So you feel it may be time to switch financial advisors.  There are some common reasons people leave their advisor: lack of communication, poor investment returns, you were introduced to someone more knowledgeable, or a significant error was made in managing your finances.   Whatever the reason may be, successfully executing the transfer process is no small task.  In some cases major tax and legal complications can arise.  Here are some tips to be aware of when transferring your brokerage account.

Automated Customer Account Transfer Service (ACATS)

Here is a basic breakdown of how the transfer process works.  Before you decide to transfer your account to another advisor or online brokerage account you must set up a new account at the receiving firm.  After the accounts have been opened and you are designated a new account number, your broker may conduct what is known as an ACA T transfer.

ACATS is transfer processing system of the National Securities Clearing Corporation.  It interlinks accounts between brokerage firms that are involved in the ACAT program.  It enables your broker to enter, review and finalize account transfers automatically.  The general turnaround period for a transfer is between 4-8 business days depending on the size and type of the account, the assets held, trading activity and the broker dealer’s overall operations and clearing process.  

Problem #1: Account Title

Prior to transferring an account from your existing broker, you must establish an account at the receiving firm.  Since the transfer process is automated, the account title must be identical.  Although this seems like a fairly simple requirement, mistakes are frequently made.  For example, “Michael Smith” does not match “Mike Smith” and would be rejected.  Similarly “Michael A. Smith” does not match “Michael Smith” or “Michael Allen Smith”.  Little details such as middle initials or nicknames may pose significant delays in the transfer process, so make sure your name matches identically on both sides of the transfer.

Problem #2: Account Type

While nicknames and middle initials are fairly straight forward, many people have other types of accounts.  Some people have joint accounts (either with rights of survivorship or tenets in common), retirement accounts (traditional and Roth), SEP accounts, 529’s, UGMA’s, corporate accounts, partnerships, trust and estate accounts to name a few.  When dealing with these accounts, all parties that are beneficial owners of the accounts must authorize the transfer.  Therefore, when transferring these accounts, make sure the same owners, trustees, executors, custodians and beneficiaries are named at the receiving firm.  If situations have changed, say a new business partner or trustee was named, make sure that information is updated at both sides.  Otherwise, the transfer may pose major tax and legal consequences or be delayed indefinitely.

Problem #3: Securities Positions

Not all brokerage firms are created equal.  Some firms may specialize in stocks and are not able to hold bonds or commodities.  Some firms may only hold domestic securities, and are not able to hold international positions.  While this may be a problem for smaller brokerage houses, larger institutions should be able to hold a wide variety of financial instruments.  Therefore, it is advisable to speak with your new advisor or relationship manager regarding what positions they are or are not able to hold.  While basic stock and bond positions are accepted by most firms, problems often arise with mutual funds, separately managed money, and annuities. 

First off, not all mutual funds are offered by the same companies.  The firm must have selling agreements with that particular mutual fund in order to transfer that position.  For example, if you have an account with Firm A and your own Firm A’s technology fund, Firm B may not be able to hold that position.  In this scenario, the client must choose between selling that position and transferring the proceeds to Firm B or keeping that position with Firm A.

Problem #4: Tax Consequences

This can pose a potentially significant taxable event to the client.  First off, depending on the account type and investment, there may be significant tax consequences.  All investors are provided an IRS form 1099 annually and any realized gains or losses may have a major impact on your finances.  Prior to transferring make sure you are aware of what positions would require liquidation and the tax consequences behind the trade.  I’ve seen many clients transfer their accounts to another advisor, sell their positions that were not transferred and paid heavily on the capital gains tax.

Problem #5: Redemption Fees

Aside from taxes, mutual funds and separately managed accounts pose another major problem known as CDSC charges.  Mutual funds have several class offerings with A, B and C share classes being the most common.  If you own B or C shares, there may be redemption fees that must be paid if you choose to liquidate the position early.  The fee’s can sometimes be as high as 7% of the total investment, so investors should make sure are aware of the costs and fees to sell that position.

Problem #6: Ineligible Positions for ACATS

Annuities are a little bit trickier.  Annuities are not securities but insurance products.  The main advantage of annuities is their ability to defer taxes, something mutual funds are unable to do.  However, since they are not securities, they are not usually transferable via the ACAT system. Annuities are transferred using a 1035 exchange, which is a completely different process in itself.  Like mutual funds and separately managed accounts, the sale of an annuity position can pose significant fees and tax consequences, so attention must be paid prior to transferring these positions.             

Conclusion

While transferring an account can be a difficult and time consuming process, it can be a rewarding experience if the new advisor is truly better than the old.  Aside from their personality and investment knowledge, a good advisor can find ways to avoid taxes, lower fees, and help you manage your daily finances.  When all’s said, the transfer may be well worth the effort.