Matt Bacon        March 1, 2021

Where should you roll your 401k? This is one of the most asked questions we field. That, and “who is the best”? Like everything it’s a matter of perspective, but regardless of the answer we’re always struck by the knowledge gap on who the players are and what they actually do. For example, is Fidelity good? How about Vanguard? These behemoths bundle so many services that the answer you get from your friend about them may have nothing to do with what you actually want. That’s problematic.

At a base level, you need a custodian. A custodian is like a bank for your investments. They hold your assets and provide you with monthly reports that show things like transactions, start values, end values, etc. Performance isn’t generally included. Charles Schwab and Fidelity are two of the largest custodians in America. TD Ameritrade is another one of the big boys but was recently purchased by Schwab.

Nearly every major custodian now offers commission free trades for stocks, bonds, and exchange traded funds (ETFs). Anyone looking for  DIY solution should look at using custodial services only. This allows you to log in, place trades, and manage your account on your own for next to nothing. Custodial services are largely commoditized and choosing the best one is mostly a qualitative exercise. You can go with the one you trust the most, or has the sleekest online tools, or the best customer service, or whatever fits high on your list. If you’re not happy you can always switch. Custodians don’t require a contract or lock up period.

But you may want some help. Most of us aren’t wunderkind traders and appreciate having a pro at the helm to help guide the ship. This is where an investment advisor comes in. This is an additional service on top of custody and yes, both Schwab and Fidelity offer investment advice. Vanguard does as well. Although custodial services are very commoditized, investment advice is not. The kind of advice you get, the service that comes with it, the frequency of communication, and the overall end user experience can vary dramatically. So can the costs.

For example, will you use a robo-adviser? A “robo” is an algorithm that determines what to buy and sell in your account. The algorithm doesn’t require food, sleep, or smoke breaks. Just occasional updates from an investment team somewhere on one of the coasts. With most of these you’re paying a fraction of a percent to license intellectual property that manages your portfolio. There’s nobody there to help you when you have questions and the advice is narrow in scope: investments only. General planning questions about how Medicare works, when to claim social security, how much you need to have saved to live comfortably, etc, aren’t addressed here. FinancialPlanning.com put out a recent list with their 15 best robos if you’re wondering about who is who in this space.

The next step up is a hybrid solution. The robot still manages the account, but you get an actual human being to talk to! They can tell you about what the algorithm is doing and any other general financial planning questions you may have. These models usually limit the amount of time you have with your human advisor to a certain number of hours a year, but that’s not a hard and fast rule across the industry. The advisor usually works in a centralized office and may not be available for in-person meetings.

Most fund companies have some kind of robo solution and hybrid solution. Fund companies manufacture investment products like ETFs and mutual funds for sale to investors. Vanguard and Blackrock are the two largest fund companies in the US, but Schwab and Fidelity also have their own gigantic fund businesses. (It helps to delineate the business lines. Schwab and Fidelity are both horizontally integrated with TONS of related businesses and services). You can head to any of them to manage a portfolio that consists almost entirely of proprietary funds. You can check out the Vanguard offering here if you’re curious.

Why only proprietary funds? Because investment advice is an ancillary service for these companies. It’s there to increase market penetration and create new avenues for product distribution.

You can also have a human do it for you. They can place trades, make investment recommendations, help you plan your retirement, open accounts, and generally handle most every aspect of your investment and retirement planning. Some advisors may offer bifurcated services. They might only offer investment advice or only offer financial planning advice. The bulk do both but it’s not a given. Make sure you understand what you’re signing up for if you go this route and roll over your 401k to them.

Here’s the last little rub to all of this: many human advisors are not independent. Many work for an organization known as a Broker-Dealer and have their own unique mix of incentives as a result. Some of these advisors are salespeople whose advice is offered only tangentially in conjunction with making a sale. Other advisors there may have a fiduciary obligation to you. This is the highest standard of care and requires them to put your interests ahead of their own. The crazy part is that your Broker-Dealer advisor may be a fiduciary in one setting and salesperson in another depending on the situation. Seriously. Regulators are trying to crack down on this and make it easier for consumers to tell the difference between fiduciary and salesperson but the waters are still pretty muddy.

You can also seek out an independent fiduciary advisor if you want to avoid the Broker-Dealer world entirely. This group generally operates as Registered Investment Advisors (RIA). The Fee-Only Network has a great directory that can point you to a few RIAs in your area if you need a little help getting started. There are a few big national brands in the independent space but the rest of is largely a cottage industry with a few sizable regional firms and thousands of small and locally owned businesses. Crucially, RIAs partner with custodians. You can have an account at Schwab or Fidelity and simply add an investment advisor to it to go from DIY to cruise control.

So where should you roll your 401k? Figure out what services you actually need. That should eliminate half the noise. Check out these tips for choosing a financial advisor if you decide to pick up a hired gun.

I’ll end with a small bit of shameless self promotion. Carmichael Hill is a Registered Investment Advisor and one of the firms that makes up the cottage industry of small, locally owned investment advisory firms. Ping us and we’ll help point you in the right direction if you’re having trouble getting started.

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