The Smart Way to Switch Financial Advisors

Why Should You Change Your Financial Advisor?

If you're considering changing your financial advisor, you’re not alone. According to research company Spectrem Group, nearly 60% of investors have switched advisors at some point. The top reasons cited for switching include a lack of communication, a lack of good advice and ideas, and poor performance relative to the stock markets.

Whether you’re unhappy with your portfolio's performance or the two of you are simply oil and water, one thing is certain: You want to wind up better off in the long run, not worse off.

How Should You Do It?

First and foremost, check with your current firm to find out how it handles transfers. Ask if there are any timing issues with making the switch mid-year. If the firm charges an annual fee, find out if this fee be prorated if you leave before the year is up.

Once you’ve figured out those details, follow these five tips to ensure a smooth transition.

1. Read Your Contract's Fine Print

When you initially signed on with your current advisor, you probably 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. In some instances, you may have to pay a termination fee. Before you ditch your current advisor, 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: A federal regulation requires that your current advisor or broker transfer the historical records of all of your assets 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. If anything goes wrong with the transfer, you’ll have the records on file.

Most investment firms give investors access to their full transaction history through a password-protected account on their website. You'll want to download the information before you lose access to the site.

While you're copying your investment accounts, don't overlook the records of the cost basis of taxable securities. The cost basis is the price of the asset adjusted for stock splits, dividends, and return-of-capital distributions. It is required information for the IRS Schedule D that you prepare to report taxable gains.

3. Leave the Dirty Work to Your New Advisor

If you’ve already chosen a new advisor, you may not even have to talk to your current advisor about your decision to switch. Your new firm can request the account balance and the transaction records from your former firm.

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

The transfer process usually takes from one to three weeks. You may have to wait a month or two if your transfer includes money invested in a hedge fund.

4. Ask About Fees, Sales Charges, and Penalties

Some investments carry contracts that lock them down for a specified period of time. Before you make the switch, find out what it will cost you in fees.

Moreover, some of your investment accounts may be exclusive to your former advisor's firm. In that case, you cannot automatically transfer those assets to a new firm. You may be forced to sell those assets and pay related fees and penalties.

For instance, if you have an annuity contract that is proprietary to your old firm, you may have to cash it out and then transfer the proceeds to your new advisor for investment. You might have to cough up as much as 10% of the contract value, known as deferred sales charges.

5. Check Your Mutual Fund Fees

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 5% or more. The percentage typically decreases each year.

Do the math to figure out whether it makes more sense to keep the annuity contract or the mutual fund with your former advisor or take the hit for switching them. If you expect to make much more money in the new situation, a one-time fee might be worth it.

Some investment firms or advisors will 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 what fees you should expect if you switch.

Finally, don’t forget to study up on your new advisor. Beware of overly optimistic promises. If the promised returns sound too good to be true, they probably are.