The Pitfalls of Transferring Your Account
There is a little more to transferring a brokerage account than you might think.
On the surface it is an easy process. Something called ACATS (Automated Customer Account Transfer System) allows you to move from one firm to another simply by signing authorization forms. It might take two or three days for the paperwork to process at your current firm. Once your new firm decides to accept the assets, which usually is not a problem, your current firm will send them in roughly three additional days.
Before pulling the trigger, however, there are several factors to consider.
All assets must be eligible. When I worked in brokerage proprietary mutual funds from competitors were a common problem. Let us say you were moving from Morgan Stanley to Merrill Lynch. Merrill Lynch would not accept Morgan Stanley house funds. So they would have to be liquidated. If a fund happens to be down at the time that might not be a great decision. The same goes for situations involving a sales load. If a loaded fund was recently purchased you would be selling before earning that money back.
Nowadays Vanguard funds could pose a problem. Both Morgan Stanley and Merrill Lynch have stopped new sales of Vanguard Funds by their advisors. I am not sure how that might impact policy on accounts transfering in. But you would want to clarify the issue ahead of time. Vanguard funds might not be accepted. Or, if they are, you might not be able to add new money to them after transfer.
Fees are also an issue. I have not transferred an account for several years. But any fees were so minimal that they do not stand out in memory. These days transfers can cost well over $100. So cost information should be obtained before making a decision.
Once your account is transferred an audit will be necessary. An old 401(k) client of mine illustrates why. We moved their corporate benefit plan from one financial institution to another. The new institution’s accounting did not show the company owner’s account, an issue which obviously required attention. In another situation I had to audit the accounts of a big broker who had moved from another firm to Smith Barney. He wanted to make sure all client assets were there. In that case everything looked good, but it was still the right move. If you only have five or ten positions auditing will not be a challenge. People with larger portfolios will need to block out enough time to make a thorough check.
Cost basis is something that needs to be considered. In the old days the IRS took what you self-reported. But since 2011 cost basis information has been submitted to them by brokerage firms. Cost basis information is supposed to come with your assets during transfer. But that might not happen. I made a transfer in 2013 where cost basis did not arrive with the assets. There are forum posts on the Internet describing similar situations. The reasons for this are unclear. But you will want post-transfer cost basis records to be accurate. If the IRS has information from your old firm and trace it to a sale at your new firm it could mean a tax hassle. In my case statement copies from the old firm were ordered to make sure that situation is avoided.
After transfer open any mail that arrives from your old firm. Sometimes small share amounts and stray dividend payments remain behind. Brokerage back office employees have told me these items are supposed to sweep to the new firm. But there are situations where they do not. One case I remember involved a mutual fund on dividend reinvestment. The last reinvestment purchase at the old firm sat there for months. I finally had them send a check for it. Another person I know got a statement showing $3 in cash for several years before his old firm finally charged the account off.
Insure that there really are good reasons to move your account. It is not something to do on a whim, or because you might get angry one day about customer service. If a little planning is not done ahead of time things might not go smoothly.
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Articles presented here are general opinions for your own consideration. They are not specific advice for any one investor.
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