It wasn't the first time Edelman has publicly taken aim at mutual fund fees. At a conference last year sponsored by Tiburon Strategic Advisors, Edelman, who shared a panel with Vanguard's Bogle and Morningstar's head of fund research, Don Phillips, took both to task for not doing more to improve the disclosure or transparency of mutual fund fees.
Edelman's beef is that mutual fund fees are not disclosed on the mutual fund statements themselves. The fees are disclosed in the prospectus, but there are additional fees listed in a document called the Statement of Additional Information or SAI. Wading through the 200-page document to find all those fees can be laborious, and mutual fund companies aren't even required to send it to investors. Fund companies are only required to send a prospectus.
A heated exchange ensued and he and Phillips got into it a bit during a Q and A session of the conference, Edelman says. "Ask Don Phillips, but their opinion is that Morningstar does a great job at disclosing fees, that their ratings do reflect fees and that what they're doing is sufficient," Edelman says. "I wish they'd do more."
Phillips declined to respond to several requests for comment. A spokeswoman for Vanguard says the firm is an active advocate for greater cost disclosure and in fact recently wrote the Securities and Exchange Commission to encourage improvement in disclosure and transparency. Moreover, the firm has a cost calculator on its Web site that enables investors to enter any Vanguard fund and any other mutual fund to see the impact that fund costs have on returns.
Edelman's critics, in fact, say his all-in costs to investors are relatively high, for an advisor. Investors are charged a one-time fee of $800 for a financial plan, if they need one. They are then charged investment fees that are tiered, based on the dollar amount of assets they have with the firm. While a client with $1 million would pay 1.5%, those with less than $450,000 are charged 2%. The average account size at his firm is $440,000. And then there are the embedded costs for the portfolio.
Edelman claims his all-in costs are cheaper than those of his competitors because his portfolio costs are so low. Composed largely of ETFs and Dimensional Funds Advisors funds, they cost just 30 to 40 basis points. Mutual funds can cost three to five times that, he says.
But even Edelman's close friends acknowledge he ruffles a lot of feathers with his personality. When he was interviewed for this article, Gary Perlin, the CFO of Capital One, used the word "impatient" five times to describe Edelman. "He's goal-oriented and has a heart of gold, but he doesn't suffer fools gladly," Perlin says.
But Edelman's impatience is a virtue, Perlin says. He saw it firsthand when they both sat on the board of United Way's greater-Washington, D.C. chapter back in 2003, after a financial scandal rocked the chapter and slashed its annual fund-raising revenues from $100 million to about $30 million to $40 million. The two men sat on a commission brought in to review operations and make recommendations and then sat on the new board created to help right the ship.
"He adjusts his degree of urgency and political correctness to the task at hand. I think it's one of the reasons he's been successful," Perlin says. "The particular situation he and I were involved in, if you waited for all of the niceties of governance and socializing ideas, we just didn't have time. And so his impatience was actually part of the secret of the success of the venture."
If Edelman felt it was clear someone at the chapter wasn't doing a good job, for instance, he wanted to make the tough call early on to get rid of that person rather than waiting to see if things would improve, Perlin says. He was also first to see that it benefited the organization if people made contributions without designating where their money would go. That way, the charity could put the money where it was most needed. When he was campaign chairman, it was customary to have six meetings of the campaign committee before actually soliciting contributions. Rather than wasting time talking about how to meet potential donors, Edelman wanted to just get out there and meet them, Perlin says.