The Smart Way to Switch Financial Advisors

Why Should You Change Your Financial Advisor?

If you want to change your financial advisor, you’re certainly not alone. According to research company Spectrem Group, nearly 60% of investors have switched advisors over their lifetime. Top reasons for dumping an advisor include lack of contact, poor stock market performance, and bad advice and ideas.

There are many reasons why investors call it quits with their advisors. Whether you’re unhappy with weak portfolio performance, dismayed at your advisor’s lack of communication, or the two of you are simply oil and water, one thing is certain: Breaking up is always hard to do.

Not only do you have to suffer through the awkwardness of telling your advisor you’re leaving for someone else, but you might also have to deal with spools of red tape. If you are among those unsatisfied with your financial advisor, take these key steps to make the transfer as smooth as possible.

Key Takeaways

  • Consider changing your financial advisor if you are unhappy with weak portfolio performance or if you have difficulty with your existing financial professional.
  • Find out how your current firm handles transfers and whether your fees will be prorated.
  • Review the terms and conditions of your management contract and collect your investment records.
  • Ask about any sales charges that may apply.
  • Your new advisor may be able and willing to handle the paperwork for your transfer.

Get the Most Out of Your Financial Advisor

How Should You Do It?

So what’s the smart way to make the change? First and foremost, check with your current firm to find out how it handles transfers. For instance, ask if there are any timing issues with making the switch mid-year. If the firm charges an annual fee, will this fee be prorated if you leave before the year is up? Once you’ve figured out those details, follow these four tips to ensure a smooth transition.

1. Read Your Contract's Fine Print

When you initially signed on with your current advisor, you likely signed a management contract. These contracts generally include a clause about how to formally terminate the advisor-investor relationship.

In most cases, you simply have to send a signed letter to your advisor to terminate the contract. However, in some instances, you may have to pay a termination fee. Before you ditch your current advisor, it’s important to read through all those dirty details.

2. Collect Your Investment Records

If you leave your doctor, they are required by law to give you copies of your medical records. But what about your investment broker or financial advisor? Good news: Based on a ruling implemented in 2011, your current advisor or broker must transfer the historical records of all your securities to your new advisor.

While advisors are required to transfer this information, it’s important to retrieve a copy of the transaction history before you ask for the transfer. This way, should anything go wrong with the transfer, you’ll have the records on file. You can simply ask for it, and many investment firms already give investors access to their full transaction history through a password-protected account on their website. 

When you’re transferring taxable investment accounts, it’s especially critical to keep records of the cost basis of those securities. The cost basis is the original value of that account (usually the amount you paid to purchase it) adjusted for stock splits, dividends, and return-of-capital distributions.

Although this cost-basis data will be included in the transfer of your accounts, it’s wise to compile the information for your own records (if there's a website, make sure you copy the file while you still have access to the site). You will need this info when it comes time to file your income taxes.

3. Leave the Dirty Work to Your New Advisor

If you’ve already struck up a relationship with a new advisor, you may not even have to talk to your current advisor about the breakup. In many cases, your new firm can request the funds and transfer investment accounts from your former firm.

Your new advisor will likely handle this process electronically via a system called automated customer account transfer service (ACATS). Developed by the National Securities Clearing Corporation, the ACATS system allows for the transfer of securities from one trading account to another at a different bank or brokerage firm.

If your advisor can transfer your accounts via ACATS, all you’ll have to do is fill out a few forms. The transfer process usually takes anywhere from one to three weeks. However, you may have to wait a month or two if your transfer involves a hedge fund. Your advisor should get your investment history as part of this transfer.

4. Ask About Sales Charges

Before you give the thumbs-up for a new advisor to transfer your accounts, ask about what kind of sales charges you could face when you switch. Some investments carry contracts that lock them down for a specified period of time. To top it off, some of your investment accounts may be exclusive to your former advisor's firm, which means you cannot automatically transfer that account to a new firm. If this is the case, you may have to pay some fees.

For instance, if you have an annuity contract that is proprietary to your old firm, you may have to cash it out before your new advisor can invest the proceeds. If this is the case, you might have to cough up as much as 10% of the contract value, which is known as deferred sales charges.

Some mutual funds also have five- to 10-year holding periods. If you have one of these funds with your old firm, you may have to pay a contingent deferred sales charge should you choose to make the switch before the end of the time period. This fee could be as high as 5% or more. However, the percentage typically decreases with each year.

Do the math to figure out whether it makes more sense to keep the annuity contract with your former advisor's firm, hold onto the mutual fund(s) to the deadline, or take the hit for switching. If you expect to make much more money in the new situation, a one-time fee might be worth it. In addition, some investment firms or advisors will actually reimburse you for all or some of these fees in exchange for moving your business to them. It's worth asking before you make the change.

The Bottom Line

Breakups are never easy, particularly when it comes to calling it quits with your financial advisor. Before you send your current advisor packing, do your research and read all the fine print in your contract. Ask your new advisor if you could potentially face some hefty fees. Finally, don’t forget to study up on your new advisor and beware of inflated returns and overly optimistic promises. If the promised returns sound too good to be true, they probably are.

Article Sources

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  1. Spectrem Group. "It's About More Than Money: Why Investors Switch Advisors." Accessed May 2, 2020.

  2. U.S. Department of Health & Human Services. "Your Medical Records." Accessed May 2, 2020.

  3. Financial Industry Regulatory Authority. "Understanding the Brokerage Account Transfer Process." Accessed May 2, 2020.