What does the Department of Labor’s proposed expansion of the fiduciary standard mean to your relationships with retirement plans, their participants and IRA investors?

As the financial industry gears up to stop or alter the rule, the fight actually may be less about fiduciary duties and conflicts and more about costs and loss. As an ethical and successful financial advisor, you can do math for your clients. If you can reduce a client’s plan costs by 35-50 basis points per year, you may be able to increase assets available for retirement security by up to 10% over 30 years. And if you can offer solutions capable of doing that for IRA transfers/rollovers, a huge market will open for you, and continue to reward you with loyal clients for two or three decades per case.

There are three ways an advisor can cut costs in an IRA by 35-50 basis points per year:

1. Mix in low-cost investments, especially stocks and bonds held in brokerage accounts, ETFs, and index mutual funds.

2. Be compensated through an advisory account with a competitive fee structure.

3. Consolidate as many client assets as possible (plan and non-plan) under the advisory account, to give the client the best possible service and economies-of-scale for advisory fee purposes.

For example, imagine that a client is transferring $200,000 from a 401(k) to an IRA at age 65. The client has $600,000 of other financial assets which aren’t on the table right now but could move later. Your offer is: 1) a diversified IRA portfolio that will cost 30 basis points a year + a 50 basis point advisory fee – .80% in total; and 2) an agreement to keep the advisory fee at 50 basis points if the client brings you at least $400,000 of other assets in the next two years.

With this offer, you will easily carve 35-50 basis points off the costs of competitors who are offering IRA programs based on mutual fund C shares or R shares. You can include some actively managed funds (or separate accounts) in the client’s mix, along with low-cost index funds and ETFs, and still hit the 30-basis point target. Finally, you’ve given the client incentive to stay loyal and bring you more assets.

Here are a few statistics from research by the Investment Company Institute that may make this type of program attractive for your practice:

40% of all households that have completed a rollover/transfer did so in the last four years (2010-14).
81% of households that have completed any rollover/transfer to an IRA rolled over their entireemployer-sponsored plan balance.
Among households that took any withdrawals from IRAs in tax year 2013, 65% used required minimum distribution (RMD) calculations – i.e., withdrew the minimum.

In short, IRA rollovers/transfers are accelerating. They move many years of retirement plan savings to IRAs at once, and the money is very sticky, usually staying on the books as long as the law allows. To capture this type of business, you can afford to be cost-competitive.

From lemons to lemonade

Here are specific ideas you can implement now to turn the lemon of DOL rulemaking into lemonade for your practice.

Broaden the range of retirement plan investments you represent, with special emphasis on low-cost index mutual funds and ETFs. Using a stock index fund with an expense ratio of 10-20 basis points as the “core” of an IRA portfolio can go a long way toward managing a client’s all-in IRA cost.
Build relationships with third-party administrators in your market, so you don’t have to rely totally on mutual fund turnkey plans and recordkeepers.
Emphasize investments with relatively low risk and volatility. According to the ICI, only 29% of households in the prime rollover/transfer market (ages 55-64) say they are willing to take above-average or substantial risk.
Become a Registered Investment Adviser (RIA) or Investment Adviser Representative (IAR) and start charging fees for the investment advice and planning services you deliver.
Become the “go-to” advisor in your market for employer-plan referrals to employees who are planning a distribution. Package the distribution-related services you offer – including coordination with a tax advisor, education on all available choices, and services for the employer on delivering required distribution notices and WARN Act mass layoff announcements. Charge the fees you deserve for these services.
Evaluate changes in your revenue model, so you won’t be dependent on mutual fund 12b-1 fees or vulnerable to restrictions on conflicts-of-interest – which probably are coming, in one way or another.

The financial media has begun to ask why financial companies are opposing the fiduciary rule with such vehemence. It’s not exactly on the side of the angels. But there is no reason for your clients and prospects to see you on the opposite side of their interests – especially when today’s rollover/transfer market is so huge and potentially rewarding.

Instant Insights /

Retirement savings conflict rule: lemons or lemonade?

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