Maybe you’re unhappy with your portfolio. Or the fees on your investments seem too high. Or you struggle to get questions answered. It’s tempting to shoot off a “you’re fired!” message to your financial adviser, broker or brokerage house.
But as satisfying as that might feel, impulsive action could expose you to tax liabilities or cause you to repeat the errors that aggravated you in the first place. “I can’t think of too many things where acting impulsively and quickly usually works out better than coming up with a plan,” says Elliott Appel, a certified financial planner based in Madison, Wis.
Before you make any decisions, let your emotions settle by writing down the minuses and pluses of your current adviser or platform. “Writing forces you to slow down” and allows you to think more rationally about this important decision, advises Samantha Lamas, a senior behavioral researcher at investment research firm Morningstar.
Evaluate your grievances carefully. If you’re unhappy with your fees, for example, research what competitors charge for the services you want. If you think your returns are subpar, check your returns against index funds that are suitable for your goals and risk tolerance, says Jim Dahle, author of The White Coat Investor.
Look beyond oft-cited indexes such as the all- stock S&P 500, Dahle says. Instead, he suggests comparing your results over as long a time as possible against a few target-date funds with asset allocations to bonds and other lower-risk assets appropriate to your situation.
If you still want to make a change, Lamas suggests comparing your new options against a checklist of what’s important to you to make sure you don’t end up in a similar circumstance. Once you’ve found your alternative, start the process of opening new accounts there. Your new adviser or brokerage will help you transfer your portfolio.
Before your assets are transferred, make sure you have your own records in case of a dispute. Log in to your original account and download all important documents, including recent statements, portfolio summaries, tax documents and messages, advises Daphne Jordan, a Texas-based CFP and member of the board of the National Association of Personal Financial Advisors.
Once you’ve settled on a new home for your portfolio and backed up your files, you can safely fire your broker or brokerage.
Your new adviser or brokerage can manage much of this, but it pays to read any agreement you signed with your original adviser or brokerage to find the firm’s specific account closure procedures.
Some advisers and brokerages, for example, require written notification, charge fees for account closures or fund transfers, and give themselves as much as two weeks to complete the requested transfer.
The big move
As in any type of breakup, ending a relationship with a human adviser or broker can be painful. But it can be handled gracefully.
If you don’t mind a potentially difficult conversation, NAPFA’s Jordan says advisers appreciate the courtesy of a call and an explanation of your decision. If that’s too much to muster, however, a drama-free path is to just let your new adviser handle everything, she says.
If your new adviser uses the same brokerage platform as your old adviser, in many instances a simple phone call to your brokerage will immediately remove the old adviser from your accounts.
You’ll have to fill out a form to add a new adviser, but that process usually takes only a day or two, says Richard Zak, a regional market executive for Charles Schwab. “Your account numbers don’t change. Your log-ins and passwords don’t change. It’s very easy,” he says.
Changing brokerages, on the other hand — jumping from Vanguard, say, to E*Trade, Fidelity or Schwab — is more challenging. Switching these so-called custodians of your portfolio requires careful attention, can take weeks to complete, and can result in fees and extra taxes.
One of the most common ways investors trip up is by filling out transfer forms incorrectly, say brokerage officials. Mistakes or omissions can give the original brokerage grounds for refusing the transfer, and that will cause delays as you correct and refile your transfer request.
You must attach a recent statement of each account you want to transfer, for example. And investors need to use the specific transfer request form for their situation.
Transferring an IRA to Fidelity, for instance, requires a different form than transferring a taxable account. Details matter.
When transferring a trust, says Schwab’s Zak, you must fill in the exact legal name of the trust, as well as the exact legal name of the trustees in their correct roles (such as who is the primary trustee) to match the names and roles on the original accounts.
In other words, you can be delayed by a simple oversight such as filling in a nickname like “Tom” Smith instead of, say, Thomas J. Smith, if that’s what appears on the original account.
The entire process of finding a new brokerage, creating new accounts, filing all the forms and transferring your portfolio can take several weeks. The transfer stage is the most crucial part and can take the most time.
Most major brokerages participate in a system called the Automated Customer Account Transfer Service, often referred to by its acronym, ACATS. If you use the online system and fill out all your forms correctly, the transfer should take no more than six business days, according to the Securities and Exchange Commission.
But you should expect longer waits if you make any mistakes in the online forms or if you use paper forms instead.
That potential for delay is one reason Miguel Gomez, an El Paso, Texas-based CFP, advises his clients who rely on cash withdrawals from their investment accounts to withdraw enough to cover several extra weeks of expenses before starting a transfer.
Keep an eye on costs
Some brokerages charge account closure or transfer fees, typically ranging from $50 to $150 per account. But bigger potential costs can arise when you transfer your portfolio.
The simplest and cheapest option is to have all investments transferred “in kind.” That way, your 100 shares of Microsoft, say, get shipped over to your new account without triggering any potential tax liability. Unfortunately, that’s not always possible.
Many brokerages offer proprietary mutual funds or other investments, such as annuities, that won’t transfer. Selling those proprietary investments to move cash can be costly.
Redeeming insurance products bought within the past several years often incurs surrender charges, for example. And if you sell proprietary investments held in taxable accounts for a profit, you’ll face taxes on those gains.
If you decide instead to keep those proprietary investments, you’ll have the hassle and costs of maintaining and managing both your old and new accounts.
If you no longer need or want to be served by an adviser associated with the old account, Appel suggests asking to be assigned to a “house” account, which typically means you are served by just the company’s support team.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
