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Retirement Planning > Saving for Retirement

The ABCs of IRA rollovers

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Bringing in individual retirement account (IRA) rollovers is a great way to build your senior advisory business. The amounts can be significant, especially when the account owner is consolidating accounts or retiring, and older clients typically seek advice on retirement-income planning.

Consider these stats on the market opportunity. Spectrem Group, a research firm in Chicago, estimated in 2011 that 880,000 retirement plan participants had balances over $250,000. These participants are willing to move their funds: only 14 percent retained their assets with the plan provider after they left their employer.

An October 2012 discussion document from McKinsey & Company Inc. in New York City cites IRAs as the “largest asset-gathering opportunity, dwarfing all other retirement segments including annuities, separate accounts, defined contribution, defined benefit and life insurance.” This applies to affluent investors as well, the firm notes: “There are also widely held views that IRAs are insignificant as a savings vehicle for the affluent. However, in reality, IRAs represent 20 percent to 25 percent of the total customer wallet for individuals with $100,000 to $5 million in investable assets.”

Understanding the process

IRA rollover money is there and it’s in motion, so how do you encourage investors to trust you with their nest egg? As a first step, it’s important to understand how participants make decisions about rollovers. McKinsey & Company’s research clarifies the process:

  • Preexisting relationships and influencers are key. More than 70 percent of customers choose a financial institution they (or a family member) had a relationship with. Customers seek out advice, and approximately 60 percent of them consult a trusted individual.
  • Products and fees hardly matter. Customers see little differentiation among the large providers and can be easily swayed by effective sales and servicing tactics.
  • IRA rollovers are seen as a tedious “chore.” Therefore, customers typically take the path of least resistance.
  • Providers have a substantial time window to reach customers. While rollovers are usually connected to a life event, customers wait one to three months after the event to take action.
  • Time to closure is critical. Sales processes that take longer than two to three weeks or require repeated customer action lead to customer abandonment.

Gerry O’Connor, a director with Spectrem Group, says his firm’s research also validates the important role of an ongoing relationship with the investor. “The most critical factor that we have found over the years is what I would call a preexisting relationship,” he says. “Only about 20 percent of them (rollover investors) or so are working with an advisor they’ve had for less than a year. Those are the folks who either decided to change advisors or got an advisor for the first time when they’ve realized they have this big sum of money they’ve got to deal with. (For) the rest of them, the advisory relationships are relatively long-term.”

The same mindset applies when clients select a company. “In the plan, they’re dealing with an investment company that was chosen by the employer. If they’ve got a relationship with a mutual fund company or with some other organization for their own out-of-plan investments already, then that seems to be the most important factor in their selection of a company to do business with,” O’Connor says.

Investors’ personal situations also influence their rollover motivation and behavior, says Ildiko Ring, associate principal with McKinsey & Company in New York City. Job-changers and those close to retirement will have slightly different priorities and decision-making processes. “For the job-changer group, this is often a low-engagement decision,” she says. “They want to move the assets quickly. They are very often looking for convenience and not shopping around a lot. If you look at the close-to-retiring group, for them this is a much more important decision. The shopping process is much more thoughtful, and that’s when the product features and the prices do play a role.”

Focus on income

One reason the rollover decision is more important for retirees is that many of them will need to generate income from their IRAs. That highlights a second element to attracting rollovers: If you lack a clearly defined retirement-income planning strategy in your practice, it puts you at a disadvantage to advisors who offer that service and its related products. “When we look at the number of people who put all or a portion of their rollover balance into an income generation vehicle of some kindand that’s everything from simple systematic withdrawal plans to very complex individualized solutions put together by advisorsthat number has increased over the years, both the number of people and the percentage of assets,” says O’Connor. “So it is a factor of increasing importance.”

See also: Legacy planning with IRAs

Investors’ realization that it’s time to get serious about retirement income creates a business opportunity, says Thomas Rowley, executive director, retirement strategies, with Invesco Van Kampen Consulting in Chicago. But simply telling prospects and clients that you want their rollovers probably won’t be very successful. Rowley believes that a better approach is to focus on retirement income planning several years before the clients retires; discussing Social Security’s role can be a creative and informative way to start that conversation. Studies have shown that Social Security accounts for roughly 40 percent of the average retirement income. Consequently, it may be the conversation the client wants to hear about, Rowley says: “Social Security will play a big part in the retirement income discussion. You may very well have a lot of success talking about Social Security, which will lead to the conversation of retirement income, which will lead to the final IRA rollover.”

Chris Karam, CIMA, AIFA, chief investment officer with Sheridan Road Financial in Northbrook, Ill., says that rollover IRAs are important for his firm because about two-thirds of clients are in their 50s or older. He estimates that about the half the assets Sheridan Road Financial manages for private clients came in some variation of an IRA account. One source for rollovers is the retirement plan consulting service the firm provides to plan sponsors. In that role, the firm often coordinates pre-retirement seminars for plan participants age 55 and over. Those presentations allow the firm to demonstrate its retirement-income planning expertise.

Karam cites a Social Security seminar his firm presented in early 2013 that covered multiple aspects of the program and its benefits. The presentation showed how decisions related to Social Security interact with other retirement-income decisions and highlighted the need for a holistic approach. “I think people appreciate going into a relationship with a financial planner or investment advisor with a strategy and not just, hey, I have a plan for your IRA rollover, let me help you,” says Karam. “It’s let’s go in with a comprehensive retirement strategy.”

For more on IRAs, see:

Guidance is needed on new Roth 401(k) conversion

Why IRA consolidation makes even more sense

Understanding Individual Retirement Accounts


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