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Navigating Red Tape When Switching Financial Advisors

The process for switching financial advisors is fairly simple -- usually, it's just signing an electronic form at your new firm. But be warned: You might be setting yourself up for increased tax liability, transfer fees and a roll of red tape.

It helps to understand your real reasons for switching so you can find an advisor who meets your needs. The biggest reasons people switch are a lack of communication, high fees and that many advisors don't get to know their clients before investing for them, says Francesca Federico, co-founder of Twelve Points Wealth Management in Boston.

"This is a very hot topic lately," Federico says. "With the market extremely volatile, where has your advisor been?"

Check your new advisor. If you're considering a switch, use caution. Beware of advisors who promise returns that are better than 10 percent or a withdrawal rate of more than 7 percent. Also see how they are paid and what fees they charge. Variable annuities, for example, shouldn't cost more than 1.5 percent of assets per year. Also check the potential new advisor with the Financial Industry Regulatory Authority to see if there is any regulatory action against him or her, or if he or she bounces among firms.


Ask if your investments are locked down. Some may carry contracts that tie them up for a certain amount of time. Other products may be proprietary to your former firm. "If your current advisor has sold you an annuity contract and you decide to cash it out and let your new advisor invest the proceeds, you could incur fees over 10 percent of the contract value, which are known as deferred sales charges," says Ryan Kay, financial advisor for AMI Investment Management in Kendallville, Indiana.

Certain mutual funds also have holding period requirements. "If you sell before the period ends, you will incur a penalty fee -- usually about 1 percent," says Carla Dearing, founding CEO of the online financial planning service, SUM180 in Louisville, Kentucky.

Have your paperwork. At your first meeting, bring a bank statement or copy of a canceled check from your primary checking account, a copy of the last statement for any investment accounts, insurance and annuities that you own. "A screen print of the assets is not enough. It must be a statement and list all of the assets you hold," says Shanna Tingom, co-founder of Heritage Financial Strategies in Gilbert, Arizona. Also bring a copy of your trust -- and for any beneficiaries, you need their names, Social Security numbers and birth dates, Tingom says.

Know the transfer form. Once you've decided where you'll switch, "most accounts are transferred by signing a simple form authorizing your current advisor to send the funds to your new advisor," Kay says.

Make sure information matches. When multiple account transfers occur, the transfers may be rejected, says Fred Hiatt, chief operating officer at Red Door Wealth Management in Memphis, Tennessee. "The No. 1 reason for this is that registration of how the accounts are titled do not match or the Social Security numbers don't match. In other cases, the trust document hasn't been provided," Hiatt says.

Don't ask for a physical check to transfer funds. "The IRS only allows one rollover per year, so if someone has two or three IRAs and they receive checks for the proceeds of all the accounts and deposit with their new advisor, they have violated this rule and will likely be subject to taxes and penalties," Kay says. "Additionally, for nonretirement accounts, if you request a check, your advisor has to liquidate the account and corresponding investments held inside of it. This may subject you to capital gains that could have otherwise been prevented by transferring assets in kind."

Cutting transfer fees. "Some brokerage firms have transfer out fees of $50 to $150 per account, regardless of the size of the account," says Michael J. Howley, relationship manager in Marlton, New Jersey. The fees will likely be listed on the firm's website, but your new firm might help by eating some or all of them if you ask.

Termination fees. Advisors will likely have a management contract and will request a signed letter to terminate a relationship. "Some may have a termination fee that might be based on the term of a relationship, so look closely," Howley says.

The transfer may take a while. Whether your transfer is complicated depends on what you own. Usually stocks, bonds, cash and most mutual funds don't move at all because they're owned by a third party. "The authorization to access them will just change from your old advisor to your new advisor," Dearing says. "On the other hand, if you were invested in proprietary funds offered by your old advisor, it could take months to liquidate your holdings and transfer them."

Taxes. It pays to be careful and ask questions about how the new advisor plans to manage your assets. "There can be serious tax issues if they decide to sell everything in a taxable account in the transfer," Federico says. "I usually suggest moving everything over in kind, so not selling anything and having all of your current investments come over exactly as they were with your current advisor."

Clients should also be aware of any gains that would be generated by the sale and transfer of an account, says Pedro Silva, financial advisor of Provo Financial Services in Shrewsbury, Massachusetts.

Surrender fees. "Also look for 'B' class shares, which are back-end loaded funds that will charge a termination fee if sold within less than five years. Most insurance annuities will generally have surrender fees that can sometimes take more than 10 years to expire. This information should be in their contract or on the Dec. 31 statement," Howley says.

Ask for a review. Ask your advisor to review your assets and to identify any positions he or she cannot hold, such as a limited partnership or real estate investment trust, Hiatt says. If life insurance or annuities have surrender charges, it is important to make sure your new advisor can accommodate, manage, oversee and become the advisor of record on these products.

Get proof that your former advisor has let go. Once you activate your accounts with your new advisor, it will trigger the transfer from your former firm. You can request that your new advisor handle this step on your behalf; you sign the transfer papers and allow your new advisor to take it from there. "However, don't leave it at that," Dearing says. "Contact your old advisor and obtain proof of rescission of his or her authority to trade your account."

Make a phone call. You'll likely want to skip the face-to-face exit meeting with the old advisor, which has the potential to get emotional, Dearing says. But a courtesy call can facilitate an easier transition, especially since trading should stop during the transfer, and some money market funds may need to be converted to cash to be transferred, says Timothy Shanahan of Compass Securities Corp. in Braintree, Massachusetts.

Follow up. Ask your new advisor to stay on top of the post-transition and to make sure there are no small sums of money that have been deposited into old accounts if dividends or short-term distributions didn't automatically transfer after your transition, Hiatt says.

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