July 25, 2011

5 Misconceptions on IRA Rollovers Lead Advisors to Bungle ‘Unique Opportunity’

McKinsey study said wealth managers 'failed to mobilize their advisory forces' to offer proper help to clients

IRA rollovers are a “unique asset-gathering opportunity,” a report released Monday by McKinsey claims. The consulting firm found that over the next five years, rollovers are expected to drive between 40% and 50% of net new money for wealth managers and will total $7 trillion in assets or between 12% and 14% of all household assets by 2015.

Advisors often miss the opportunity to capture IRA assetsThe problem for wealth managers, McKinsey notes, is that they have largely “failed to mobilize their advisory forces,” adding that less than half of brokerage clients receive help from their advisors on rollovers.

That’s not to say wealth managers are not without opportunities to capture those assets. Among the strategies successful managers need to implement, according to McKinsey, are institutionalizing advisor practices, enhancing home office support, leveraging the brokerage call center and implementing a “quick and seamless” rollover process.

The report noted that the events that trigger a rollover often lead investors to take stock of their financial situation, allowing advisors to open the conversation about consolidating assets. McKinsey found that about 30% of affluent investors have more than one IRA; furthermore, 40% of consumers said the ability to consolidate assets was a key reason for choosing an IRA provider.

McKinsey identified five misconceptions wealth managers hold regarding clients’ attitudes.

1)  Investment options and fees drive consumer decisions. Advisors who use complex calculations and figures to impress their clients often run the risk of scaring the client off. McKinsey refers to a 2009 LIMRA study which found that 36% of job changers and 26% of retirees did not fully understand how a rollover works.

What clients are looking for, according to McKinsey, is convenience. “Rollovers are seen as a tedious chore, and consumers tend to follow the path of least resistance.”

2)  Consumers who have advisors automatically roll assets over with them. McKinsey acknowledges that “pre-existing relationships are critical for IRAs,” and that 70% of IRA assets remain at financial institutions that already have a relationship with the consumer. Because of this, many advisors fail to offer support for IRA rollovers, leading to fewer than 50% of clients who received support from their advisor when they changed jobs or retired.

3)  IRAs do not bring in substantial assets from the affluent or high-net-worth segments. IRAs are not a middle class product, McKinsey asserts; rather, they represent almost 20% of household assets for households with $500,000 to $5 million in investable assets. In fact, the average IRA rollover captured by wealth managers is about $100,000. Additionally, 50% of affluent investors expect their advisors to create and update a holistic retirement plan.

4)  IRA rollover events are rare and hard to predict. On the contrary, one out of five brokerage clients experiences a rollover event each year, but advisors make “little effort to anticipate these events.” Even when advisors fail to recognize an opportunity for rollovers, they typically have between one and three months to identify events because that’s usually how long it takes consumers to transfer their assets, McKinsey found.

5)  The “sale” is closed when the client agrees to roll over assets. Finally, McKinsey notes that advisors who give up once clients agree to roll assets over risk having clients drop out of the process. McKinsey recommends advisors lead their clients through the process within one to two weeks, and to focus on online or phone conversations, rather than using paper forms, to complete the process.

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