Fiduciary Corner

Blaine F. Aikin

IRA rollovers offer a huge opportunity

Here are guidelines for advisers on how to conduct them without raising regulators' red flags

Feb 2, 2014 @ 12:01 am

IRA rollovers represent a huge and growing market, and there are many retirement plan participants seeking help with their rollover decisions.

Individual retirement accounts constitute $5.7 trillion of the $21.7 trillion held in retirement accounts, according to the Investment Company Institute.

Between 1996 and 2008, 90% of the growth in IRA assets came from rollovers, and nearly half of IRA holders rolled over assets in their employer-sponsored retirement plans into their IRA, according to the ICI.

A 2011 McKinsey & Co. report estimated that rollovers would account for 40% to 50% of net new money for wealth managers through next year.

The predominance of money flowing into IRAs has led regulators to question whether investors understand the merits of keeping retirement assets in a previous employer's plan when they leave or rolling over the assets into a new employer's plan.

The Labor Department, the Financial Industry Regulatory Authority Inc., the Government Accountability Office and the Securities and Exchange Commission all released rules, reports or alerts over the past three years expressing concern about aggressive marketing of IRA rollovers and conflicts of interest.

Last month, Finra and the SEC said they will include IRA rollovers on their lists of exam priorities this year.

From the regulators' perspectives, the rollover market represents an unusual opportunity to identify bad actors. The source of invested assets is clear, as are the investor protections in place for retirement plans governed by the Employee Retirement In- come Security Act of 1974.

By examining the conduct of advisers as it relates to the handling of rollover assets, patterns of abuse are relatively easy to spot. Advisers and firms that operate “rollover mills” are likely to face particularly tough questioning about the processes used to protect individual investors' interests.

Both Finra and the SEC have said that they will be looking for conduct in the handling of rollovers that is contrary to the interests of investors. Based upon this common “best investor interest” frame of reference and related guidance the regulators have provided, the message to advisers is clear: Whether or not advisers are technically considered fiduciaries, they should conduct themselves as such in regard to the rollover practices they employ.


Fiduciary conduct boils down to adhering to the duties of loyalty and care. These entail avoiding conflicts of interest and exercising a professional level of skill and judgment in providing advice and services.

A few standard guidelines can serve investor interests and help advisers avoid compliance problems.

Helping clients or prospects seeking rollover advice to understand the options available to them is absolutely necessary. Unless the rollover assets have already been withdrawn from the participant's account, the adviser should make sure that he or she is aware of alternatives to an IRA rollover and the relative merits of each option.

Due diligence matters. Advisers must apply prudent processes to thoroughly profile their clients, devise or understand appropriate investment strategies and make proper investment recommendations. For example, a common reason for rolling over assets into an IRA is to gain access to a wider range of investment options. This often makes sense if the investor is particularly sophisticated and has special investment needs. If, on the other hand, the investor ends up with investments in his or her IRA that are very similar to those held in the retirement plan, the “wider option” argument doesn't hold up.

Fees and expenses matter. Costs affect outcomes. Incur costs only when they are reasonably justified by quantifiable compensating benefits.

Conflicts of interest matter. Avoid them whenever possible. For example, don't recommend products that pay production bonuses. Even if the products are high-quality, conflicts skew decision making, sour investor relations and often are prohibited by law or regulation.

Document, disclose and discuss all of the above. An adviser's client should never be surprised to learn after-the-fact information on any of the above topics, and regulators should be able to observe from the adviser's records that each has been considered to the benefit of the client.

In short, both Finra and the SEC recognize the special significance of retirement assets to the future financial security of America's workers. As the IRA rollover market continues to expand, regulators will continue to watch closely for signs that investors understand all their options and are receiving the best advice possible.

Blaine F. Aikin is chief executive of Fiduciary 360 Inc.


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