Saturday, March 28, 2009

How to Switch Brokers -- Painlessly

Account transfer is a top investor complaint.

IF YOU HAVE DECIDED TO PULL your portfolio from your broker (and who hasn’t thought about that in the past year?), what is the best way? These days most online brokers can open a new account electronically. You simply fill out a few pages of online forms and provide electronic signatures for several required agreements full of legalese.

That’s the easy part.

Then comes the fun—transferring your cash and various security positions from your old account to the new one. To make the account transfer go smoothly, be sure the name on the new account exactly matches the old one, and that both old and new accounts are the same type (sole owner, joint owners, IRA, etc.). If the title on the accounts isn’t a match, you have created a problem for your new broker and yourself.

THIS LACK OF STANDARDIZATION or automation is likely why ‘account transfer’ is consistently near the top of the list of investor complaints filed with the Securities and Exchange Commission and the Financial Industry Regulatory Authority,” says Felix Davidson, TD Ameritrade’s managing director of operations. Often seemingly small problems end up causing big delays, prompting investor disputes with brokers.

Some securities, such as options contracts nearing expiration, can’t be transferred from broker to broker. If you are planning a transfer, study all your expiry dates and make sure they are at least a month (or more) away.

Moving cash can be relatively easy. Most of the brokers we talked with said the best way to transfer cash is to write a check or initiate a wire transfer from your old account to your new account. If you decide to let the cash be moved along with other securities when you initiate an ACAT (automated customer-account transfer) request, it can take longer.

Start the ACAT process with your new broker by filling out a form and sending her a copy of your most recent statement. The firm you are leaving is then given an opportunity to affirm or deny the transfer request. Some are denied when there are problems with a customer’s margin balance or if there is an open order.

If there are no hurdles, a transfer should take five to 10 business days. But it will take longer if your paperwork is incomplete or incorrect, or if you have open orders at your old broker. In addition, your new broker might slow the process by requesting more information if you have a low equity-to-margin ratio at your old broker. A low figure can raise a flag that your risk profile is too high for your new broker.

Several brokers told us that the simplest way to transfer assets would be to liquidate all of your positions at your old broker, and send a wire transfer to the receiving firm. However, this seemingly straightforward solution could result in some unintended tax consequences, not to mention commission charges for closing positions at one firm, then opening them at the new firm. Besides, you will have to wait for the positions to settle once you have closed them, which can add another three days to the process.

A major hang up in account transfers—and one I dealt with personally—is the movement of proprietary mutual funds held at the broker you are leaving. I transferred an IRA several years ago from a large, full-service broker we will call Ferrill Mynch. It contained a couple of mutual-fund holdings that couldn’t be moved to the new broker. If you hold proprietary mutual funds, check with the new firm in advance to see if it has agreements in place to carry them after you transfer. Some firms can’t or won’t hold proprietary mutual funds from other firms.

YOU MAY HAVE TO LIQUIDATE these assets and select a comparable product at your new firm. In my case, the Ferrill broker didn’t cooperate initially with my requests to sell that mutual fund. It took three weeks for my new broker to complete the transfer.

Selling that position off at the new broker was a lot less expensive, even if I did have to wait almost a month. The one piece of good fortune was that the fund gained enough in value in that month to offset my expenses.

ACATs don’t include the original acquisition date and cost of securities. Compounding the problem, securities are transferred as positions, not tax lots, which occurs when you buy the same security on different dates. (Tax lots include all of the relevant prices and dates needed for computing your capital gains or losses.) The investor then must break up the individual tax lots on his own and try to assign accurate costs for each of them. So hang onto any records that tell you your cost basis.

CAMERON ROUTH, SENIOR vice president of Strategic Products at Scivantage, the publisher of the Maxit tax accounting software used by several online brokers, notes that, for tax purposes, your activity spans both firms. An investor can trigger wash sales by buying a security at Firm B within 30 days of selling it for a loss at Firm A. These transactions are still linked even if they occur at different firms.

“Don’t sell securities with the intention of taking losses for tax purposes and repurchasing at the new firm,” says Routh. “Wash sales would defer the losses. Also, this maneuver would reset the holding period, losing any long-term tax advantages.” (A wash sale occurs when you sell stock at a loss and then buy similar securities back as a replacement within 30 days. You can’t take that sale as a loss for taxes.)

Online broker MB Trading ( offers a helpful monthly webinar at its MBT University that walks you through the entire ACAT process. Other firms provide other kinds of assistance.

For instance, Tom Sosnoff of thinkorswim ( says his firm will reimburse you for any account-transfer fees charged by your old broker.

Just be prepared for all the complexities before you pull the trigger. Your new broker wants to make the process easy for you, so feel free to ask for help if you need it.

Published in Barron’s, March 23, 2009. 

Posted by twcarey on 03/28 at 03:00 AM
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