Rollovers inspire yawns in most advisors — and not just because the word reminds them of their mattresses.
Over the years, the subject of rollovers has been overexposed. But there is good reason for that: They are an incredibly important segment of the financial advisory market, and they're growing to be more so.
According to an April 2004 Business Week article, 3.8 million Americans lost their jobs in recent months, either through layoffs or by choice. At the same time, each month over 3.8 million people began new jobs. In many cases, these individuals owned company-sponsored retirement plan accounts. According to the Investment Company Institute's 2003 fact book, there's more than $1.5 trillion in 401(k) accounts alone, with an average balance of roughly $43,000, and much higher balances for older employees.
Set the Stage
Perhaps the best way for an advisor to take advantage of this market is to have clients establish IRAs. Though this can be time consuming, and might not seem worth the effort, it creates a foundation to generate future rollover business.
Many clients also have the ability to roll over 401(k) plans from a previous employer into a new employer's plan. While this may be a viable option — certainly better than taking the money in cash — it can dramatically limit a client's investment flexibility and an advisor's ability to oversee what could be their largest asset. So, often an IRA is the better choice.
In some cases, better even than an IRA is a managed account, which lets clients benefit from a variety of special features not commonly available in 401(k) plans or traditional IRA rollover accounts. The special features include:
Personalized Portfolio Management
Portfolios are tailored to meet your client's specific needs. Each portfolio contains individually selected securities, chosen by a specialized asset manager.
Diversification and Specialized Asset Management
Managed accounts typically offer a wide array of core and specialized holdings, and they can provide access to a wide variety of the country's most highly regarded asset managers.
Ownership and Transparency
In contrast to mutual funds where assets are pooled together, clients own the individual securities in a managed account. The transparent aspect of these investment vehicles helps to ensure diversification, since the advisor and his client know exactly what is contained in a portfolio, leading to less overlap.
Comprehensive data for all the managers handling the client's assets are consolidated into one report. As such, it's easy to ensure that the client's investment strategy remains intact and to track performance results.
Converting to a Roth IRA
Another rollover option is to convert to a Roth IRA. Current laws do not allow for 401(k)s to be directly rolled over into a Roth IRA — they must first be rolled over to a traditional IRA, an account that can then be converted to a Roth. The drawback of this approach is that the client must pay the taxes on the contributions to the Roth.
If, however, a client owns highly appreciated stock in a 401(k), it's important to ensure that he doesn't roll it over into an IRA. To do so would be to avoid taking advantage of the net unrealized appreciation (NUA) rule.
With the NUA rule, the client is immediately taxed at the ordinary income tax rates on the cost basis of the security, not the stock's current market value. When the stock is eventually sold, the gain is then taxed at the applicable capital gains rate, which is currently 15 percent.
Using these and other approaches can increase an advisor's assets under management, and they're also a conduit to offering additional services, such as wealth enhancement.
By meeting multiple client needs, an advisor stands a better chance of being perceived as the go-to financial authority. This is instrumental in expanding existing relationships and retaining a high-net-worth client base.
Susan L. Hirshman is vice president at JPMorgan Fleming Asset Management. jpmorganfleming.com