Freedom
of Choice.
SDBA for Your
Retirement Plan
Self-Directed Brokerage Accounts offer greater diversification and the ability for a trusted financial advisor to manage your account.
What is a Brokerage Window?
Many employers have enhanced their retirement plans to include a brokerage window opportunity that offers participants more choice and flexibility with their retirement investments. This option, known as the Self-Directed Brokerage Account (SDBA), exists in 401(k), 403(b) and 457 plans where participants will have access to professional management, stocks, bonds, mutual funds, and ETFs.
How it Works
Employees' retirement plans exist in the Core account that offers limited, pre-selected investment choices. Plans that offer the SDBA option provide the opportunity for employees to take full control of a portion of their current retirement account by linking it to the existing Core account. That expands the range of investment choices beyond the Core investments and provides access to the same management style as high net worth investors, institutions, and foundations.
Managing Expectations and Behavior
Creating healthy habits and a disciplined approach with your trusted advisor helps with managing investor expectations and behavior. Using RiskPro® to help determine how much downside risk is reasonable to achieve your goals, we can now establish a reasonable expectation of participating in a fair share of the upside.
From Core Options to a Fully Managed Account
Core Investment Options
Pre-selected, Limited & RestrictedSelf-Directed Brokerage Account
More Options + Professional AdviceRiskPro®
Determine Your Risk ToleranceMore Choices
Investment options from familiar names you know and trustBuild a Plan.
Put It to Action.
The process of investing allows you to grow, rather than maintain, your savings for greater financial rewards in the future. Investment planning requires the continual assessment of goals and risks, alongside a professional financial advisor.
Working Alongside a Professional Financial Advisor
Riskassessment
Real budgetassessment
Retirement goalevaluation/income
One voice onall your accounts
Qualified vs non-qualifiedassessment
Knows youand your family
Systematic Withdrawalsfor investment accounts
Annual Coaching/Reassessmentas your family and life changes
Riskassessment
Real budgetassessment
Retirement goalevaluation/income
One voice onall your accounts
Qualified vs non-qualifiedassessment
Knows youand your family
Systematic Withdrawalsfor investment accounts
Annual Coaching/Reassessmentas your family and life changes
ADVICE MATTERS.
Every financial decision is a personal decision. Make yours count, with precision investment guidance.
VALUE OF AN ADVISOR
When we make big decisions in life, most of us look for a source of expertise and guidance to help us make thoughtful choices. That's what professional financial advice is all about. Several pillars of advisor created value can be quantified. The following are 4 areas where a professional financial advisor can add value and help improve investment returns.
Behavioral Coaching
Most people act like humans, not investors. But when it comes to investing, acting like a human may actually cost you money.
Today's modern advisor is now also a behavioral scientist and coach. Someone who helps their clients avoid bad decision making, weather market volatility, and stay on track with their financial plan. A strong behavioral coach understands an investors goals and fears and is able to help steer their financial behavior.
It's common for investors to become overly optimistic when markets are rising, or overly pessimistic when markets are declining. Left to their own devices, many investors buy high and sell low. An advisor can help an investor remain objective and disciplined through the cycle of market emotions. Avoiding behavioral mistakes is a significant contributor to the overall value of a financial advisor.
According to Vanguard's Advisor's Alpha®, behavioral coaching alone can add 1.5% to net returns.1
The Basics of Behavioral Finance
We tend to overestimate the accuracy of our predictions. For an investor this could mean believing their knowledge of an investment is greater than it actually is.
We prefer outcomes and patterns we have observed previously. Investors in the midst of a long bull market run may not feel a need to rebalance, as they have become familiar with the direction of the market and forget about corrections and consequences.
The concept of herding refers to individual investors finding comfort in following the crowd, or “herd”. This behavioral phenomenon can easily cause an investor to abandon their personal financial goals for fear of missing out on opportunity or making mistakes.
Well-rounded financial plans require an advisor's process and decision making, not cognitive “short cuts”. Too many choices or too much information can actually cause an investor to withdraw, delay decision making, or take no necessary action at all towards achieving their goals.
¹According to Vanguard's study based on their Alpha framework. Putting a value on your value: Quantifying Vanguard Advisor's Alpha, Vanguard Research, 2016.
Asset Allocation
Advisors are trained and licensed to do what is in their client's best interest. A big part of this obligation is to really “know the investor”. Knowing an investor includes revealing the investor's willingness and ability to tolerate risk. Advisors have a fiduciary responsibility to make sure their clients understand investment risks. This understanding allows advisors to use specific mandates and strategies to allocate client portfolios properly. Allocation models are managed professionally with close attention to many possible market variables. For example, asset allocations are no longer just a simple 60/40 split of fixed income and equities.
The modern advisor may now include asset allocation models with strategic and tactical styles holding underlying active and passive securities with several non-correlating asset classes for a truly diversified allocation.
A thoughtfully developed asset allocation that is both diversified and consistent with the client's risk profile and investment objectives can add 52 basis points of value annually.3
Active Allocation
For illustrative purposes only. Allocation will vary in each of our models.
Active Rebalancing
Often when advisors recommend changes to client portfolios, the number one reason is rebalancing. Rebalancing a portfolio regularly can help an investor stay within a risk tolerance zone and prevent an overreaction to market movements, benefits that outweigh rebalancing costs.
Regular systematic rebalancing has the potential to generate higher returns when taking market momentum into account. Vanguard research estimates that annual systematic rebalancing can increase the expected portfolio return by up to 0.35% annually, while Russell² and Envestnet³ estimate this annual return improvement to be 0.30% and 0.44%, respectively.
Envestnet reports the process of systematically rebalancing a diversified portfolio annually can add 30 basis points of value each year, compared with a naïve strategy of rebalancing once every three years.3
When Balanced Becomes the New Growth
The potential result of an un-rebalanced portfolio
January 1, 2009
December 31, 2018
Hypothetical analysis provided above for illustrative purposes. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Source: U.S. Large Cap Growth: Russell 1000 Growth; U.S. Large Cap Value: Russell 1000 Value; U.S. Small Cap Value: Russell 2000; International Developed: MSCI World ex USA; Emerging Markets Equity: MSCI EM; Global Real Estate: FTSE EPRA NAREIT Developed; Fixed Income: Bloomberg Barclays U.S. Aggregate Bond.
¹According to Vanguard's study based on their Alpha framework. Putting a value on your value: Quantifying Vanguard Advisor's Alpha, Vanguard Research, 2016.
²According to Russell Investments annual study. Why Advisors Have Never Been So Valuable, 2017 Value of an Advisor Study.
³According to the Envestnet/PMC research brief, Capital Sigma: the Sources of Advisor-Created Value, 2019.
Tax Management
When it comes to investing, it's not what you make that counts. It's what you get to keep. Advisors, working with accountants and attorneys, implement strategies for tax shelters, and smart withdrawal strategies.
Advisors know it's not just asset allocation that is important, but asset location is just as important. A good advisor will holistically manage all of your assets, placing less tax efficient investments into sheltered, or qualified accounts, and more tax efficient securities into taxable, or nonqualified accounts.
Envestnet concludes that managing an all equity portfolio for tax optimization can add approximately 100 basis points of annual value when compared with an investment strategy that is not actively tax managed.3
Helping Investors Keep More of What They Earn
Hypothetical growth of $500,000 over 10 years at 7.5% per year
This is a hypothetical illustration and not meant to represent an actual investment strategy. Taxes may be due at some point in the future and tax rates may be different when they are. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Tax-drag is the difference between pre-tax and after-tax return. The smaller the tax drag number, the less you'll likely pay in taxes. The difference of a few percentage points can seem important, but over time, reducing tax drag can make a real difference in your portfolio's ending wealth projection.
²According to Russell Investments annual study. Why Advisors Have Never Been So Valuable, 2017 Value of an Advisor Study.
What is a relationship with a financial advisor worth to an investor?
A 2019 Vanguard study estimates that an advisor adds about 3% of “advisor alpha” annually. A 2019 popular study estimates that an advisor can add about 3% in net returns over time if utilizing wealth management best practices. ¹The biggest opportunity to add value was found to be in behavioral coaching, which was estimated to be worth about 1.5% in additional return.
Source: Envestnet¹; Morningstar; Vanguard
| Source | Annual Value-add |
|---|---|
| Financial Planning | > 50 bps |
| Asset Selection and Allocation | 52 bps |
| Investment Selection | |
| Active Management | 67 bps |
| Passive Management | 61 bps |
| Systematic Rebalancing | 30 bps |
| Tax Management | 100 bps |
| Total | Around 3% |
