In the wake of a tumultuous 2020, too many investors, especially those who are 50-plus, are finding themselves “seeking new opportunities.” Studies show 50-somethings are more likely to lose their job because they’re at the upper end of income and, sadly, tend to be among the first to be let go due to current economic conditions.
And while they are looking for what’s next, they are also determining where to place their IRA rollover. This vulnerable group wants and needs to get the most bang for the bucks they’ve accumulated in taxable and qualified accounts.
I asked my colleague, Paul Samuelson, to run some numbers to show advisors how to demonstrate their value in managing these newly available IRA rollovers as part of a comprehensive household portfolio, as well as to help advisors answer the question of why investors should choose them. It comes down to quantifying the financial benefit of tax-smart asset location as part of a coordinated household portfolio management process.
Assuming you won’t start by trying to prove you can beat the market or outperform other advisors, I asked Paul to use his algorithms to show why these rollovers should be under an advisor’s care, especially for those who manage portfolios in a comprehensive way. He pointed out the key is to provide guidance on optimal asset location and to quantify the value of the advisor’s stewardship in dollars and cents.
Paul’s day job is to develop sophisticated algorithms for household portfolio management systems. He also provides guidance pro bono to friends and family on how to maximize the growth and income of a household portfolio. In a recent example he shared, John and Mary have $1,500,000 in retirement savings. John lost his job and is looking to place a $300,000 401(k) rollover. The couple owns mutual funds in all of their accounts and have a moderately aggressive asset allocation with essentially the same target allocation in every account. Paul observes over half of the accounts he sees are set up “pro rata,” or proportionally in all accounts.
Paul applied his algorithms to this portfolio to optimize asset location, and recommended John and Mary move from a pro-rata allocation to an optimized asset location across all their accounts. Paul’s math showed John and Mary could add $212,000 of after-tax value over the next 15 years. Same asset classes, same risk, same household asset allocation. The only difference is the portfolio with the $212,000 advantage employs tax-smart asset location.
He also notes that rollovers often happen in an effort to organize accounts and achieve clarity about what to expect when retired. He finds that adding the financial benefit of a household approach is the nudge that encourages investors to consolidate assets. That’s what happened here.
Assisting clients in long-term tax efficiency is not charitable work. Every dollar of unnecessary taxes a client avoids adds up—and compounds—over time, improving asset-based revenue to the firm by anywhere from 4% to 13% annually, according to Paul’s calculations. For these clients, he projected the revenue generated from an optimized portfolio to be 6% greater in the 15th year compared to one that is left unattended. If an advisor were to improve outcomes through tax-smart asset location across an entire book of business, the revenue bump would make a major impact on the firm’s bottom line.
On a $10,000,000 revenue business, a 6% raise comes out to $600,000. With M&A activity in financial services heating up, firms with the best margins get the best valuations. And for most advisors this is a not-to-be-missed opportunity to enhance their own retirement. For advisory rollups, applying asset location optimization to an otherwise poorly located book of business can be a shot in the arm to improving client outcomes, retention and improving margins on the business. Experience shows a firm enjoys revenue increases from asset location and also benefits from asset consolidation, as well as retention.
This revenue bump comes from having an increase in portfolio value due to avoiding unnecessary investment taxes. This reinforces the most valuable asset of all—time. The more time assets grow tax efficiently, the more valuable the compounding effect is. After all, it’s not about how much we earn, but how much we keep.
Money is in motion. Investors recognize they need to get the most out of their retirement savings in an environment where an easy market lift may no longer be the path to growth. Showing how to maximize the accumulation of assets by managing the household portfolio with tax-smart asset location gives cause to improve outcomes and consolidate assets. It’s a win-win for the investor and the advisor. Success will come to the firms that make rollovers as financially advantageous—and effortless—as they can.
Jack Sharry is co-chair of MMI's Tech & Ops and Digital Advice Community, on the The Next Chapter Advisory Council and executive vice president of LifeYield.