What does that mean?
Going forward, we will allocate the investments of employer-controlled accounts (401k, 403b, 457, TSP, profit sharing plans, defined benefit plans) separately from those under your control (taxable accounts, IRAs). This means if the optimum asset allocation for you is, say, a 60/40, we will invest your employer accounts in a 60/40 allocation using the best options we have. We will then invest those accounts controlled by you, which are those held at TD Ameritrade, in a 60/40 allocation. In the past we allocated both employer-controlled accounts and TD accounts into one 60/40 allocation.
For example, let’s say the proper asset allocation for a client is 60/40. Previously we looked at all your accounts in making up the allocation. This meant your employer-controlled retirement account may have been invested in just one asset class, but when we considered it as part of the whole (to include the TD Ameritrade accounts) the entire portfolio came out to a 60/40 allocation.
From now on, we will invest the held-away accounts separately from the funds held by TD Ameritrade. They will now each have the same asset allocation, so in the example above, the held-away account will have a 60/40 allocation.
The reason driving this change is increasingly restrictive SEC regulations. In the past, we would make the trades in your employer-controlled accounts when we rebalanced each month. This is no longer allowed by the SEC. If we know, or are in possession of, a password to your accounts, the SEC could deem us to have custody of the accounts, which violates our registration requirements with the SEC.
The downside of this means you will now need to personally execute trades in these accounts. If we continued as we have in the past, you would need to manually allocate new contributions and execute all rebalancing trades, which can happen monthly. We think that is unworkable. Therefore, we will set up employer-controlled accounts to stand alone with their own asset allocation, and we will automatically allocate all new contributions based on the asset allocation. We will reduce our rebalancing to once a year so we can minimize your involvement in having to execute the trades to just that, once a year.
For most clients, separating the employer-controlled accounts will not significantly affect your overall portfolio returns. It may result in slightly greater volatility in some portfolios, depending upon the choices we have in the held-away account and the size of the account.
We know this is not something you, or our staff, wants. We constantly try to find ways we can expand our service and increase efficiency. This overreaching regulation, designed to protect you from your trusted advisor, requires us to give less service to you while increasing our workload.
We intend on making these changes around the 1st of January. This is going to mean many clients may realize some capital gains as a result of having to completely rebalance portfolios. We will work hard to ensure any gains are held to a minimum whenever possible.
We have fought doing this for several years while trying to find a workaround. Our compliance attorneys have finally told us we must take this action. Again, we are disappointed we must take this step.