IRA rollover market a big opportunity for advisers

The estimated $2.75 trillion IRA roll-over market is poised for significant growth in assets and is expected to take on more prominence in advisers' practices. The individual retirement account market as a whole is expected to have a five-year compounded annual growth rate of 12%, according to Brightwork Partners LLC, a research-based consulting firm in Stamford, Conn. The IRA rollover segment makes up two-thirds of that total and is expected to grow at a rate of at least 13%. While less than 10% of financial advisers focus solely on the retirement-planning market, all advisers dedicate at least some of their practice to retirement services, according to Cerulli Associates Inc., a Boston-based research firm.
Most advisers use traditional methods to expand their rollover business, and "have been working with referrals from existing clients," said Tom Modestino, senior analyst at Cerulli, which conducted a survey last year with the Financial Planning Association of Denver. To expand that, advisers should consider partnering with broker-dealer firms, asset managers or plan sponsors, he said. There is opportunity for advisers.
"People want advisers, they don't want a salesman. These advisers are chipping away at the big banks and brokers because [banks and brokers] still have that model to sell instead of serve," said Ed Slott, founder of Ed Slott & Co. of Rockville Centre, N.Y., which offers educational seminars and a newsletter. "I don't think that's going to cut it with this generation of retirees," he said. "They are looking for advisers who can give them a plan to manage the taxes, income and distribution so that they can enjoy the money in retirement," Mr. Slott said. "Money is moving to advisers who can create those plans." People are seeking independent advisers, said Kevin Reardon, president of Shakespeare Wealth Management Inc. of Brookfield, Wis., which manages $50 million in assets. "Coming out of the mutual fund scandals of 2002, people are more in tune to the financial conflicts of interest," he said. "People are searching out fee-only financial planners."
About 45% of participants in defined contribution plans will roll over the assets to an IRA, and 30% will leave the money in their former employer's plan, according to research from Brightwork. Only 20% will take cash and pay the taxes, the firm said. Brightwork partner Ron Bush said that net flows into IRA rollovers totaled $200 billion last year alone. Most participants don't stay with their 401(k) provider. Last year, 18% of all assets stayed with the same company that provided the 401(k) and 82% rolled over the money to a different company, Brightwork found.
Each year, about 9% of assets in employer-sponsored retirement plans come to market, Mr. Bush said. This year, the firm estimates that about 7.8 million participants in these plans, which have about $540 billion in assets, will face the decision of what to do with their 401(k) accounts either through job changing or retirement, he said. It can be a time to change the funds as well. Most advisers in the Cerulli survey, 78.1%, said they chose mutual funds when selecting a rollover product, while 27.8% said they chose ETFs, 25.4% individual securities, 20.3% separate accounts, 11.3% annuities and 4.8% other products. The number of fund choices is limited in a 401(k) account, said Joseph Alexopolous, co-founder and principal of Aequitas Wealth Management LLC of Los Angeles, which manages $15 million in assets. "There are cheaper alternatives available," he said. It's like going from dining at one restaurant to being able to dine at the whole planet." There are better options outside the 401(k), said Rob Williams, adviser and portfolio manager at Baltimore-Washington Financial Advisers of Columbia, Md., which oversees $200 million in assets. "You can also buy stocks and bonds, which is what we do," he said. "There are a lot of hidden fees in 401(k) plans," Mr. Williams said. "Because of all of the bad things you don't see, it's good to get out of the 401(k) plan as soon as possible."

MARKET DIFFERENTIATION

Education is important to distinguish the advisory firm, said Peter Lynch, president of Peter Lynch Inc. of Red Bank, N.J. The nine-year-old firm doesn't disclose assets. "You need to establish yourself as a specialist in that area," said Mr. Lynch, who has completed Mr. Slott's IRA training program for advisers. "Many people want to be conservative investors with their rollover," Mr. Lynch said. "What I try to tell them is that they could be in retirement longer than they were working." "The risk is if they get too conservative," Mr. Lynch said. " You still need some of that money working for you." E-mail Sue Asci at sasci@investmentnews.com.