Content provided by Case Eichenberger, CIMA, CLS Client Portfolio Manager

As long as people keep populating this earth, there will be a need for better products, better options, and better ways to perform critical functions. The drive for innovation and advancement is ever-present.

Forty years ago, professionally managed pension plans were the norm in the retirement space. Since then, there has been a notable shift from these large pension plans to the now commonplace defined-contribution plan. This switch has opened up investing options and the ability to control investment areas.

However, the search continues for even more nimble, effective options. Enter the self-directed brokerage account (SDBA), the next level of advancement in the defined-contribution space.  The typical qualified retirement plan looks something like this: a mix of 10-20 actively managed and index-based mutual funds, as well as a few target date funds based on an investor’s retirement year. That’s it. In comparison, the SDBA offers a brokerage window to be opened by participants if they want to invest in a multitude of additional mutual funds, exchange traded funds (ETFs), stocks, bonds, etc.

More choices may provide better control over an investor’s individual retirement situation, risks, and objectives than the traditional lineup. These windows still offer the same benefits as the traditional qualified retirement plan, including tax deferral and contributions through payroll deductions. But it also provides the ability to use both sides of the retirement plan. Investors can open the brokerage window, invest a few assets there, and still keep some money in traditional investments chosen by the plan provider.


This flexible-option plan might not be right for every participant. As with everything, there is always a wrong way to use it. At CLS, we often see the SDBA used by participants with more investment experience — typically highly compensated employees who carry higher account balances. These savvy investors are more likely to understand their options and do more research. But does this mean inexperienced investors can’t participate in these flexible plans? No, it doesn’t. Just because the typical user is more experienced, that does not mean an inexperienced investor cannot enjoy these benefits.

With the potential pitfall of overchoice for participants, the role of a financial advisor is even more crucial to the investment process. Choice overload could prompt investors to select positions that have a narrow niche, high fees, or a combination of those factors and several others. The role of a financial advisor is to cut through the noise and provide clear and concise advice based on the participant’s retirement goals.

CLS has partnered with financial advisors for nearly 30 years and helps to provide an outsourced solution of professional money management to advisors’ clients. With experience in several different channels, it’s no surprise we have seen fast growth in this area for our financial advisor partners around the nation. In fact, growth rates (see below) with SDBA accounts under management at CLS have exploded since the early 2000s. We currently manage about $200 million in SBDA-type accounts, up from under $2 million in 2002.


CLS recently conducted a review of advisors who grew their fee-based practices by providing fee-based advice to SDBA participants. One such advisor in the Midwest was able to grow his book of accounts from approximately $2 million in SDBA assets under management in 2010 to more than $18 million by the end of 2015. That is more than 800% growth in assets. The number of clients under management is also impressive. He grew his client base by 300%, from approximately 50 clients under management in 2010 to nearly 200 in 2015. As a fiduciary, CLS manages clients’ portfolios to their desired levels of risk in order to effectively meet their retirement goals, while the advisor works with clients to review their portfolios and make sure they are on track.

Faced with such large potential growth, many advisors have asked CLS how to get started with this little-known investment option. CLS generally recommends starting local. Most successful plans are larger physicians’ groups, lawyers’ offices, or occasionally a corporation that allows the option. Once a specific opportunity is identified — meaning the retirement plan has a brokerage window and allows for fees to be deducted — advisors should examine their existing client lists to see who might have the option available. Word of mouth has always been the best way to build a client base, and this is no different. By working with just a handful of accounts, an advisor’s network will grow as word spreads that participants are gaining customized investment advice from a professional advisor and a qualified, experienced third party money manager.

SDBA opens new doors to investment options for investors and in turn for financial advisors who can provide customized advice to those investors.