Why is IRA Rollover Superstar Ed Slott So Happy?

ED SLOTT won’t let us off the phone.  Despite a number of awkward attempts to bring the conversation to a close (“Well, this has been great …” and “Fantastic, I think we have all we need …”) the advisor, author, trainer and coach is still going strong, and we’re well over an hour into our scheduled 30-minute interview on IRA rollovers and distributions.

Truth be told, his enthusiasm is infectious. It’s inspiring to see someone still so passionate about their particular area of expertise, and for Slott, that expertise stretches over three decades. If anything, his enthusiasm seems to increase the longer he’s on the phone, as years of evangelical preaching about the importance of IRA rollovers and distributions finally comes to a head— big time.

The Wall Street Journal calls Slott “the best source for IRA advice” and if you haven’t caught him in The Washington Post, Forbes, Money, NBC, ABC, CBS, CNBC, PBS, etc., you’re probably living on a mountaintop in Nepal.

The reason he’s so amped for our discussion? Research firm BrightScope shook the 401(k) world last June when it announced that in 2013, for the first time, more money moved out of the retirement savings vehicle than went in. Which means that the 401(k) rollover frenzy, predicted for so long, is on—and demographics will only drive it higher. How high? Fellow re­search firm Cerulli Associates predicts that rollovers from 401(k)s and other defined benefit plans will cause IRA assets to hit $12 trillion by 2020 (go ahead, read that again, we’ll wait).

It’s one reason the following statement is so maddening: predicted or not, it’s a frenzy for which advisors are incredibly unprepared.

“Fully 99 percent of advisors know noth­ing about the rollover and distribution side,” Slott claims. “Now you may say ‘Ed, are you saying only 1 percent of advisors know anything about this?’ No, it’s actually lower and I rounded up. That’s how bad it is.”

Yet retaining rollover assets already on the books as well as attracting new assets from clueless and incompetent competitors will be an enormous key to success moving forward.

“I fly around the country and do these seminars,” he relates. “I always ask the audience the same two questions: ‘How many of you already have a financial advi­sor?’ And every hand goes up. So the next logical question is ‘Why are you here? You just spent $300 or $500 for tickets and you already have a financial advisor.’”

The answer, he says, is always the same and just as scary; because they’re not getting rollover information from their current advisors, with the emphasis on “current.”

Which, to Slott, makes sense; financial companies don’t want the assets to leave, so they’re more reluctant to train their reps on decumulation strategies—a major mistake for them, and a major advantage for retire­ment plan advisors.

“Unfortunately, the whole advisor business is built on accumulating assets,” he says with his trademark exasperation. “Otherwise, nobody gets paid. But I always ask audiences if they have a plan to take the assets out, because it will determine how much they keep. When I ask this, they all look like ‘holy crap!’—like nobody ever told them any of it.”

A good chunk of any client’s net worth is going to be in an IRA or 401(k) and that money, at some point, has to come out.

“That’s where advisors miss the boat, because it affects every other part of their financial planning process; how much Social Security is taxed, which money to take, it affects everything. As a result, the No.1 comment I hear from advisors in our two-day program is ‘I didn’t know how much I didn’t know.’”

Which is really the point. Referring to IRA and 401(k) assets as the “black hole” of planning, the metaphor-loving Slott says “everybody thinks the other guy took care of it. The financial advisor thinks the accountant’s on top of it. The accountant thinks the attorney must have it. The attor­ney thinks the cat must have it.”

And it’s not even about simply moving money. Every time the IRA or 401(k) mon­ey is touched it’s like “an eggshell; you break it and it’s over.”

“It’s subject to a different set of rules, and there are strict new rules this year,” he says. “You mess up the rollover and you could lose the IRA. How can an advisor call him­self an ‘advisor’ and not know this?”

It’s a good question, yet Slott constantly hears how he’s “opening up this whole new world” for advisors and how they’ve “been in business for 30 years and nobody ever told them about it.”

The reason so many advisors shy away from rollovers and distributions is because of the legal exposure that can result from tax implications. “These accounts are infested, not invest­ed but infested, with taxes. Most people don’t realize they need an exterminator, but being that exterminator is how advi­sors stand out.”

Slott often speaks with an affected, exas­perated air—and it’s easy to see why. None of what he shares is particularly earthshattering. Indeed, most of the same technical informa­tion he dispenses can be had from a 20-some­thing phone jockey in the retirement planning department at a large mutual fund company. We mention that we saw him at a conference in 2006, and that his message was almost the same, and it’s something he readily concedes.

But it’s information people want and need; while other advisors either don’t realize or don’t care about the opportunity it presents, Slott has achieved remarkable success just by taking the initiative to act.

“Here was my big prediction that put me into this field,” he says by way of example. “Thirty years ago, I said anybody that’s age 35 would be age 65 in 30 years. That was my big, bold prediction. And it happened.”

In other words, the coming demographic changes were obvious, but while others talk­ed, Slott pounced. By educating himself on IRAs, 401(k)s and attendant rollover issues, he was able to avoid—and capitalize—on the big mistakes other advisors made. He helpful­ly lists a few:

1). Not checking beneficiary forms — “To me, that’s rollover 101, yet some of the biggest problems happen because advisors never check beneficiary forms. This ties into the 401(k). You take the average advisor, he has nothing to do with the 401(k) but he has a client that has a $100,000 IRA and a large 401(k). The average advisor doesn’t go above and beyond and simply ask about the 401(k) beneficiaries. To me that’s where you gain your competitive edge. If the beneficiary form isn’t updated a basketball game breaks out. One beneficiary gets five lawyers, the other beneficiary gets five lawyers and the money just dribbles away. When you ask about beneficiary forms, what you’re really doing is asking about the family. And that’s good business; that’s what builds relationships and that’s what make you stand out.

2). Not knowing and keeping up with rollover rules—“Most advisors don’t realize rules change almost weekly. Even if they are up to speed, some of the bills read like they’re written in Sanskrit. We now have the one rollover annually rule. If you do a second rollover, the client will lose their money. I’ve polled advisors and I said ‘How many of you are aware of this new law?’ And the best I ever got is maybe a third of the audience raised their hands.

3). Inherited IRAs—“This is where some of the biggest mistakes are made; people don’t know how to handle inherited IRAs. They’re subject to different and harsher rules over and above those for regular IRAs. For example, one of the biggest rules blown is the one that says a non-spouse beneficiary cannot do a rollover. If a spouse inherits an IRA she could roll it over to her own IRA; no problem. But let’s say a dad dies and leaves his IRA to his son. Well, sonny boy can’t wait to get his hands on the money so the attor­ney puts the son’s name on it and that’s the end of the account—game over. It’s a taxable distribution because a non-spouse beneficia­ry cannot do a rollover. It has to be set up as a properly titled and inherited IRA. If it goes to the beneficiary’s own IRA, it’s taxable and a fatal error. The dad spent a lifetime accumulating a $600,000 rollover and now a big chunk is gone.”

Slott ends each rapid-fire horror story the same way, “I mean, I could go for days …,” and we believe him. He’s trying to pound it into our brain, the same way he pounds it into the advisor’s brain, and after hearing one anecdote stacked atop another anecdote stacked atop yet another, they (and we) willingly submit.

“It’s two sides of a coin; opportunity and the negligence. And those are the only two ways to go. Either be a hero or the opposite, which in this case isn’t zero, but defendant.”

He should know; part of his job descrip­tion we didn’t mention at the top is “expert witness,” and business is only getting better. And now, of course, 401(k)s are added to the mix.

“We’re seeing the first major wave of 401(k) transitions, and I mean major as being those 401(k)s that have built up for 30 years. It’s time to pull the trigger on this 401(k) experiment and see if it’s really worked. The year 2013 was the first that we saw more going out of 401(k)s than going in, so we’re turning the corner and it affects more people. I said it 20 years ago and peo­ple said ‘I’ll worry about that in 10 years,’ like it’s global warming or something. Well, good luck with that.”

The firehose that is Ed Slott is almost exhausted, but he ends on a final note, one that appears to have no hint of hyperbole.

“It’s the opportunity of a lifetime for the advisor who wants to get educated, stand out from the crowd and have that compet­itive edge to really build a business. And it’s the tragedy of a lifetime for the advisors who don’t, because without a doubt, some­where it’s gonna bite them.”