That means advisers have a key and growing role to play in asset managers’ ability to win flows from qualified retirement accounts, says Bing Waldert, a director at Cerulli. The firm recently published another issue of The Cerulli Edge—U.S. Asset Management Edition, which focuses on trends and challenges in advisers’ IRA business.
The report finds that financial advisers, on average, tend to capture larger rollovers than direct service providers, with the largest balances coming out of existing advisory relationships. The findings are made more significant by the fact that IRA rollovers are receiving increased scrutiny from various regulatory and government authorities, which could result in changes to the way advisers are allowed to recommend related products and services.
The Financial Industry Regulatory Authority (FINRA), for instance, has said reexamining IRA rollover practices will be a priority in 2014. That has led some industry experts to go so far as recommending some providers pause on rollovers until further guidance is issued. The Department of Labor’s Employee Benefits Security Administration (EBSA) has also thrown its hat into the rollover ring, warning that pending regulatory changes could add certain IRA rollovers to the list of transactions prohibited under the Employee Retirement Income Security Act (see “New Restrictions Loom for IRA Rollovers”).
The Cerulli report breaks down the expected impact of increased regulation of rollovers by firm type and finds the following:
- Recordkeepers should feel a positive impact of increased scrutiny of IRAs and related fees, as better informed participants are more likely to stay in their existing defined contribution (DC) arrangement—or roll to a new DC plan—to pay lower costs and fees.
- Asset managers with retail distribution business lines should feel only a slight impact from changing regulations, as registered representatives and advisers will likely continue to win large rollovers as an extension of clients’ existing financial planning services.
- Asset managers with institutional distribution can expect positive impacts from changing fiduciary and suitability requirements, as participants will be more likely to stay in their institutional plan for lower costs and fees.
- Broker/dealers and asset custodians could feel a slightly negative affect should new regulations be approved this year. That’s because, while advisers will continue to win large rollovers from existing clients, broker/dealers will likely be the party forced to bear the brunt of greater disclosure requirements.
- Direct providers are expected to feel the most pain from stricter rules on the marketing and selling of IRA rollovers, as many direct platforms depend on their recordkeeping business for rollovers. This may not be all bad for direct providers, as many of the largest direct platforms are also the largest recordkeepers (i.e., Fidelity, Vanguard and Charles Schwab), and should therefore also benefit from more participants staying in DC plans as opposed to establishing an IRA.
One major takeaway from what has been reported on and speculated about regarding new rules for IRA rollovers, Cerulli says, is that new regulations are most likely to focus on the relative costs of funds inside DC plans versus funds offered through a retail IRA platform. In many cases, DC plans of reasonable size can benefit from economies of scale and can access institutionally priced mutual funds and support services—two perks lone IRAs can’t often achieve.
As a result, Cerulli says, investors choosing to roll over their assets may end up with higher costs in an IRA, meaning a provider might have breached his fiduciary responsibility in recommending such a service. While Cerulli is quick to point out that costs are not the only factor advisers must consider in determining a client’s best interest, the increased costs of IRAs over DC plans may make it more difficult for advisers to appropriately suggest rollover services in a fiduciary context.
As a counter argument, Cerulli points out that many industry executives believe that investors do not understand the fees associated with maintaining an IRA, which may be higher than a brokerage account. According to these observers, investors value the choice and flexibility associated with rollover IRAs, and these attributes outweigh the potentially higher costs.
However providers decide to address pending regulatory changes, Cerulli says strong relationships appear to be the key to securing rollover assets, which in turn suggests an emphasis for firms on developing service to promote good will with current clients. And the IRA rollover market is still growing significantly, Cerulli says, even as regulatory scrutiny and increased focus on rollovers from DC providers will encourage more and more job changers to roll over to a new employer's DC plan rather than an IRA.
Cerulli estimates that rollover contributions to IRAs totaled $321 billion in 2012 and will reach $467 billion by 2018. Breaking down those figures, Cerulli finds rollover totals from 2007 through 2012 were more than 20 times the amount of recurring contributions.
For two of the largest providers assessed in Cerulli’s reports, the second-largest source of IRA assets was the transfer of assets from other IRA providers—not contributions. Another IRA provider told Cerulli that only one of every five IRA account holders makes an annual contribution, further highlighting the importance of rollover revenues.
Other results from the Cerulli report show that the total amount of assets annually eligible for distribution from DC plans is more than twice as large as the amount of assets that actually roll over ($940 billion compared with $290 billion)—implying a substantial and lasting opportunity for advisers and service providers once the pending regulatory changes get sorted out.
In breaking down the assets that do make it into IRAs, Cerulli finds that older participants, as expected, make up the majority of those rolling assets into an IRA. In fact, rollovers from participants in their 20s, 30s and 40s together only rolled over 31.8% of those assets moved in 2012.
Despite the top-heavy nature of the market, Cerulli stresses that the advantage of a rollover from younger age groups is the longer period of time that assets will remain in the account before withdrawals being. Firm will do well, then, to focus rollover efforts on all age groups to ensure lasting and dependable revenues.
Information on how to obtain a full copy of the report, as well as a short sample and table of contents, is available here.