Rollovers

Published On: January 21, 2022

Written by: Ben Atwater and Matt Malick

One of our highest priorities is implementing a straightforward investment and financial planning process.

In the spirit of transparency, we are continuing our series of essays on “conflicts of interest.” Although not the most exciting subject matter, please bear with us, as we think it is an important and ultimately engaging topic.

At the end of 2021, we prepared our regulatory filings, including a conflict of interest evaluation. Although our transparent business model and our duty to you as fiduciaries greatly eliminates most conflicts, we still register a few and, in this series, we will explore them.

It is important to remember that these conflicts are not prohibited, nor do clients need to formally waive them. However, we must disclose them in our ADV filings.

Regulators view our recommendation to rollover a workplace retirement plan into an individual retirement account (IRA) as a conflict of interest. This stems from our ability to directly assess a management fee to the IRA. If we do not manage a client’s qualified plan, we receive no revenue from the client’s qualified retirement plan assets. Therefore, a recommendation to rollover funds to an IRA will result in our earning a fee on those assets.

Additionally, our fee will sometimes be higher than the fee the client is currently paying for their qualified retirement plan. The fee comparison is highly dependent however on the size of the client relationship with us and the size of the qualified plan. All things being equal, our tiered fee schedule reduces our basis point fee as the dollar value of the relationship increases and, similarly, a large employer sponsored plan will likely pay a lower average fee than a smaller plan.

One can take this potential conflict though to an absurd level. We are in the business of managing money and providing financial advice and, of course, we receive compensation for our services. Based on the logic behind the rollover conflict, suggesting that any prospective client works with us would be a conflict of interest.

Of course, we provide our clients with what we believe to be the best advice. In building our independent business from the ground up, we have created a dependable and repeatable investment process along with a strong client service orientation.

And as fiduciaries – professionals legally obligated to act in our clients’ best interests – we maintain there are material benefits to rolling over a qualified plan to our management.

When we manage a client’s rollover IRA, we can directly make changes to the portfolio, whereas, when we indirectly advise on a qualified plan, we can only make recommendations that the client may or may not implement in a timely fashion. And speaking anecdotally, portfolios where we have complete discretion and control tend to perform best. Clients often direct their qualified plan holdings based on a strong personal intuition about the direction of markets, the economy or policy. Because all three of these areas are wildly unpredictable, making investment decisions on these hunches is normally unwise.

A rollover also allows us to consistently monitor more of a client’s investable assets and maximize the coordination of your total investable assets. Your money working in a coordinated approach as part of a larger goal-based plan is superior to different parties having varied mandates. Disparate strategies do not scale for most mass affluent investors.

This spills over to our financial planning work where managing all of a client’s assets gives us the visibility to help you make the best overall financial decisions whether that involves debt, cash flows, spending, savings, major purchases, family support, charitable giving, etc.

As we alluded to before, rollovers further allow us to implement our investment management process. We believe a straightforward and transparent investment portfolio is best for our clients. In many cases, this means owning individual securities, which is rarely an option in qualified plans.

Although we explicitly acknowledge that clients may experience a higher fee in a rollover IRA than in a qualified retirement plan, we align our fee structure with your best interests. In other words, the better we do over an extended period, the more your money grows and thereby the more fees we earn.

We are fee-only advisors, so we sell no investment products and receive no commissions or incentives for the sale of any proprietary or outside products. Instead, we manage our assets in-house and charge for that work. Too often in qualified plans providers choose funds based on their own compensation needs (i.e., 12b-1 fees). In these cases, the plan advisors’ interests may not align with the participants’ interests. We maintain, however, that not only are our interests aligned, but as fiduciaries, we go a step further and put client needs above all else.