The Smart Way to Switch Financial Advisors

If you want to change your financial advisor, you’re certainly not alone. According to a 2015 study by research company Spectrem Group, 60% of high- and ultra-high-net-worth survey respondents have switched advisors over their lifetime, and 51% of less wealthy “mass affluents” – individuals with a net worth between $100,000 and $1 million – say they have done the same. Take these key steps to take to make the transfer as smooth as possible.

There are countless 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; you might also have to deal with spools of red tape. (For more, see Do You Need to Change Your Financial Advisor?)

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 midyear. 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 the Fine Print on Your Current Advisor Contract

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 All Your Investment Records

If you leave your doctor, he or she is 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. Have Your New Advisor Handle the Dirty Work

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 you’re transferring 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 types of 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 that 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.

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 on 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. (For more, see 6 Questions to Ask a Financial Advisor.)