IRA's are goldmines to banks and brokerage houses. This is why you see transfer/rollover bonuses on offer from almost every high street outlet.
A common number I see is (up to) $600, it is typically tiered and starts lower, and while less publicized there are higher bonuses available for larger accounts, some of the ones I have seen recently:
$600 TD Ameritrade (for accounts $250K or higher) - 12 month hold
$600 Etrade (for accounts $250K or higher) - unclear on hold period
$600 MerrillEdge (for accounts $200K or higher) - 90 day hold
$600 ShareBuilder (for accounts $125K or higher) - unclear on hold period
For those of you who want to 'game' this, the accounts come with a minimum holding period, which varies by account, when I checked these links it didn't discuss a clawback on the bonus for Etrade or ShareBuilder, Merrill stated holding the funds there for 90 days, and TD a full year. If you pull out before this then you will forfeit the bonus (check with all of these guys before you do in case this info isn't accurate, or it simply changed)
It is not uncommon to find transfer bonus offers of $2500 for accounts of $1M or more. Also, I have discussed in the past that is possible to have brokers match this in order to retain your business.
NB - You may transfer IRAs an unlimited number of times per year, but you may rollover only once per year per IRS regulations - be careful not to mix up the two! They are very similar things.
If you have a large account and are not receiving some sort of annual bonus you are potentially leaving something on the table here. The Secret To Negotiating Brokerage Account Bonuses is worth a quick read.
Brokerage vs IRA bonuses
I have discovered that many banks offer bonuses like this even if not well advertised, however, you will see much more offering them for IRA's instead of Brokerage accounts.
The logic seems quite simple - IRA's have a restricted withdrawal schedule. This is particularly attractive to retain Assets under Management by the Brokerage in younger clients. For example, if you have a person who is 25 years old with a $100K IRA they are much more likely to see that IRA grow in value by both capital additions and asset appreciation.
That same person who held a regular brokerage account might instead pull funds out for a home purchase, or other lifestyle needs - the lack of Qualified withdrawal rules makes a regular Brokerage/Investment account more transient as it can be accessed with ease.
Where is the payoff for the Bank/Broker?
These institutions are excited by account sizes of $100K or more, and you can expect to be called up by the brokerage and 'advised' into a sound asset allocation. This will likely be in the form of Funds. If you transfer in $250K in exchange for $600 you can bet all that on Red in Vegas that your Client Management Representative is not going to suggest a low cost ETF strategy for you, instead they will seek to provide a 'full service, wealth management strategy'.
Fee BASED Planning offered
Fee BASED is not Fee ONLY. Fee BASED is a word invented by the Brokerage houses like this to confuse you as a customer. This will be the biggest mistake of your investment career. Fee based means that they will charge you an Assets Under Management Fee as an advisor, and then they will go on to offer you products that may or may not offer them a commission too (they aren't going to focus on commission free when they could earn a commission, just FYI..)
As a Fee Based Advisory you will see fees ranging from perhaps 0.85% -2% per year for advisory services. That would be valued at: $2125-$5000 per year in exchange for the $600 they hooked you in with.
Additionally, they will offer funds that have loads which could cost 1% or more on the front or back end. That is another $2500.
Other fees, such as Fund Management Fees could cost between 0.5%-1.5% and 12b fees (marketing so they can sell the fund to other suckers) of up to another 1% or so - lets call that 2% total - and another $5,000 per year.
So worst case, you transfer into a Merrill type place, they send you $600, invite you in for 'Wealth Management' either via the phone, or in their offices, or perhaps over a nice steak dinner. Once you think you are now a 1%er and that your guy is doing you right, you get an annual bill of about $10,000.
You won't be able to see the $10,000. It will be buried in fees that are swiped away from the eye before they hit your return.
What's that worth to a bank?
We are talking $10,000 on $250K in year 1. If you were 35 years old when you did this, and they retained you as a client for life, you would not be able to withdraw (barring some rules) from the IRA until at least 59.5yrs. A 'good' advisor would encourage you to max out your annual contributions, currently at $5,500.
Let's set asset appreciation from all stocks at 4% (your fees mean you make half of the 8% I would normally assign to this calculation)
So, should they pull you in for $600 (this is Lead Generation) then use their client relationship management skills to retain your business your account value would be worth $1.1M.
Production (Churning)
In addition to the Assets Under Management fee that you may, or may not be charged these advisors are compensated via 'production'. This means taking you out of one fund and into another. The savvy reader here would say that my numbers above were unfair because Load fees would not apply each year.
However, Advisors that do not hit Production figures for any 3 month period are typically fired. And in order to do that they will 'churn' your account. You will receive a call suggesting that you 'reallocate' it might even appear to have a lower annual fee, or maybe just great 'Alpha'... whatever the story is, you are going to get hit for another fee in the process.
Surviving the bloodbath
There is a simple solution - you can invest with Vanguard or other low cost funds - Fidelity Spartan Funds have great options too. You can do this within any of the brokerages that offer you the $600, but be ready for the onslaught... if you are transferring in attractive account sizes it is simply to feed the lead generation for your 'client relationship managers' and they will do their best to make a nice profit from you.
You can expect a phone call, you might get an offer to attend a meeting, or lunch, or an exclusive event...it is nice to be courted, but remember what this is really worth. In order to understand the value of this to the bank, if you were to instead use a low cost index strategy and yielded an average of 8%, that $250K wouldn't be worth $1.1M, it would be worth 3x that....
A common number I see is (up to) $600, it is typically tiered and starts lower, and while less publicized there are higher bonuses available for larger accounts, some of the ones I have seen recently:
$600 TD Ameritrade (for accounts $250K or higher) - 12 month hold
$600 Etrade (for accounts $250K or higher) - unclear on hold period
$600 MerrillEdge (for accounts $200K or higher) - 90 day hold
$600 ShareBuilder (for accounts $125K or higher) - unclear on hold period
For those of you who want to 'game' this, the accounts come with a minimum holding period, which varies by account, when I checked these links it didn't discuss a clawback on the bonus for Etrade or ShareBuilder, Merrill stated holding the funds there for 90 days, and TD a full year. If you pull out before this then you will forfeit the bonus (check with all of these guys before you do in case this info isn't accurate, or it simply changed)
It is not uncommon to find transfer bonus offers of $2500 for accounts of $1M or more. Also, I have discussed in the past that is possible to have brokers match this in order to retain your business.
NB - You may transfer IRAs an unlimited number of times per year, but you may rollover only once per year per IRS regulations - be careful not to mix up the two! They are very similar things.
If you have a large account and are not receiving some sort of annual bonus you are potentially leaving something on the table here. The Secret To Negotiating Brokerage Account Bonuses is worth a quick read.
Brokerage vs IRA bonuses
I have discovered that many banks offer bonuses like this even if not well advertised, however, you will see much more offering them for IRA's instead of Brokerage accounts.
The logic seems quite simple - IRA's have a restricted withdrawal schedule. This is particularly attractive to retain Assets under Management by the Brokerage in younger clients. For example, if you have a person who is 25 years old with a $100K IRA they are much more likely to see that IRA grow in value by both capital additions and asset appreciation.
That same person who held a regular brokerage account might instead pull funds out for a home purchase, or other lifestyle needs - the lack of Qualified withdrawal rules makes a regular Brokerage/Investment account more transient as it can be accessed with ease.
Where is the payoff for the Bank/Broker?
These institutions are excited by account sizes of $100K or more, and you can expect to be called up by the brokerage and 'advised' into a sound asset allocation. This will likely be in the form of Funds. If you transfer in $250K in exchange for $600 you can bet all that on Red in Vegas that your Client Management Representative is not going to suggest a low cost ETF strategy for you, instead they will seek to provide a 'full service, wealth management strategy'.
Fee BASED Planning offered
Fee BASED is not Fee ONLY. Fee BASED is a word invented by the Brokerage houses like this to confuse you as a customer. This will be the biggest mistake of your investment career. Fee based means that they will charge you an Assets Under Management Fee as an advisor, and then they will go on to offer you products that may or may not offer them a commission too (they aren't going to focus on commission free when they could earn a commission, just FYI..)
As a Fee Based Advisory you will see fees ranging from perhaps 0.85% -2% per year for advisory services. That would be valued at: $2125-$5000 per year in exchange for the $600 they hooked you in with.
Additionally, they will offer funds that have loads which could cost 1% or more on the front or back end. That is another $2500.
Other fees, such as Fund Management Fees could cost between 0.5%-1.5% and 12b fees (marketing so they can sell the fund to other suckers) of up to another 1% or so - lets call that 2% total - and another $5,000 per year.
So worst case, you transfer into a Merrill type place, they send you $600, invite you in for 'Wealth Management' either via the phone, or in their offices, or perhaps over a nice steak dinner. Once you think you are now a 1%er and that your guy is doing you right, you get an annual bill of about $10,000.
You won't be able to see the $10,000. It will be buried in fees that are swiped away from the eye before they hit your return.
What's that worth to a bank?
We are talking $10,000 on $250K in year 1. If you were 35 years old when you did this, and they retained you as a client for life, you would not be able to withdraw (barring some rules) from the IRA until at least 59.5yrs. A 'good' advisor would encourage you to max out your annual contributions, currently at $5,500.
Let's set asset appreciation from all stocks at 4% (your fees mean you make half of the 8% I would normally assign to this calculation)
- Time = 30 years until you hit 65 and regular retirement age
- Annual Payment, $5,500 (increases to $6500 for final 10 years due to catch up) - i'm going to ignore annual increases here to simplify.
- Starting Value $250,000
- APR 4%
So, should they pull you in for $600 (this is Lead Generation) then use their client relationship management skills to retain your business your account value would be worth $1.1M.
Production (Churning)
In addition to the Assets Under Management fee that you may, or may not be charged these advisors are compensated via 'production'. This means taking you out of one fund and into another. The savvy reader here would say that my numbers above were unfair because Load fees would not apply each year.
However, Advisors that do not hit Production figures for any 3 month period are typically fired. And in order to do that they will 'churn' your account. You will receive a call suggesting that you 'reallocate' it might even appear to have a lower annual fee, or maybe just great 'Alpha'... whatever the story is, you are going to get hit for another fee in the process.
Surviving the bloodbath
There is a simple solution - you can invest with Vanguard or other low cost funds - Fidelity Spartan Funds have great options too. You can do this within any of the brokerages that offer you the $600, but be ready for the onslaught... if you are transferring in attractive account sizes it is simply to feed the lead generation for your 'client relationship managers' and they will do their best to make a nice profit from you.
You can expect a phone call, you might get an offer to attend a meeting, or lunch, or an exclusive event...it is nice to be courted, but remember what this is really worth. In order to understand the value of this to the bank, if you were to instead use a low cost index strategy and yielded an average of 8%, that $250K wouldn't be worth $1.1M, it would be worth 3x that....