Episode #47: Ric Edelman, Edelman Financial Service, “47% Of The Occupations In America Will Be Gone Within 15 Years”
Guest: Ric Edelman. Ric is widely regarded as one of the top advisors in the advisory field. He is the 2017 recipient of the IARFC’s Loren Dunton Memorial Award, awarded to an individual who has made a substantial contribution to the financial services profession and/or financial interests of the public. He is also a member of the Financial Advisor Hall of Fame, sponsored by Research magazine, has been named among the “15 most transformative people in the industry” by InvestmentNews, and voted by readers of Wealth Management as one of the “four most influential people in the financial services field.” Ric is also a #1 New York Times bestselling author. With more than 1 million copies collectively in print, his nine books on personal finance have been translated into several languages and educated countless people worldwide.
Date Recorded: 4/6/17
Topics: In Episode 47, we welcome New York Times bestselling author, Ric Edelman.
We start with some quick background on Ric, but then jump into the main topic: the future of technology and how it will affect our lives.
In essence, the future is going to look far different than what we’ve known. The tendency is to believe that the future will be similar to what our parents and grandparents experienced as they aged. A linear progression – school, work, retirement, death.
Ric tells us this is going to change. The linear lifeline is going away. It will more resemble school, work, back to school, a new, different career, then a sabbatical, more school, and so on… Think of a lifeline that’s more cyclical.
What’s the reason? Well, we’re going to be living far longer. Technological and health care advances mean we’re going to be far more vibrant much later in life, so this will change everything we know about retirement and our traditional life-paths.
The guys then dig into the role that technology and robots will play in all this. Robots are going to eliminate numerous existing occupations. On the other hand, new jobs and skill sets will be created, but we’ll have to go back to school to learn them.
Meb ask Ric to dive deeper into this “loss of jobs” forecast, as it’s a common source of concern for many people.
Because of computers’ increased capacity, robots will be able to do jobs that humans do – and not just “factory line” type jobs. Any jobs that are repetitive in nature are at risk – which means white collar jobs too; for example, certain types of legal work. As another example, did you know that computers are already writing news articles? There’s a program that currently writes sports stories, and apparently, readers can’t tell the difference between a human and computer author.
Ric tells us “According to Oxford University, 47% of the occupations in America will be gone within 15 years.”
So what can you do to protect yourself from being replaced by a robot?
There are 4 skill sets that will give you an edge: thinking, managing, creating, and communicating. These four things will be the most difficult for computers to do.
The conversation bounces around a bit before the guys dig deeper into how working has changed over the years – and how it will continue to change. This leads into a conversation contrasting the “New York model” with the “Hollywood model.”
In essence, the New York model is “one job.” You do a given thing with same people for the same customers for decades. With the Hollywood model, you have a group of people who come together for one project, though they’re likely working on multiple projects at the same time. You’re using your skills in a wide variety of activities at the same time. We’re moving toward a Hollywood model.
Meb asks how this view of the future impacts asset allocation.
There are two big ways: One, we need to increase our allocation to stocks far more, and maintain it for much longer. Most peoples’ asset allocation models are flawed in this manner.
Two, we need to re-think the types of companies that are in our portfolios. Most of these businesses were likely built for the 20th century – and if so, they’re at risk of failing in the 21st century. As an example, think Kodak that went bankrupt when it couldn’t transition and monetize newer technologies. Ric mentions Tesla and AirBnB as two examples of 21st century companies.
This leads into a discussion about an ETF that targets only 21st Century companies. You’ll want to hear this topic.
There’s way more in this episode: behavioral challenges for investors and the role that an advisor should play in helping… an irrevocable trust, created by Ric, that’s helping parents save money for their children… the challenges facing Social Security given our much longer life-spans… Even why personal finance isn’t taught in schools, despite being one of the most critical skills our kids should learn.
So why isn’t it taught? Hear Ric’s thoughts in Episode 47.
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Links from the Episode:
2:55 – The Truth About Your Future – Ric Edelman
9:50 – ROSS (Robotic Lawyer)
14:20 & 19:20 – The New York Model vs. The Hollywood Model
15:53 – CRISPR DNA editing tool
32:56 – Vanguard: “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha” – Kinniry, Jaconetti, DiJoseph, Zilbering, & Bennyhoff
33:17 – Morningstar: “Mind the Gap” – Russel Kinnel
34:11 – Edelman Online
38:00 – RIC-E Trust
Transcript of Episode 47:
Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the Co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
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Meb: Good afternoon podcast listeners we’re very excited today to have a special guest Ric Edelman. Welcome to the show.
Ric: I’m really glad to be with you Meb, thanks so much.
Meb: Listeners, I’m sure all y’all are familiar with Ric but a quick background for the younger crowd he is a… is this your ninth book Ric by the way?
Ric: It is, yes, this is my ninth book.
Meb: Just published a new book which we’ll get excited to talk about today, but he’s done everything from being a professor to hosting his own radio show for, man, over 25 years so it’s good to have him on the other side of the mic. Also, publishes a newsletter, testified before Congress, has been on Oprah, and in his spare time ran a registered investment advisor that now has over 30,000 individuals, 42 offices, manages over 17 billion. So Ric, let’s… His new book which just hit the New York Times best seller, congratulations, is called “The Truth About Your Future. The Money Guide You Need Now, Later, and Much Later.”
The way this book flows is it talks a little bit about the future of technology and how it applies to people’s lives. So I’m gonna let you get started by leading it in with a quote, two quotes you started the book with. One which is Yogi Berra, you say, “The future ain’t what it used to be.” And then lead on with talking a little bit about you said “Financial planning is all about anticipating and preparing for the future.” You say a little bit that the future is gonna look a lot different. Why don’t we get started there?
Ric: Sure, it’s really very true, Yogi Berra is right. Everybody is anticipating that their future will be similar to the way it has been for their parents and grandparents. That’s the way it’s always been in history and we act linearly, we assume that we’re gonna work until our 60s, we’ll live until our 80s or 90s, that’s the way it’s always been and we know we’re living a little bit longer, but that’s what our future is, we think. And we have experienced a linear lifeline, historically. Meaning you’re born, you go to school, you get a job, you retire, you die, in that order one at a time.
That linear lifeline is going away. Instead you are not going to go to school, work, retire, die, instead you’re gonna go to school, you’re gonna go to work, you’re gonna go back to school, you’re going to emerge in a totally new career, then you’re gonna go back to school, do it again, and then you’re gonna go on a sabbatical. Not for a few weeks or few months but for a few years and after your sabbatical, you’re gonna go back to school, and emerge in yet another new career. And you’re gonna repeat this cycle forever. It’s called the cyclical lifeline instead of a linear one, and the reason this is occurring is because you’re not gonna die in your 80s or 90s. Instead, you are likely gonna live until you’re 110, or 120.
And because of that, the notion of retirement as we’ve come to understand it, is going away. There’s no way you’re gonna be able to retire at 65 if you’re gonna live to 125. No way you’ll be able to afford a 60-year retirement, nor are you gonna wanna be retired for 60 years, life will get very boring very quickly if you’re not productive and engaged and participating in society. So you’re going to wanna work, you’re gonna need to work economically as well, and here’s the good news. You’re gonna be healthy enough to do this. A lot of folks fear the future, they fear old age because they picture Whistler’s[SP] mother, and nobody wants to be sitting in a wheelchair looking out a window while drooling. I mean that’s just not exciting.
But that’s not the future you’re going to have, because of medical advances in the field of exponential technology, neuroscience, nanotechnology, bioinformatics, bionics, all of this means we’re going to be far healthier in the future than we are today. All the leading diseases of today heart disease, respiratory illness, Parkinson’s, Alzheimer’s, cancer, diabetes all these are gonna be cured. In fact, aging itself, scientists are recognizing is simply a disease. It is not a natural part of the lifecycle, and they are recognizing that they can slow disease and even reverse it. They’ve already done this in mice and as a result by the time you’re 95 years old, you’ll be as healthy as you are at 55 years old. And just as you are a vital vibrant member of the community at 55, so will you be at 95 and 105, and 115.
So that changes everything about our notion of retirement and working and longevity, but it gets a little dicey, because robotics and artificial intelligence are going to eliminate most of the jobs that exist today. So although you’re going to be healthy enough to work and you’re gonna wanna work, robots and computers are gonna take away a lot of existing occupations. New occupations are going to be created but this means you’re going to have to be retrained and going to become better educated and skilled in careers that frankly don’t even exist yet. And that’s why you’re gonna go back to school on a repeated basis, to stay current and knowledgeable, so that you can be viable and competitive in the workplace. And this contributes to that cyclical lifeline I described.
Meb: And so there’s quite a bit in there in that great first intro. So you’re a young guy by the way. What’s your target? What are you planning for yourself? Is this like a 110 years old you’re gonna expect to live to?
Ric: I’m fully expecting well into my 100’s and…
Ric: There are some futurists who say it’s even going to be beyond that. So yeah, there’s no question in my mind, the leading cause of death in the future will be accidents and stupidity.
Meb: Well, I love it you’ve got Ray Kurt [SP] as well, on the back your book, giving a recommendation so I can see the influences there. So let’s chop this up a little bit we’ll talk about a few of the technologies and impacts before eventually segueing into kind of the investments side. One of the things that probably concerns people most is, as you mentioned jobs, and so there’s a lot of jobs that are what we call not particularly…not gonna be around due to automation or robotics and encourage people to think about having a career or jobs that are a little more future proof. What are your thoughts on areas that are obvious gonna be most impacted, as well as you had a great example in your book where you’re talking about the editors of “Car and Drivers” saying… and this is only like a year or two ago, saying there will never be a fully autonomous car. So maybe talk a little bit about the employment and job picture.
Ric: Yeah, there are a lot of luddites [SP] out there, there are a lot of people who are resistant to technology, who are in denial about technology, who don’t like change and I get it, none of us like change we like things the way they are. And we certainly don’t want disruption but there’s no denying that exponential technologies are dramatically improving the entire environment. Computers are getting faster, they’re getting smaller, they’re getting cheaper and as a result of this they’re getting smarter.
Because of their increased capacity and capabilities, computers and by extension robots, are going to be able to do jobs that currently humans are doing. So any job that is predominantly repetitive, redundant, is going to be taken over by a computer or a robot. And an awful lot of jobs in America are exactly that they are repetitive and even high paying jobs like lawyers and in the financial services industry. I’m not just talking about coal miners and ditch diggers who are certainly engaged in the repetitive tasks. I’m not just talking factory line workers who are the ultimate of repetitive tasks lawyers and accountants and financial services people are going to find their jobs replaced by computers.
There’s already a robotic lawyer called Ross that has eliminated a lot of jobs of first year law firm associates. We already have computers writing news articles. Quill is a program that’s used by the Associated Press, Forbes and a number of other organizations that write sports stories and other news articles and humans are unable to determine the difference between a human written article and a robotic written article. So we’re gonna see this continue in the future, and I’ll give you a couple of simple examples. The iPhone everybody is amazed at this, that the iPhone is only 10 years old. Can you remember Meb life without the iPhone?
Meb: I was thinking about it the other day when I was traveling somewhere and pulled up a bunch of maps and just literally thought for a second I was like, “My god, how in the world would I get around…?” and I was in a foreign country, get around this place without this iPhone? I would have to talk to people, I would bumble and stumble. It’s almost unfathomable at this point.
Ric: And it’s only 10 years old. But at the same time let me ask you this, when’s the last time you talked to a travel agent? Most of us we use an app on the phone to buy airline tickets and book hotels and car rentals. So travel agents are an industry that is dying and people are losing their jobs left and right because of the Smartphone. But at the same time, we now have 300,000 Americans working full time as app developers, they’re earning an average of $100,000 a year, three times as much as travel agents used to make. So we’re seeing what technology does. It eliminates some jobs but it creates brand new ones.
So if you’re looking at a career that you think, “Gee is my current career at risk because of repetition or obsolescence? What kind of a career can I get into that will be able to take advantage of technology?” It’s four broad categories. Thinking, managing, creating and communicating. Those are the careers that are going to grow in society as a result of technology. So you’ve gotta think about this for what you wanna do yourself and you’ve gotta think about this for your kids who are headed to college. Make sure they’re studying fields that are not going to be obsolete due to technology.
Meb: You know, that’s interesting. Your talk about the iPhone makes me immediately think back to the first time I saw an iPhone. A buddy had it, we were sitting there watching football, and he’s showing to me and it is astonishing, it’s an incredibly cool product. But I remember my response, I was like, “Man why would I want that? I have this amazing flip phone that does everything I need to do.” And fast forward 50 iPhones later that I’ve broken and lost. But it just goes to show how quickly it can change. And so this is interesting takeaway because part of it feels like at its core it’s gonna be hard to prepare for the future. Where things are changing so fast, jobs are changing, the world’s changing but you’re saying there’s these four core elements can you repeat them one more time for the guests on the skill sets.
Ric: Yes, what I describe in my book “The Truth About Your Future”, the four skills sets that are going to be viable and vital in the future thinking, managing, creating and communicating. Those are the four things that computers will find it most difficult to do. In other words, it’s judgment, its relationship, it’s your ability to invent an idea, to communicate it to others, to manage the process for execution and production and distribution, and to create that entire scenario. So thinking, managing, creating and communicating are fields that are going to be very, very valuable going forward.
Meb: You know, it’s funny as I read through this book so many threads of my own life just came to mind. I mean, I remember talking to my father in college and he was an engineer and I ended up studying engineering. And he had great advice, he said, “Meb, study engineering and science, it will be a great base.” And it ended up being a great base and of course I don’t do anything related to biotech anymore. But he also came from that generation that you talked about where it was one job. I mean he was a lifer at Lockheed and similar air space companies, and after about age 28, I’d had probably five jobs and he’d just pull his hair out thinking about.
And we’re not gonna talk too much about it here because some other areas I wanna talk about, but Ric has some great examples talking about the New York model versus the Hollywood model and all these other concepts about employment, we’ll put it in the show notes but highly recommend taking a look at it. I wanted to segue briefly to thinking about living longer and concepts around retirement. And something you mentioned in the book is you said, “The demise of retirement is not something to lament but to celebrate.” And back then when you started being an investment advisor you were doing plans for people at 85, with their life expectancy now you’re saying 110, 120, touch a little bit about how this is gonna affect people’s lives on the longer life expectancy. And you even talk at one point you say it’s gonna render nursing homes obsolete, which I think is maybe a typical view of what people would assume that maybe would actually be the opposite. Maybe you wanna talk a little bit about there before we get into the investment side.
Ric: Sure, there’s no question that health is going to get better, medical science is advancing at rapid paces and so the reasons that people go to nursing homes are all gonna go away. We’re already replacing hips and knees, we’re replacing hearts and livers and kidneys. In the future, we’re gonna replace every organ in the body, we’re gonna replace every joint, every muscle, every bone, we’re gonna be replacing things at the DNA level. We’ve already developed this thing called Crisper which is a way for scientists to edit DNA. We can now edit DNA as easily as you cut and paste in a Word document, and what this means is, if you have a gene that’s deformed or defective they can replace it. If you’re missing a gene, they can insert it, and as a result we can dramatically improve the health of an individual at the molecular cellular level, at the atomic level through our DNA. Which means your future is going to be healthier than ever. This is how we’re gonna cure everything from not just diabetes but obesity and alcoholism by affecting the DNA in our bodies. And so why on earth are we gonna need nursing homes in the future?
So those things go away. As a result you’re gonna be living at home the way you do now enjoying a lifestyle that you are engaging in today, but because you’re gonna live so much longer and be healthy so much longer, you’re gonna reinvent yourself several times in your life. It’s already happening. According to the Department of Labor the average 35-year-old in this country has had eight jobs. That’s going to continue and grow in the future. So people who are…they’re “blank” forever, they’re a school teacher, a firefighter, an airline pilot, in the military, folks who have been a veterinarian for their career or a lawyer these folks are not gonna keep doing that for the next 60 years. They’re gonna quit and they’re gonna go back to school and engage in something else and emerge in a totally new occupation or totally new career.
So yeah, you’ll spend 20 years as a school teacher, but then you’ll spend another 20 years doing something completely different, maybe as a musician. And then you’ll do that for 20 years and you’ll emerge again, coming out and the field of social work, and you’ll do that for 20 years and then you’ll leave that and you’ll go into public service, and you’ll leave that and you’ll go do’s when else completely different in the field of computer programming, or who knows what. And this cyclical environment where you’re constantly doing something different is going to be extraordinarily exciting and fulfilling as well as economically rewarding.
Meb: That’s interesting. So Ric, for someone who’s done so much already have you started thinking about your 60s, 70, 80s? What other sort of career paths do you have in the back of your head? You got anything you’re marinating on?
Ric: Sure, I’ve been engaging in this kind of behavior for a very long time myself. I created my financial planning firm 31 years ago with my wife Jean, but along the way I’ve also built a large activity as a radio talk show host and a television talk show host, and as an author of now nine books, and as a seminar leader and thought leader in the industry. I have several other business activities on the side. For example, right now we’re looking to bring minor league baseball to our local community so we’re doing… always engage in a variety of things.
I’ve always adopted the Hollywood model as opposed to the New York model of employment. I’ve always been fascinated by folks who have a single paycheck, a one W-2, as opposed to having a multitude of them and a variety of different business interests and activities. So I’ll always engage in those kinds of things. One of the things I look forward to doing one day is learning how to play the piano. I have no musical skills of any kind, unlike both of my brothers who are both talented musicians, and I’ve always wanted to play the piano. And I know that I will in the future, there’s no question about it.
Meb: Well, that’s perfect you can record the intro for your radio show. Will be Ric on the piano. Didn’t interrupt you because we skipped over this. Could you define just real quick for the listeners what you mean by the New York versus Hollywood model?
Ric: Sure, the New York model is the traditional method of employment that we’re used to, you have a job, you go to one place to do that job, in New York you go into a big sky rise building and you do a given thing and you do it with the same people for the same customers on a repeated basis, often for decades. I often find people who say they’ve got 20 years of experience and in fact they don’t have one year of experience 20 times, because they just do the same thing, for the same people all the time that’s a traditional New York model. And if you lose that one job, it’s scary you gotta go find a new one.
The Hollywood model is very different and it will be the format broadly used across the country in the future. In the Hollywood model, you have a group of people who come together for a specific project. You have a producer, and a director, screenwriter, and an actor, and a makeup designer, and a costume designer and the music gets written, then you have a caterer, and you have a limo driver. And you have all these different people coming together, the film editors and on and on and on, who come together for a given project. And it’s a short-term project and once that project is finished they disband and they go on to another project. And often, they’re working on multiple projects all at the same time.
And that’s the model that is gonna be more common in the workplace in America in the future, and worldwide in fact. Where you will be engaged using your skills and abilities in a wide variety of activities, all at the same time. You’re not gonna have this womb to tomb employment like we used to have in the past, where you got out of school, you went to work for IBM and you stayed there until you retired 40 years later. That’s not gonna be the future. You’re gonna have a series of gigs and those gigs are all gonna be short term often simultaneous. That’s the Hollywood model compared to the New York model.
Meb: I was going to jokingly comment that living in LA the Hollywood model is actually most of my friends being quasi employed as actors, but I get it. So look this has been a good intro and I think it’s gonna be a lot for people to chew on, and mostly people listen to this podcast because we talk a lot about investing, and finance, and planning, so let’s segue now… although I did wanna ask you, you talked a little bit about 3D printing do you have a 3D printer yet, by the way?
Ric: No I don’t, at this point they’re pretty much still toys at the consumer level. I’ve used 3D printers and I’m real familiar with them, but at this point they’re effective use is at a significant industrial level. They’re not yet ready for home use.
Meb: I just love because Rick says eventually you’re gonna have a 3D printer in your kitchen, and I’m a terrible cook but a total chef science geek. So I have a blowtorch and a Sous Vide machine and everything else. I was trying to think of…I’d love that idea. Let’s segue a little bit to the planning and life time finance implications. You talk in the book, and the thread is… and it’s a great kind of mindset you talk about your plan for now, your plan for later, and your plan for much later, so why don’t we use that as a jumping off point? Because there are some elements of your lifetime financial plan that may be similar than in the past, of our parents’ generation and some that are gonna be vastly different. Why don’t I let you just kinda take that lead and run with it, and we’ll kinda go down some different branches from there?
Ric: Sure, in my book “The Truth About your Future” I lay out the fact that you need three different financial plans, not just one, and the reason is because we’re living so much longer than ever before. And so you need a financial plan for now that focuses predominantly on your immediate needs for example. Your need for insurance. What happens if you suffer an injury or illness right now or death. You need cash reserve in case you lose your job or there’s an unexpected medical expense. You need a financial plan now for privacy protection. Increasingly our lives are being lived online. In the old days, you took your family photographs put them in a photo album shoved them in a closet. If you died your kids went to the closet they got the photos but today those photos are all online, they’re on Facebook, they’re on Pinterest. They’re on a variety of different online sites, password protected. How does your family get a hold of your online life if they don’t have access to those online accounts? Your banking is now being done online, your brokerage activities are being done online, your health insurance is online. So we need to protect our digital assets online and incorporate them in our estate planning. So you need a financial plan for now based on today’s world that we’re living in.
Second, we need a financial plan for later. Helping you transition over the next couple of decades as robotics and artificial intelligence permeate in the marketplace and wipe out a lot of jobs. According to Oxford University, 47% of the occupations in America will be gone within 15 years, so half of Americans are gonna find themselves having to go get new jobs in brand new careers, often fields that don’t currently exist. So we need a financial plan to help us figure out how to transition and how to sustain our lifestyle while we’re engaged in that transition. That’s the financial plan for later. And then finally our financial plan for much later. When you’re going to live 50, 60, 70 more years, we need to take a completely different approach to insurance to investments and to our estate planning. If you have seven generations living in your family and you have a variety of relationships because of multiple marriages and children from a variety of scenarios, this requires a dramatic change in review over our estate planning, our investment management strategy, and our insurance. So you need a financial plan for much later as well.
Meb: All right, so there’s a lot to chew on in that discussion, why don’t we talk about investments as the first part and how is sort of this view of the future, in this rapidly changing environment how does that impact your views on say asset allocation for both a young person, an older person? Does it change anything and what are the main considerations that they would need to think about in investing for the next 10 to 100 years?
Ric: Yeah, it changes things in two very important ways. First, we need to dramatically increase our asset allocation to equities, meanings stocks we have to… The big issue is how much of your money should be in stocks versus bonds. Most Americans have far too little of their money in stocks and most people, as they age, will reduce it, the attitude is that a 65-year-old should be far more conservative than a 25-year-old. That makes sense if your dead in 10 years but it doesn’t make sense if you’re going to live another 60. So we need to increase allocation of stocks and we need to maintain that increase for a much longer period of time. So that’s the first piece. Most people have an asset allocation model that’s flawed that’s number one.
Number two, is the kind of stocks in your portfolio. The majority of companies were built for the 20th century and companies… David Rose said this, he’s one of the top angel investors in America, a brilliant writer himself. And he said that, “If you are investing in a company, or rather any company created for the 20th century will fail in the 21st.” And the best example I can give you is Kodak, this is a company that’s 135 years, 170,000 employees and yet it went bankrupt in 2012, because nobody is using film anymore they were instead taking photographs with digital photography, and Kodak couldn’t make the shift. So the year they went broke, come along Instagram, a company that’s less than two years old and it’s sold for a billion dollars with only 13 employees because it took advantage of digital photography.
So we have to recognize that the companies we’re investing in are probably not the ones that are going to survive and thrive in the future. Look at Tesla, came out of nowhere and it now has a market value bigger than Ford. Look at Airbnb the world’s largest hotelier doesn’t own any hotels. So we need to be investing in companies for the 21st century as opposed to companies for the 20th.
Meb: And so how does one do that? The basics I know, a first step of course would be to index so you’re guaranteed to own the winners as they become a bigger part. How do you actually implement that? Are you using mutual funds, ETFs?
Ric: Well, this was a real challenge and as I began and continued my research in the field of exponential technologies, I began to realize this point, that we need to invest in companies that are focusing on the future that are using technology to grow and develop their businesses. And I discovered that there was no mutual fund, not a single ETF that had a focus on exponential technologies and companies that are exploiting them. So I went, three years ago, in 2014 I went to BlackRock the world’s largest money manager. BlackRock owns iShares the biggest ETF producer in the world, and I asked BlackRock to create an ETF that focuses on companies that are growing based on exponential technologies.
BlackRock loved the idea, they went to Morningstar and asked Morningstar to construct an index which Morningstar did, and they call it the Morningstar exponential technologies index. They licensed it to Blackrock and BlackRock introduced two years ago this month in fact, it was March of 2015. BlackRock introduced the iShares exponential technologies ETF symbol XT. I have no financial stake in that ETF, I just asked them to build it, so we don’t earn any fees or compensation from its existence. But we have placed virtually all of our clients into that ETF. Because we believe that it makes an awful lot of sense.
And the construction of this ETF is simple. Morningstar identified 200 companies from around the world, most of them are overseas, that are either developing or using exponential technologies to grow their companies. And we believe that this is the proper kind of a focus that consumers should have and we believe that XT belongs in a client’s portfolio for long term stock investment.
Meb: And by the way, listeners, that’s been a very successful product up around a billion in assets under management. Ric, so one of the challenges as you know, you’ve been doing this for 30 years on Managing Money, is the behavioral aspect of clients. And so one of the difficulties for what you mention is in a particularly equity centric portfolio of course is the drawdown’s and bear markets and we haven’t seen one of those in a while. A lot of my young millennial friends are I think expecting 12 to 15% equity returns forever because they’ve never been through one, but of course Bear markets are normal and they happen. What is kind of your solutions to either nudges or ways to help clients kind of stay the course, particularly when they have a large equity portfolio?
Ric: This is I think one of the most valuable services that financial advisors provide. I know that it’s an extraordinarily important function we give to our clients which is the hand-holding, which is the sounding board. Helping our clients make the right decision at the right time for the right reason, because left to their own devices as you pointed out Meb that most consumers, most investors are their own worst enemy. We are victims of emotion we tend to react either fear or greed. Fear we sell low, greed we buy high and as a result we’re buying when we should be selling, we’re selling when we should be buying. We’re doing the wrong thing at the wrong time for the wrong reason. And by using us as a sounding board with our experience and our expertise and the fact that we’re dispassionate because it’s not my money at the end of the day, it’s yours, we’re able to provide our clients with a calm professional measured evaluation of what’s happening, to help them avoid doing the wrong thing at the wrong time. So I would argue that you should approach money the same way that alcoholics approach Westie [SP].
These folks when you look at alcoholics who are recovering that’s what the 12-step program is all about, that’s what Alcoholics Anonymous is all about. They recognize that their own willpower isn’t enough to help them stay sober, that’s why they rely on a mentor, why they rely on a coach, why they rely on a friend to help them stay straight and narrow when they are personally weakening or finding themselves threatened, and our clients are the same thing. So before they sell, they call us and they talk to us and by having that conversation, we can often refocus them back to what really matters and help them avoid the behavioral mistakes that afflicts so many investors.
Meb: Vanguard has a great study that talks about advisors and tries to quantify their benefit and interestingly enough and we agree with this, they state that the largest benefit of course is the behavioral coaching or keeping people from doing dumber things that they would already do. And a lot of this you see in the mutual fund data the classic Russ Kinnel studies at Morningstar called “Minding the gap”, on how the dollar weighted flows for a lot of funds trail the time way it flows because people chase like you said the hot markets and vice versa. So Ric, I sat in on a panel you did a few years ago at the etf.com conference, and it was in the early days of all the excitement about robo-advisors. And you were paired on the panel with Adam Nash who was the CEO of Wealth Front who’s no longer the CEO of Wealth Front, but maybe help our listeners talk a little bit about from someone who’s been managing money a long time, to kinda relay your thoughts on that trend in robo-advisory. Because you touch on it a little bit in the book and your views on it and kinda your views on how that will kind of evolve in the future for both investors as well as advisors.
Ric: Yeah, my firm built one of the first robo-advisors, Edelman online which still functioning today and doing just fine. So I’ve been very much involved with robo-advisors since the beginning. It has evolved as you’ve noted now very much so and so. What it really comes down to is that in the early days…and Meb you remember this very well, in the early days it was an “us versus them” conversation. You had brick and mortar advisors, human advisors and then you had the online robo-advisor and both sides hated each other, bashed each other, talked about the negatives of the other guy and considered each other to be a competitive threat. That conversation has gone away, as I predicted it would.
What we’re now seeing is the inevitability of the future. We’re recognizing that neither one will survive in the future independently. As a human advisor, I must use technology to help me deliver effective client advice and service for my clients. And the robots are discovering that online algorithms are insufficient to meet the demands of consumers. So all of the online sites are adding human advisors to their efforts so you’re seeing a morph, you’ve seen BlackRock, Fidelity, Vanguard, Schwab, TD Ameritrade everybody is launching… Wells Fargo’s just announced theirs. Everybody is launching a robo-advisor. All the brick and mortar guys are doing it. And the robots are adding humans to their offerings.
So it’s not a question of us versus them it’s recognizing that there are attributes, they are qualities, there are abilities that each offers and everybody is going to be offering everything to the benefit of the ultimate end user, which is the investor. So if you’re not up doing this if you’re an advisor and you are resisting technology, you’re gone. You will not survive in the marketplace for long. And if you’re an investor who’s happily using an online service, you will discover that you aren’t getting all of the services that you need, and you’re gonna need to turn to an advisor for what you’re missing.
Meb: A lot of your views at that time and still today aligned very much with what we believed and thinking about it, it’s kind of happened to where the killer business model clearly has become kind of the cyborg advisor. Meaning a traditional financial advisor aided by the use of technology. My favorite comment on this space is our buddy Josh Brown who years ago said it best he says, “Look I was around when email got introduced and when all the financial advisors starting using email, they didn’t start calling us email advisors, just like they’re not gonna start calling us robo-advisors today.” But I do believe that the traditional advisors that derive their whole value-add from just the asset allocation process, are the ones that likely will be in trouble. Because for the most part the friends at etf.com published a piece update, yesterday talking about the cheapest portfolio in the world. And you can get an asset allocation ETF or portfolio for less than 25 bips at this point all the way down to less than 10 if you really wanted to try.
But the value-add, like you mentioned, the behavioral coaching, the estate planning, all the other goodies, is really what is gonna be kind of the future-proof part of the advisory business. There was something really cool in your book that just was a tiny box that I had never heard of that I thought was interesting and to the extent you talk about it, would love to hear about it. You develop something and I think it’s even patented called…and I may get the name wrong, but it’s a Etrust. Could you maybe talk about that and it’s interesting, as we’re talking about behavioral nudges and long term time horizons, could you talk a little bit about that concept?
Ric: Yes, it’s the RIC-E Trust, the Retirement Income for everyone trust. I introduced this into the marketplace in the 1990, and it’s patented. I have two patents, I don’t know many advisors have any patents but I’ve got two of them for this. It’s a unique retirement planning tool for children, and we invented it for people to be able to set money aside for a child as young as a newborn. We’ve discovered over the years, that many people provide them for children who are much older than newborns. The oldest was a sadness for a child who’s 54. But a lot of them get established for teenagers and kids in their 20s and so on.
And it’s a real simple concept. Parents today know how hard it is to save money for the future. And the most common thing people say to us at our seminars is, “I wish I’d started 20 years ago.” We’re all in our 40s and 50s and we know we squandered our 20 and our 30s, because we were didn’t think about our future, we thought we had plenty of time and now we realize we blew 10 or 20 or 30 years’ worth of savings opportunity. And parents are realizing, “Boy wouldn’t be great if I could do this for my kids.” Well, the problem is that you can’t under current tax law and under the current investment methodology, there’s really no effective way for you to open an account for a newborn knowing for sure that that money will remain intact when the child is 65 years old. And that’s what the RIC-E Trust is, it’s a patented retirement planning tool that allows you to set money aside for a child of any age…in fact, it doesn’t even have to be a child, you can do this for anybody, a friend, family, niece or nephew, grandchild, what have you. And it’s a minimum of $5000. There’s a onetime set up say of $400 and it’s an irrevocable trust.
Meaning that once the money is placed into the trust the money stays there and is never touched. It’s untouchable in fact until retirement age. You set the age when the child is able to get the money. And we fund these irrevocable trusts with a variable annuity, we use the Polaris variable annuity which allows the money to grow on a tax deferred basis. So there’s never before been a way that you could set money aside for 50, 60, 70 years, 80 years with no taxes, knowing for sure that the money will be there untouched. And there are now 4000 or 5000 children who are future beneficiaries of RIC-E Trust as a result of this.
Meb: We think a lot about that and as an advisor who does separate accounts as well as ETFs, we spend a lot of time thinking of how best to package, and behavioral ideas about having people really truly think long term. And one of the benefits of private equity or private funds per se, is these really long time horizons that you just can’t sell if you didn’t want to, or if you wanted to even, the problem of course is the high fees. But coming up with some of these concepts we were literally joking about this in the office yesterday some ideas called something like a forever fund that enables money to compound for a long time, but keeps people from really doing the dumb stuff. Kind of in the same vein, that there’s probably some policy challenges our country and we’re gonna face in the future. Talk a little bit about how you see longer life times for people, how is gonna impacts certain things on the investing side for like Social Security, pension funds and retirement, in general? What else should people be thinking about or not necessarily thinking about that they may not be prepared for?
Ric: Yeah, longevity is a huge issue the Social Security system is under threat as we all know, Congressional Budget Office says by 2030, it’s broke. Benefits have…nothing has changed. Benefits are gonna get cut 30% and taxes are gonna rise 20%. So we recognize that this is a huge problem. Next month in fact I am introducing my solution to Social Security. We have an event at the National Press Club on April 19th, in just a couple of weeks to reveal my solution to this problem. Because it is a huge national issue. It’s probably the most significant issue affecting retirees in the nation. So the good news is we’re gonna live longer than ever but the bad news is Social Security can’t afford to pay for all those retirees. So this is a huge issue we have to deal with.
Likewise, pensions are severely at risk on the same basis, because the actuarial data is not assuming that people are gonna live into their hundreds at all they are assuming they’re going to die in their 80s instead. So people who are promised pensions have to recognize that those promises are probably going to be unfulfilled. And as a result of that we have to dramatically change the assumptions we’re using and the expectations we have, of financial security. So your future, more than ever is going to be dependent on you and your behavior, your actions. And the sooner you recognize it the sooner you deal with it the better off you’re going to be.
Meb: Yeah, we also mention the challenge on the pension funds at least in the shorter term with lower interest rates and potentially lower expected on return on equities, the challenge is a lot of those funds being underfunded as well, the traditional 8% expected return may have made sense in a world of four or five percent inflation, but really down in the zero to two percent inflation world with interest rates maybe at two percent, it’s going to be a much higher hurdle. It’ll be an interesting time. We wrote a paper we’ll put in the show notes called, “What If 8% is 0%? Pension funds investing with eyes closed and fingers crossed.” That’s a mouthful. That’s been our least downloaded paper of all time and you can probably see why.
Ric: “Eyes closed and fingers crossed”, that’s a great description of what’s going on right now.
Meb: Yeah, and don’t get me to go down this rabbit hole this could be another whole hour talking about institutional investors making a lot of similar mistakes as behavioral investors. I just saw a great chart in Germany that aligns very much in the U.S., but when the pension funds invested most in stocks, of course it was late ’90s or early 2000, and in Germany at least, it’s now they’ve gone down to some of the lowest levels ever. Anyway, one question for you and then we’re gonna do a couple quick hits and promise to let you go. I know you’re working in New York City. Something that’s always bothered me and I don’t understand and it’s more of a thought question. Since it’s one of the most useful and relevant skill sets to know, why is personal finance not taught in high school or general education curriculum. Any thoughts there?
Ric: Yeah, I’ll give you the bottom line reason for this. I’ve been heavily involved over past couple of decades in financial literacy activities with the Jump Start Coalition, with the American Savings Education Council, with the Employee Benefit Research Institute and other groups, and I can tell you exactly why. It’s because of the NEA. It’s because the teacher’s unions don’t want to teach personal finance and there are two reasons they don’t wanna teach it. Number one, they don’t understand it. You know, a school teacher can only teach you subject matter that they know about. So they emerge from college as a science teacher, or an art teacher, or a Phys. Ed. teacher, or a math teacher, or a literature teacher. They don’t emerge from college as a personal finance educator. So they can’t teach what they don’t know. That’s the first problem.
The second problem are the standards of learning. They have so many mandates from the governments at the federal and state level already, of what they must teach, that the last thing they want is another requirement. So when I go to meetings of Jump Start or ASEC or these other groups in the room always you find academics, you find corporate sponsors, you find government officials, you find nonprofit organizations, you find financial services representatives. The one group that’s not in the room are educators. And so right now you only have 17 states in the country that require high school students to take a personal finance class, only 17 states. And of the 17, only 14 require that they actually take a test. That’s the problem is that we have not institutionalized this into the educational curriculum on a national basis.
Meb: Yeah, it’s frustrating. Maybe it’s on the to do list in the coming years. A couple of quick questions, and I promise we’ll let you go. Two quick questions that popped in from Twitter, I said, “Hey, I’m gonna have Ric on the show. What do you wanna ask?” And one person said, “If you were to start an advisory firm from scratch today, what would you be doing differently this time?” I’m guessing the answer is probably it’s what you’re doing now with your advisory firm, but I’ll ask it as pure as it was asked. So what would you be doing differently this time?
Ric: Yeah, I think the question is in the context of how do you build a successful practice in today’s world? And I would do it the exact opposite of what I did last time. In other words, I’m pretty well known for having built a very large broad national firm through mass media, through broadcasting. I’ve been doing radio and television for 25 plus years and my books on a national basis, and seminars nationally. We’ll do six hundred seminars this year across the country and so on. Broadcasting has changed dramatically over the past couple of decades and the way that I engaged in radio and television literally doesn’t exist today. It’s not that I’m better and nobody can do what I do, it’s just the model doesn’t exist. The world of radio and the economic business model of radio and TV has just totally changed. So I would not say that anybody should try to do what I do. Every so often somebody says, “Rick I’d like to host a radio show,” and my response is, “You’re out of your mind.” Instead of being a broadcaster if I were going to start over today I would be a narrow caster and what I mean by that? I would choose the market segment that interested me the most, and I would delve deep into that target.
For example, if you became an expert on the financial planning and investment management needs of plumbers, you wouldn’t need to have anybody as a client other than a plumber. You would go to the plumbing convention, you would write an article for the plumber’s magazine, you would know everything there is to know about the plumbing business, and the people in it, and the economics of it. And you would be known across the country by plumbers everywhere as “the guy”, but an electrician will never have heard of you nor what an airline pilot or a school teacher or an office executive or retiree. Wouldn’t matter. Because there are so many plumbers in this country you can make a perfectly fine living as “the plumber guy”. And so I would narrowcast.
Medicine has been doing this for decades. I met a surgeon the other day, the only thing he does is operate on thumbs. That’s a pretty narrow specialty but everybody knows if you’ve got a problem with your thumbs, that’s the guy you go to. And people fly all over the country to have him do surgery on their thumbs. And we have medical specialties, we also have that in the field of law. There are highly specialized practices in law but in our business, we still don’t do that for the most part. Advisors are too happy to work with any client they can come upon. The only criteria is that they have a pulse. So I would argue that you should narrowcast. Choose the market segment, the type of individual either demographically or psychographically that you wanna work with and work with them exclusively.
Meb: I got a couple comments there, one it’s funny to talk about doctors because there’s a lot talking about the future proof of what type of doctors and there’s a classic example of the radiologist saying, hey, that’s one, despite the fact how much money they make, may be in jeopardy, but I think thumb doctor with the amount that people are playing apps on their phones and swiping left and swiping right, that might be a booming business for years to come. Second is what you mentioned about narrow casting is so true because some of the most successful ROIs we see are…like there’s some in SoCal here, where they focus purely on defense employees. That used to be a huge business here but still is, with Northrop Grumman and Space X etc. And they memorize their plans and focus exactly knowing how their options work and their retirement everything and similar…
You mentioned doctors and etc., and I think that’s a great piece of advice. But it also applies to content and so it’s always fascinating to me to see these little super niche ideas or concepts of content online, or someone’s writing about, “You know what? I’m only writing about Porter style beers that are brewed in the U.S.” And has thousands if not millions of followers or interested people. And also, it applies to publishing as well as monetization as well, where if you are in a world of how many six, seven, eight, nine, ten billion people, there’s going to be ten thousand that are probably super-interested in Porter beers, if not 100,000. So I think that’s great advice. One question we always ask guests is, what is your most memorable investment? And this could be winner, loser, trading instrument anything to take to mind, but most memorable investment in your career?
Ric: Of course, we always prefer to remember the winners. We’re all trying to forget the losers there were two. And one was dumb luck. The other one was an astonishing level of obviousness that proves how most investors don’t read. The one that was dumb luck was a bank stock. A bank got taken over and because it got taken over, it sold for a 30% premium which was very exciting. But then three weeks later bank the acquired it, itself got taken over with another 30% premium. So there was this massive profit in an extraordinarily short period of time, the kind of thing that will never happen again. It was literally getting struck by lightning twice it was kind of amazing.
The other one goes back to very early days of my career and I have to credit one of my clients who was in this. He was in the radio industry, a radio executive and he started buying the stock of a company in the radio industry, and I didn’t understand… and I eventually asked him why was he doing this, he was ignoring my advice of diversification and risk and all that kind of stuff. And he said, “Because they’ve just filed a 10-K with the FCC that says they are going to be required to sell their business, somebody has to buy them, and they have to pay this dollar amount, $20 a share.” And I went and looked at the 10-K and that’s exactly what it said.
So here they were basically acknowledging to the world that in a couple of months the stock would be $20 a share, which was a huge increase over its current price. And I said, “Isn’t this insider trading?” And he was like, “No, it was filed with the FCC, that makes it the most public of all documents.” So it was just an illustration that everybody should have been aware of this, but nobody was because nobody bothers reading 10-K. So it just demonstrates that if you do your research, you can come upon investment opportunities as opposed to listening to the guy at the other end of a bar talking about a hot stock tip and he doesn’t know what he is talking about.
Meb: That’s funny, listeners one of the best parts about the book is, you need to make it all the way through, because at the end Ric’s wife talks about in kind of an epilogue, and talks about the other side of money. And so much on this podcast and we spend so much time talking about investing and personal finance and everything and focus on accumulating the money but also there’s the flip side, which is of course how we spend it and in what you guys call, “the other side of money”. And you seem to be a bit of an optimist Ric, and I like kind of a quote you have, where you mentioned that this will be “the greatest time of our lives”. Maybe touch on that real quick as kind of a last stop before we start to close down.
Ric: Yeah, there’s a lot of fear about technology, robotics and AI, we’ve talked about and we didn’t even mention big data and all the other elements of technology that’s coming, and it’s unsettling. Disruption is nerve wracking. But you know what? You put it all together and we are going to enjoy an age of abundance like we have never seen in human history. We’re gonna solve all of our current problems. We’re gonna create a whole bunch of new ones, but the current problems of poverty and famine and crime and health, aging, all these issues go away. Energy, water, food, education, all these problems go away and we’re going to be finding ourselves in an opportunity to live happier, healthier lives, engaged with our families and our communities in a way we have never contemplated. And it’s going to be extraordinarily exciting and even more so if you are aware of what’s coming and make preparation for it. That’s basically the theme of my entire book “The Truth About Your Future.”
Meb: It’s great we have a quote that was on our first book, and still sits on our blog today, from George Mallory that says, “We do not live to eat and make money, we eat make money to be able to live that’s what life means and what life is for.” Ric, thanks so much for coming on today we really appreciate it. We’ll have to have you back on in five years to see what your next career path is. Where can people find more information if they want to learn more about your business and books and everything else?
Ric: You can go to my website at ricedelman.com, that’s ricedelman.com and the book “thetruthaboutyourfuture.com.
Meb: Ric, thanks so much for coming on today, listeners thanks for taking the time to listen. We would always welcome feedback and questions through the mailbag at firstname.lastname@example.org. As a reminder, you can always find the show notes and other episodes at mebfaber.com/podcast. You can subscribe the show on iTunes, and if you’re enjoying the podcasts, send Jeff a bottle of tequila and please leave a review. Thanks for listening friends and good investing.
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