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RIAs should address their own retirements

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Advisers who move from employee status to an RIA must take on new responsibilities, such as preparing for their own retirements.

“The cobbler’s children have no shoes,” says David Edwards, president of and wealth adviser at Heron Financial Group in New York. “Ironically, some advisers spend all year working on their clients’ retirement plans, yet neglect their own.”

For a solo adviser with an employee or two, a SEP-IRA “makes the most sense,” Edwards says. “This plan has exceptionally low administration costs, unlimited investment choices, and maximum annual contributions of the lesser of 25% of income or $53,000 in 2016.”

The ceiling will be $54,000 next year.

The catch? As employers, advisers must contribute the same percentage of income to employees as to themselves.

“As you ramp up employees, this quickly becomes unaffordable,” Edwards says.

An RIA firm with three or more employees might be best served with a conventional 401(k) plan.

“If the adviser already uses a payroll processing service, adding a 401(k) is a minor additional expense,” Edwards says.

“The adviser can design the investment choices and decide to have only employee contributions to the plan, so there’s no out-of-pocket expense to the firm’s owner,” he says. “Alternatively, advisers can choose to do an employer match, which is an extra expense, but tax-deductible.”

Edwards’ firm has a conventional 401(k) as its retirement plan.

“We enroll new employees automatically on the date of hire, with a 3% withholding rate [more if they want],” he says. “We encourage people to bump up their withholding by one percentage point every time they get a salary increase, up to the maximum contribution.”


Assuming that an RIA has a handful of employees or more, there are many options from which to choose.

The “best one” depends on the goals of the firm, says Mark Wilson, a CFP and portfolio manager with Tarbox Group, a wealth management firm in Newport Beach, California.

At Tarbox Group, the goals are served by a profit sharing/401(k) plan.

“These can range from an employee-contribution-only plan to one that could have very generous employer contributions,” says Wilson, who also holds the accredited pension administrator designation. “These are relatively inexpensive plans, flexible in annual contributions and easy to understand.”

Employees at Tarbox Group choose how much of their income to defer and contribute to the plan.

“Tarbox makes a mandatory 3% contribution for everyone, and the firm also makes 5% to 15% profit sharing contributions each year,” Wilson says. “The safe-harbor addition allows us to skip discrimination testing that might be a problem if some employees choose not to make their own contributions.”

The plan’s assets are managed in-house, Wilson says.

“We use the same growth portfolio we use for client accounts,” he says.

“This is further proof that we eat ‘our own cooking’ with our personal investments. It also simplifies plan costs and keeps employees from spending time tweaking their own accounts,” Wilson says.

Donald Jay Korn is a New York-based financial writer who contributes to Financial Planning and On Wall Street.

This story is part of a 30-30 series on smart strategies for RIAs.

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