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.”