this. And we're now the official education partner for the Financial Planning Association, NAPFA, the XY Planning Network, the Money Management Institute, the Investment Adviser Association, and others, because we're really the only game in town. There's nowhere people can turn to learn about this other than DACFP.
Ptak: And we'll include information about DACFP in the show notes for this episode. I think that probably is a good segue to the next topic that we wanted to take up with you to pick your brain on the future of advice. You've had a very storied career, delivering advice yourself and also building organizations that offer advice to clients at scale. There's quite a bit of debate about what advice will look like in the future. What portion of what's handled by an advisor today is likely to be automated in the future, if you had to guess, Ric?
Edelman: Data, pure and simple. This trend has been underway for the past 30 years, again, thanks to the internet, and it's going to continue. Back in the ‘80s, when I got started, clients had to call me on the phone to ask me what the price of a stock was at the moment. If you wanted to know what the price of IBM was, you had to call your broker. And this is why brokerage firms used to have big lobbies, lots of furniture with a ticker running across the wall behind the receptionist desk, because it was the only way for an investor to get the current pricing. If you try to go to any other resource, it was a 15-minute delay, which was of no value. Today, of course, real-time stock prices are available for free on our phone. You don't need a financial advisor to get that info. Advisors used to be the resource of information, and we aren't anymore. And that trend is going to continue more and more.
The data collection, the data display, and the distribution of data is increasingly automated. We're already seeing robo-advisors and online trading tools and calculators that are all free, all available in real-time that aggregate all of your financial info from your bank and your brokerage firms and your 401(k), putting it all on a simple little dashboard for you so that you can see all the information about your personal finances. You don't need a financial advisor for that. You also have mountains of data about what's happening in the financial markets, economics, the sociopolitical environment, all of this throwing huge amounts of data at you. And the advisors have access to that data as well, of course, often far more sophisticated because we've institutional resources of information that ordinary retail investors don't have access to. The data is available in huge quantity. So, nobody needs an advisor for that.
What we're going to need the advisor for and where the advisor will become even more vital in the future than in the past is in the interpretation and analysis of that data. What does it all mean? What matters? What actions should I take as a result of all of that information? We need the skilled training and expertise of the advisor to interpret the data to turn it into actions for the consumer without them having to spend huge amounts of time and that effort on their own. That's where advisors will shine in their value-add to the client.
Benz: I wanted to ask, putting the clients’ cap on—from the clients' standpoint, what should they be demanding in the advisors that they work with today? Is it technical proficiency? It sounds like being able to convey some of the more complex concepts to clients is important, or is it emotional IQ? How do you think about what clients should be asking from their advisors and how it might evolve in the future?
Edelman: There are only three things that advisors should be delivering to their client. First, comprehensively showing you where you are. Too often, people have no idea what's going on with their personal finances. It's just a mess. It's befuddlement. So, let's clarify. Let's consolidate, condense. Let's make it simple and easy to help you understand your current state. Where are you right now from a personal finance perspective? And this isn't just your money. It's every aspect of personal finance: your debt, your income and expenses, your current assets, your wills, your employee benefits, your homeownership and mortgages and real estate—just every aspect of your personal finances. And intergenerational family issues are a big part of that.
Second, where do you want to go? Most people are floundering because they don't have a real direction in life. They're so busy doing what they're doing, trying to get through the day, they haven't bothered to look up. It's the forest and trees situation. And so, let's help you identify the point to all this. What are you trying to accomplish and why? What's going to make you happy? What's going to bring happiness to your life and that of your family? So, that's the second piece.
And the third: How are we going to get there? How do we get from here to there? And that mapping out of the plan is exactly what you should be asking for from your advisor who can't deliver it until they go through the steps one and two: where are you, where do you want to go? So, that's all you're looking for from your advisor. Everything else is a detail that you couldn't care less about. The advisor cares. The advisor needs to care; but not you. When I go to the doctor, I say, “It hurts when I go like this.” The fact that he is going to go through a whole bunch of tests and examinations and do all this stuff that he does behind the scenes, I couldn't care less about. I just want him to tell me, “What do I do when it hurts when I go like this?” And that's the way most consumers feel about their personal finances. I don't want to become an expert in this. That's why I'm hiring you. Make it simple, make it easy, make it quick, make it in plain English, and if you can, make it interesting and entertaining at the same time. That's all investors want. That's all the American household wants. And advisors who can deliver that are going to be the biggest, best advisors in the country.
Benz: One thing you mentioned is this idea of financial planner as kind of a life coach, or a financial life planner. One question I've been wondering though is, are people who have been trained in investing, first and foremost, necessarily well equipped to help clients sort out some of those questions? I just wonder how advisors can climb that hurdle if their skill set started somewhere completely different?
Edelman: You're right. The majority, traditionally, don't have the training or the natural inclination to do that. This is an EQ conversation, at least as much as an IQ, and I would argue more. We're talking about humans. This isn't about money. This is about people. I argue, for years, that managing money is easy. Managing clients is hard. We know how to manage money. Wall Street has figured that out for decades. Thanks to Harry Markowitz and a dozen others, we all know how to manage money effectively. And you have a lot of conversations on your podcasts of those brilliant people and their strategies. Managing money is easy. Getting people to do it and to stick with it is really hard. Because we are creatures of emotion, not creatures of intellect. We make decisions based on feelings, not thinking. And we're our own worst enemy. So, it's the hand-holding and the guidance that advisors provide. And that's not a traditional source of training. That's not traditionally what attracts people into the industry. Historically, people got into the business because they love numbers, and they love money, and they want to pay attention to numbers so they can make a lot of money. And they don't really pay attention to risk or people's attitudes about risk, and they don't care about things that aren't directly related to stock prices moving up. They don't want to pay any attention to employee benefits or credit and debt or the emotional toll that a family is experiencing because of a child with a substance abuse problem or a spendthrift problem or a bad marriage with a son-in-law or who knows what. All those seem to be too cumbersome and annoying and distracting. And it's got nothing to do with today's Dow Jones Industrial Average.
So, many are simply misplaced now that that's what consumers are saying that they want. Fortunately, the new generation of advisors entering this industry and already largely in it—you look at the millennials, people in their 20s, 30s, and 40s who are in this industry, they get it. They got into this because they enjoy the financial-planning angle. They recognize that there's more to life than money, and it's not all about the investing conversation. It's about everything else going on in the family's life. You need to make sure that you're dealing with an advisor who thinks that way, behaves that way, acts that way and can help you deal with all those kinds of issues. That's the advisor of the future. The stock-trading jockey of the past, they're dinosaurs.
Ptak: That was actually going to be my next question, which is, what do you think is going to be that next big iteration in the advice business, which is, as you mentioned, it's transited from brokering to portfolio management, to asset allocation, now increasingly, financial planning. But it sounds like what you foresee is, advisors who are equipped to help with maybe this softer side of things—not to use that as a pejorative—but focusing on issues like wellness and emotional well-being, that sort of thing. Do you think that's a fair characterization, Ric?
Edelman: Very much so, Jeff, and it really leads to the next ideology, which is, life planning, recognizing that the traditional lifeline that people have experienced, the one that everyone's familiar with, and frankly, most are assuming will be theirs, is dead. I'm on the advisory boards at both the Milken Institute's Center for the Study of Longevity and the Stanford Center on Longevity. And our efforts are all on the new map of life, recognizing that the old lifeline, which was—you're born, you go to school, you go to work, you retire, you die—one thing at a time in that order, which is how it was for our parents and grandparents and great grandparents. That's not us. We're now in the aging and the cyclical lifeline. And it's all because of longevity. We're going to live to age 100. If you're listening to this podcast, odds are really good, you're going to live to age 100 or beyond. The old paradigm of retiring at 65 and dead at 80, that's gone. That's not going to be us.
If we're going to live to age 100, the notion of retirement at 65 is impossible. First, economically, most people will never afford to be able to do a 40-year retirement. Second, you're not going to want to. At 65, you're going to be healthier than your parents were when they were 65. In fact, due to medical innovations, by the time you're 95, you'll be healthier than when your grandparents were 55. And so, you're going to want to be active and contribute to society and be engaged and you're going to need to make money at the same time. So, this notion of retirement for 40 years will go away. It will be replaced by going to school, going to work, and then going back to school to get new skills, to get more training, to stay viable in the marketplace. And then, you'll take a two or three-year sabbatical—forget about a two-week vacation—you'll take years’ long sabbaticals, and then you go back to school for more training, go back into the workforce, and the cyclical life of school, work, sabbatical will be how you live until you are age 100.
This requires an entirely new set of thinking about our approach to money and career and college and family in a way that is unprecedented. And it's the financial advisor who is going to guide people through that new approach. And it's going to make advisors more valuable than ever. How they do it technologically, what are the resources, what are the software tools and the AI programs that they use to guide the clients? That's all back-office stuff. Clients couldn't care less. It will be simply available to the advisor through technological innovation, and it will simply allow the advisor to be of more value than ever to the consumer, delivering the EQ that will remain the elusive Holy Grail of technology. The notion of a computer being able to replace the humans' empathy is decades away.
Benz: You referenced the Stanford Center for Longevity. One of our favorite conversations over the past couple of years was with Dr. Laura Carstensen, where she talked about some of the work that she and the team are doing there.
Benz: I guess the question is, if the separation between work and retirement is becoming more porous—as you seem to think is the case, she thinks is the case—how does that evolve? It seems like many older adults I speak to still actually want to hang it up at the traditional retirement age of mid-60s.
Edelman: They're going to change their mind. The reason that they want to hang it up is that their job is no longer fun or interesting. Sometimes people say I've got 30 years of experience. No, you don't. You have one year of experience 30 times. By the time you're doing whatever it is you're doing in your 60s, you've been doing it for decades, and the innovative fun, discovery element is long gone. It's rote. It's the same damn thing every day or every year, and you're tired of it; you're bored. It's no longer interesting. And you might not like the new company environment that you're in, you might not like the economic issues, you might not like the sacrifice. You're beginning to recognize your own mortality, and you'd rather go do something else. And that is perfectly understandable. And this causes people to retire in their 60s.
But after a few years of that, boredom sets in, the lack of social interaction, the lack of intellectual stimulation, the lack of economic remuneration, all of that is gone. And yet you feel physically and mentally fine. You're still perfectly able to engage. And this is when people figure out, it's time to reinvent themselves. And they do it by entering a brand-new career, starting a new business. More businesses are formed by people over the age of 50 than people under the age of 30. And so, they will start a new business. They will go back to school and get a new degree. They will engage in educational travel, not just for vacation, but for learning. And they will discover that they now have opportunities they didn't have before, because the kids are grown, and the dog has died. They're free and clear on what they want to do. They now have money, and they have time. And they're going to take full advantage of this. So, people will discover after a few years of that gold watch and a pension that this ain't it. Sitting in front of the TV and eating bonbons, that's fun for a couple of years, but you're not going to do it for a couple of decades. You’d drive yourself crazy.
Ptak: Since we're on the topic of retirement, I wanted to also ask you about retirement income. There's quite a bit of debate about the right and wrong way to sustain one's spending in retirement. Do you think the 4% spending rules still works? Or do you think retirees need to reconsider that given lofty market valuations and paltry yields?
Edelman: I'm not sure it ever worked. It's a rule of thumb. It's just a guideline to help prevent clients from overspending in their early years of retirement. I'm not sure it was ever something anybody truly relied upon, because there's so many unique circumstances to each client of income sources, and life expectancies, marital statuses, and so on. But the point is well taken that as we reach the point where we're going to stop earning the income we spend, we need to generate it from resources available to us. Pension, Social Security, investment income are the three dominant resources. We need to reevaluate the legitimacy of those resources, the sustainability of them, how much can they genuinely produce and how much am I going to need given my lifestyle and the cost of living? Especially in this decade, we're going to be in an inflationary environment. So, we have to go creatively through all of that.
And so, what I have found is that most people are shocked to discover that they spend more in retirement than they spent prior to retirement—they spend it differently, but they spend more. The only people who spend less are people who are forced to. If you're spending less in retirement than you did pre-retirement, it means you failed in your financial plan. You should spend or be able to spend at least as much as you spent before. You'll spend it differently in more fun ways, but the dollar amounts will go down, especially when you consider healthcare costs. You're going to spend a lot on that as you age.
In addition to that, we have the longevity factor. And for that reason, it argues, as I mentioned a moment ago, that you're going to go back to work in retirement, but you're not going to go back to a 40-hour workweek. You're going to work for 10 hours a week, or maybe 15 or 20 hours in a month. You'll make $10,000 or $15,000 a year. You don't have to make $100,000 a year; $15,000, $20,000 in a year to supplement your income is plenty to allow your nest egg to last as long as you do. So, all you got to do is work an extra year or two in your career. Don't retire at 65; retire at 67. And then, go get a part-time gig until you're in your 70s. And you'll be amazed at how impactful that is in making sure you never run out of money. You add the 4% or what now Morningstar is suggesting 3.33% on a distribution basis of your portfolio and you'll be fine.
Benz: You mentioned annuities and that every advisor has an opinion about them. What role should annuities play in retirement? And do you prefer one annuity type over some others?
Edelman: None. They should play no role in retirement. I'm very concerned about the annuity marketplace. And I’ve been working with a couple of annuity carriers to solve this dilemma. I used to love annuities back in the ‘80s and ‘90s. They had guaranteed features that the products no longer offer because the insurance industry realized they couldn't afford the guarantees that they were offering. So, the annuity products today—there's one flavor that I kind of like or I should say, kind of don't hate, and that's a low-cost, fee-based variable annuity. For 50 or 60 basis points you can invest in a stock portfolio on a tax-deferred basis. What's not to love? So, it's kind of like a non-deductible IRA. So, great. That's perfectly fine.
But to use an annuity, an income-oriented annuity, to generate income in retirement, I have a real problem with, again, simply because the longevity curve. I haven't found yet—I keep looking, and I am, as I said, talking with insurance companies about the development of a product that solves the longevity crisis, meaning the actuaries of these products are assuming traditional life expectancies of 85, 90, or 95. And they're basing the incomes they're providing on a monthly basis on that actuarial data, which is all valid historically. But it doesn't take into consideration the exponential growth of changes in longevity due to advances in medicine and neuroscience, in bioinformatics, and 3D printing, nanotechnology, and so on, that are contributing to our longer life spans. The fact that over the next 15 years, we're going to cure the leading causes of death, we're going to eliminate heart disease, respiratory illness, obesity, diabetes. Cancer itself over the next 15 years will be gone. And what has been killing people in their 80s and 90s, is now going to allow us to live to age 100-plus. I don't think the annuity products today that are being sold, have that factored into their modeling. What happens if a whole bunch of the people who buy annuities instead of dying at age 90, like they're supposed to, live to 105? I don't see how the insurance or annuity company that is guaranteeing those incomes is going to be able to continue paying those checks. And I fear that you're going to have millions of retirees dependent on those annuity products, are going to be getting letters in the mail one day saying, “Sorry, no more money. Your principle is gone, and the checks are stopping.” I think it's a real problem that many are not paying sufficient attention to.
Ptak: I wanted to make a quick left turn to portfolio construction if we could. We've seen, as you know, both the stock and bond market pullback recently, which is a little atypical given the way bonds have helped to cushion stock market losses in the past. Some are using this time to argue for different approaches to portfolio construction, including heavier use of alternatives. Do you agree with that? And to the extent that you do, how do you think portfolio construction might need to be rethought in view of this?
Edelman: Jeff, I think that is all absolutely correct. The party is over. And most people are totally unaware of this for the simple reason that our life experience has not prepared us for what's happening next. If you were an investor in the 1970s, you remember what the bond market was like with rising interest rates and the fact that as rates go up, bond prices go down. But very few Americans alive today were investors in the 1970s. Because if they were alive at all, they were children like me, which means our personal investing experience is more recent than 1982. And therefore, from 1982 to the present, if you owned a bond or a bond fund—any kind, government bond, corporate bond, municipal bond, I don't care what it was—it made money. You not only earned a lot of interest, but it rose in value. And that lolled everybody into a false sense of confidence that bonds are safer than stocks. It's been true for the past 40 years. But that's only because we've had a declining interest-rate environment for the last 40 years.
That party is over. Interest rates are now near zero. The Fed has turned the direction around and already begun to raise rates and they're going to raise rates a lot more over the next two years. And as rates go up, the value of bonds goes down, and most people are completely unprepared for this because they have no knowledge or education or personal experience about it. And therefore, people who are running away from stocks into the perceived safety of bonds, literally jumping out of the frying pan and into the fire, and we're going to see massive losses in the bond market, we already have so far this year, massive more to come. And the sad part is that it's going to cause losses for the very people who can afford the losses least: safety conscious, income-oriented investors. And it's a real crisis. And this is a generational shift—comes only once every half century. We're experiencing the crux of it right now. We're at the knee of the curve. And there's too insufficient, too little warnings about this from the financial advisory community, some out of motivated self-interest, some out of a genuine lack of knowledge themselves, because they're so young and inexperienced and uneducated.
So, yeah, we need alternatives that we need to implement to our clients right away to provide a different approach for generating income in a safe way. Alternatives make a lot of sense, and there's a wide variety of alternative ways to generate income, not least of which also includes crypto, because you can now generate yields that are 5% to 15% from digital assets. Sounds like a ridiculously high rate of interest, until you understand, again, that crypto operates totally differently from any other aspect of the financial marketplace. So, there are a lot of alternative approaches that need to be considered. And you're right, Jeff, this is a huge deal. And the sooner advisors and their clients recognize this, the better off everyone will be.
Benz: I thought of about 30 follow-up questions as you were talking. But I did want to ask you about financial education. You've spent a career counseling others and helping them to set expectations and put together their plans. Can you talk about what you found are the best ways to inculcate good savings and investment habits and what doesn't work?
Edelman: Richard Thaler has it best. I'm a big fan of behavioral finance and the work done by Tversky and Thaler and so many others. Nobel Prize-winning research all has it best. We're not going to change consumer behavior. Because we're all humans, we act emotionally, we just aren't able to look 30 years out. We look 30 minutes out. We spend more time planning vacations than retirement. That is simply not going to change. So, what we need to do are two things: First, to help people understand the importance of the subject, help them understand that it's really easy to understand these concepts. Wall Street does a good job at making things confusing to try to make you their slave. We don't need to do that.
Helping you understand interest-rate risk is simple and easy to do. Anybody can learn it, even a five-year-old, and it should be taught as early as elementary school. Once we teach people this, we then help them understand that the best way to have you implement it, is to automate it. And this is what Richard Thaler argues for so much. We need to automate America's money behaviors. This is why 401(k)s are so successful, because you have money taken out of your paycheck without you thinking about it; the savings occurs automatically. Same thing with Social Security. I don't have to ask if you're willing to save, I don't have to motivate you to write a check or make a deposit. It just happens automatically. And we need to do more and more of that for every aspect of key personal finance issues. We need to do it not just for retirement like we do with a 401(k). We also need to do it for college, we need to do it for homes, we need to do it for cars, and we need to do this for cash reserves and rainy-day funds. Because all of those things happen in life, and nobody is going to take the effort and the time to go proactively handle it on their own. Even if they try, they won't sustain it. Even if they attempt to sustain it, life gets in the way with a job loss, or a medical issue, or a distraction, and they just don't stick with it. We've got to automate the savings effort across the board for people, making it easy, cheap, and affordable and automated so that people can get it done despite our own emotional inclinations.
Ptak: Well, Ric, I think we could ask you questions for hours. What terrific insights. Thanks so much for taking the time to speak with us today. We really appreciate it.
Edelman: It's been my pleasure, Jeff. Christine, thank you so much.
Benz: Thank you so much.
Ptak: Thanks for joining us on The Long View. If you could, please take a minute to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow us on Twitter @Syouth1, which is, S-Y-O-U-T-H and the number 1.
Benz: And @Christine_Benz.
Ptak: George Castady is our engineer for the podcast, and Kari Greczek produces the show notes each week.
Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)