The popularity of ETFs will soon go parabolic, and that will spell the end of the mutual fund industry as we know it, the top-rated advisor says.
Ric Edelman, a marquee name among U.S. registered investment advisors, is as harsh a critic of the mutual fund industry as John Bogle—probably even more so. He gave up on mutual funds almost 10 years ago, around the time of the market-timing scandal, and lambasted the industry in his 2007 book, “The Lies About Money.”
He now builds portfolios using ETFs and products from Dimensional Fund Advisors, with an emphasis on passive investing, if not indexing. That essentially means he’s casting a wide net, with $8 billion in client assets, and not making any big sector bets.
In a recent chat with IndexUniverse.com Managing Editor Olivier Ludwig, Edelman said that as he surveys the post-crash investment landscape, he sees the dawn of what 20 years from now will be considered a golden age of investing.
Ludwig: What is it that got your attention and made you first think ETFs were where the world of money management was going?
Edelman: There are several advantages ETFs have over traditional retail mutual funds, which is what we had traditionally been using for the first 15 years of our practice. Retail mutual funds operate in a manner that is not in the best interests of investors.
Ludwig: Cash drag, friction of trading costs—all that?
Edelman: All of that, plus the fact that the retail fund industry engages in a wide variety of deceptive business practices that are designed to increase the profitability for the funds’ sponsors and manufacturers as opposed to the shareholders who are investing in those funds.
Ludwig: You’re talking about expense ratios, or is it going deeper than that?
Edelman: It’s far deeper than that. I’m not just talking about high expenses. I’m talking about outright fraud.
Ludwig: You’re sounding a bit like John Bogle—I’m listening.
Edelman: Well, all this came to light in 2003 when Elliot Spitzer revealed the mutual fund scandal. And it goes on and on and on. My book, “The Lies About Money,” is an exposé on the retail mutual fund industry. And our research found 25 different ways that the fund industry exploits its investors. And virtually all of these are avoided by ETFs. So ETFs not only manage the money more efficiently with much lower turnover, and much lower cost than retail funds, they do so without the manipulation that fund investors often otherwise encounter.
The fund industry wishes “The Lies About Money” would go away. They are unable to counter any of the statements that I make in the book, because everything I say is factual, accurate, and heavily documented and substantiated. So the fund industry just prefers to pretend that this book doesn’t exist.
Ludwig: Now that said, back in 2003, there were far fewer ETFs. Walk me through what that challenge has been like. Obviously at this point doing full asset allocation plans with ETFs is a very doable proposition.
Edelman: It’s easier today—well, first of all, we’re not ETF-only. We do use institutional funds from Dimensional Fund Advisors. But it was not always easy to find ETFs worthy of investment 10 years ago. It’s much easier today, as the ETF industry has matured and expanded. And it’s going to continue to get even easier as the industry continues to overtake the retail mutual fund industry.
The retail mutual fund industry is a dinosaur and won’t exist in 10 or 15 more years, as investors are realizing the incredible opportunity to lower their cost, lower their risks and improve their disclosure by virtue of ETFs compared to mutual funds.