Advising existing or even new clients regarding assets in the individual’s pension, profit sharing, or other retirement plan accounts (e.g., 401(k), 403(b), 457, IRAs) can reap both economic and relationship benefits for clients and advisers alike. As discussed in our prior post regarding pension consulting , there are a variety of ways that different registered investment adviser (RIA) firms with unique focuses will interact with pension plans, profit sharing plans, and other retirement plans, as well as the assets in such plans. This is the second in a 3-part series providing an overview of three of the main adviof sory relationships in dealing with plan assets: pension consulting, portfolio management for a pension or profit sharing plan, and investment advice concerning individuals’ retirement plans – the subject of this post.
Advising for an Individual’s Retirement Account
Investment advisers focused on growing assets are inclined to explore all avenues of growth, such as prospecting for new clients in the same ideal demographic, engaging younger relatives of existing clients, or convincing existing clients to place additional assets under the adviser’s management. The last possibility, bringing in additional assets from existing clients, is an ideal option if your clients have surplus investable assets sitting in a low interest savings or checking account (beyond what is reasonable for monthly expenses and emergency funds) or being managed by a different adviser. However, your RIA has probably already explored these assets.
A less traditional avenue (although it is becoming more popular) is advising clients regarding assets in 401(k) or other retirement accounts. Individuals with assets already in a managed account with your RIA will often already have one or more retirement savings plan accounts. Because these plans typically present a limited universe of investment options, often do not allow direct investment in a particular company’s securities, and have age-based limitations on withdrawals (at least without penalty), clients do not necessarily think of those accounts as needing a professional adviser’s services. Fortunately, however, the restrictions characteristic of retirement plans do not preclude an investment adviser from adding value to a client relationship, particularly for those advisers focused on broader asset allocation and/or passive investment strategies.
For those firms favoring a holistic financial planning approach, advising a client regarding general retirement planning strategies at any state of the client’s life will necessarily involve assessing not only the aggregate amount saved in such plans but also the asset allocation and timing of withdrawals (now or in the future) in light of a particular client’s risk tolerance, time horizon, and investment objectives. This is particularly true for those advisory practices with a focus on tax efficiency, as many retirement plan options provide inherent tax benefits to investors. RIAs offering solely portfolio management are also in prime position to advise on these accounts by either suggesting reallocation of current holdings to coincide with the client’s other accounts already under management or potentially using the retirement account assets as part of risk reduction and diversification to counterbalance existing managed account holdings (e.g., brokerage accounts invested more heavily in low-risk fixed income with younger clients who may need the fund for an impending large purchase, while retirement plan assets are weighted toward equities that have higher volatility and higher average returns as long term investments).
A significant benefit to bringing an existing client’s retirement plan assets under the RIA is to provide the client a more comprehensive picture of her/his financial situation. Again, for financial planning practices this is par for the course, but for traditional portfolio managers this helps reinforce the notion that the RIA is helping to manage the client’s overall wealth rather than just a portion of the individual’s funds. It may also open the door to bringing into the fold other non-traditional assets that the client may have (e.g., 529 plans, employer-granted stock, brokerage accounts held away) and/or assets of a family member who may have a separate savings, brokerage, or retirement account. Knowledge of the pros, cons, and mechanics of rollovers can provide further value, particularly if your client has worked for several employers along the way and accumulated retirement assets across multiple plans.
As compared to managing assets owned by a plan itself (which will be Part 3 of this series — think CalPERs’s hiring an array of different advisers to manage portions of its massive pension plan assets) or pension consulting, advising an individual on her/his assets in a 401(k) is very much in line with advising that individual’s existing brokerage accounts. Here, the client still the individual, rather than the plan itself — as compared, again, to the RIA being retained by a plan sponsor to either (i) directly manage assets of the plan or (ii) provide pension consulting to the plan. Accordingly, the Form ADV and standard client contracts for a firm already offering portfolio management wouldn’t necessarily require a major overhaul in terms of disclosure. Advisers should, however, refrain from maintaining client passwords for those accounts, as this presents significant custody issues.
On the other hand, the differences between a typical managed account and a retirement account, such as restrictions on early withdrawal and limited investment options, may warrant a lower management fee for retirement plan accounts. RIAs may even consider taking on these accounts free of charge as a means to differentiate themselves from competitors and demonstrate additional value to clients. No matter the fee, there is risk to the adviser if the relationship is not handled properly. Advisers should ensure that there is a written contract memorializing the advisory arrangement for each client account and update Form ADV as needed to disclose the services provided, together with any associated fees.
From a regulatory perspective, the nature of many retirement plan accounts mean that the investment advisory firm will not be providing the “continuous and regular supervisory or management services” that give rise to regulatory assets under management (AUM) , so firms must be cautious in assessing retirement plan assets as AUM. Critically, RIAs providing advice regarding 401(k) or other accounts will still act in a fiduciary capacity. This means that firms undertaking to serve individuals’ retirement plan accounts must spend the time to get up to speed on these assets (e.g., the current allocations, the different investment options within the plan, the fees associated with different plan offerings, etc.) and operate as an informed financial adviser consistently acting in the client’s best interest. Finally, there is always the risk that these accounts underperform client expectations causing friction between adviser and client.
Overall, providing investment advice to individuals for assets held in 401(k), 403(b), 457, IRA, or other retirement plan accounts can be a sensible complement to your RIA firm’s practice. It can serve as a means to expand revenue, provide a more complete picture of your client’s financial situation, and generally deepen the client relationship. Executing this strategy will require the RIA to extend its fiduciary duty to those accounts, update contracts and disclosure documents accordingly, and periodically reassess the benefits and costs of providing this service to clients. As with any line of advisory services, an RIA should conduct its own research, take into account the needs of its clients, and make decisions based on that firm’s particular characteristics and objectives.
Note: RIA in a Box LLC is not a law firm and does not provide legal advice. We advise that all RIA firms providing services to assets held in pension plans, profit sharing plans, and/or retirement plans consult with a qualified Employee Retirement Income Security Act of 1974 (“ERISA”) attorney for any matters relating to Department of Labor (“DOL”) and ERISA law. This overview is provided for general information purposes only and should not be relied upon to take any action. RIA in a Box LLC does not offer services or assistance regarding DOL, ERISA, or other legal issues.