In Practice April 15, 2013

No Sophomore Blues for These Second-Year RIAs

Unsurprisingly, client retention is one of the top areas of focus for advisers who make the move to the independent model.
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According to a survey of 40 “sophomore year” independent registered investment advisers (RIAs) who custody with Schwab Advisor Services, the firm found a majority of advisers’ clients stick with them once they make the switch. Not only do clients agree to transition with their advisers as they seek independence, but most are immediately on board when told about the change.

The RIA industry has witnessed an annual growth rate of 8% over the past 10 years, more than doubling industry assets under management, from $1.3 trillion to $2.8 trillion , according to research from Cerulli Associates and Charles Schwab Strategy estimates.

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On average, 79% of clients make the jump with advisers when they turn independent, the survey found. The average length of time it takes for advisers to make the decision to turn independent is two years. Self-employment and long-term financial success are the main reasons for going independent. A solid majority (90%) said independence positioned them better for growth. One-hundred percent of those surveyed said they would make the same decision again, and would recommend others do the same.

Most advisers noted “the ability to provide more personalized service to clients” as being a very or somewhat important aspect in the decision to become an RIA, followed by “the preference to work for yourself.” Also important was the need to “protect their personal reputations” by moving to the independent model.

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Calling the RIA space one of the fastest-growing segments of financial services, Jon Beatty, senior vice president of sales and relationship management with Schwab Advisor Services, said it is clear that the appetite for independent advice is expanding as more and more advisers turn independent. “With industry growth comes more choice for advisers as they seek out a path to independence,” Beatty said. “Schwab works one-on-one with advisers to determine which solution is best for them, evaluates the economics, and helps develop a transition plan tailored to their needs.”

Schwab also launched the RIA Economic Discovery Tool to provide a hypothetical view of the financial benefits associated with the RIA channel compared with other advisory models.

“We’ve found that the economic decision can often weigh heavily on an adviser considering a transition,” Beatty said. The tool, paired with a conversation with a conversation with a Schwab business development officer, can give a better picture of what the transition might mean to an adviser.

More information about the tool is here, and the survey can be foundhere.

Compliance April 12, 2013

Budget Proposals for Savings—A Deterrent or Not?

Since the release of the proposed fiscal year 2014 budget by President Obama, opinions  have differed on how retirement-related provisions will potentially affect retirement savings.
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The budget would place a cap on retirement savings, prohibiting employees from saving more than $3 million in individual retirement accounts (IRAs) and other retirement accounts. Analyses from the Employee Benefit Research Institute suggest that up to 5% of retirement plan participants could be affected by this cap. (See “Savings Caps Could Affect 5% of Participants.”)

The budget would also place a cap on how much could be deferred on a pre-tax basis, taxing participants’ savings before they are put into retirement plans, but not eliminating the taxation of assets when they are withdrawn.

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Small-Business Owners Will Be Limited 

“We were very concerned when last year’s budget included a double tax on contributions to 401(k) plans. Small-business owners earning over $250,000 would have to pay tax on contributions in the year the contributions are made then pay tax at the full rate when contributions are distributed at retirement,” said Brian H. Graff, executive director and chief executive of the American Society of Pension Professionals & Actuaries (ASPPA).

“We were hoping this misguided proposal would be eliminated in this year’s budget, but instead the Administration has kept the double tax proposal, and added another penalty for retirement savings. Now, if a small-business owner has saved $3 million in his or her 401(k) account, they won’t be allowed to save any more. Without any further incentive to keep the plan, many small-business owners will now either shut down the plan or reduce contributions for workers. This means that small-business employees will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules,” Graff said.

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Participants Don’t Need Disincentive from Saving  

Scott Macey, president and CEO of the ERISA Industry Committee (ERIC), says the budget proposal does not consider unintended consequences.

“Individuals and families already are struggling to save enough for retirement, and they do not need another disincentive from saving. Moreover, the burden of calculating whether a participant exceeds the $3 million cap would only add an additional layer of complexity in retirement planning and would unfairly burden participants, as well as plan sponsors.

“Policymakers should keep in mind that most monies saved in retirement accounts are tax deferrals, and will eventually be subject to taxation. There are also complex rules which limit the amount that highly compensated workers can contribute to retirement plans, as well as detailed rules that assure comparable treatment of all participants in plans. This proposal appears to be a way to pay for other Administration spending priorities, with no real sound policy justification.

“ERIC urges the president to withdraw this ill-advised proposal and concentrate more on incentivizing individuals and families to save more for retirement, rather than penalizing those who have successfully planned for their retirement.”

Kenneth E. Bentsen, Jr., acting president and CEO of the Securities Industry and Financial Markets Association (SIFMA), said savings have a positive effect on capital markets as well as the quality of life for retirees. “We need to be emphasizing the importance of saving and saving early, not changing the tax rules midstream.”

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Not a Big Deterrent  

Not all the reactions over the proposed budget, however, have been negative.

In speaking with PLANADVISER, Lee Topley, managing director of Unified Trust, a Lexington, Kentucky-based wealth management and retirement plan consulting firm, said he believes that the $3 million cap will “really only impact a small percentage of participants, targeting the higher income level.”

When asked if he thought the budget provisions would discourage someone from joining a company or participating in a retirement plan, Topley said, “No, I don’t think so. And I don’t see someone switching jobs because of this, since these restrictions would be everywhere.”

As to how plan sponsors would be affected, Topley said, “It may create a burden on the plan sponsor in that this is an additional thing to monitor. There may be questions of how this new data is tracked and who will be responsible for tracking it. I don’t see plan sponsors changing their contribution rates because of this. Overall, these provisions will not be a big deterrent to an employer starting or continuing a retirement plan.”

Topley pointed to a dichotomy in the situation. “On the one hand, we’re trying to get people to save more for retirement,” he mused, “and on the other hand, we’re penalizing those that save well.”

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