Not all courtships last forever and the failure rate of investors' relationships with their investment firms probably tops divorce rates.
Just like most people date around before they get married, many have experimental experiences with an adviser or discount brokerage before they settle down with one for the long haul. And since there are costs to every divorce, it's important to know what they are ahead of time.
Account Transfer Fees The firm you are leaving will almost always charge transfer-out fees. These can range quite a bit and are generally higher for self-directed accounts versus directed accounts. A point of clarification: a self-directed account might not mean what it sounds like. Many accounts held with an adviser are in fact self-directed accounts. The average transfer-out fee is around $125 plus tax, but I have seen firms - not many but a few - that charge more than triple this amount.
Transfer “In Cash” versus “In Kind” Ticking the wrong box on this form can lead to nightmares. An in-cash transfer request tells the relinquishing institution to sell all your holdings and cut a cheque to your new institution. There are a few potential problems with this. First, this would trigger commissions or fees to sell the investments – all the investments. If you hold a Deferred Sales Charge mutual fund that charges a 5 per cent fee for selling too soon, you can kiss $5,000 per $100,000 invested goodbye. Secondly, an in-cash transfer for non-registered accounts would trigger capital gains tax - if you were above water on your holdings.
A special form is required for transferring registered accounts. For example, you require what is known as a T-2033 for transfers of RRSP accounts. If someone somehow managed to allow a non-T-2033 transfer from an RRSP every penny transferred would be subject to income tax. Imagine a $100,000 transfer adding an unexpected $40,000 to your tax owing for the year. The $125 account transfer fee would be the least of your problems.
An in-kind transfer is generally going to be the way to go, when possible. In this case the investments are transferred as-is to the new institution. No selling of investments occurs so no commissions incurred, only the transfer fee. Sometimes the receiving institution can not hold some of your investments and a representative will urge you to use an in-cash transfer. Sometimes this is valid, but sometimes an in-cash transfer is pushed on you if they simply want to generate new commissions by deploying cash into new products altogether. It is possible to have a combined in-cash and in-kind transfer and it is advisable to sell as little as possible during a transfer. If warranted, you can always make appropriate changes to your account after the transfer.
As always, costs are important to monitor but it is also always equally important to see what value you receive for those costs. One running joke is that the reason a divorce is so expensive is because it's worth it. The same might hold true for changing investment firms, but you can still keep your costs down by ticking the right boxes.
Preet Banerjee, B.Sc, FMA, DMS, FCSI is a W Network Money Expert. You can follow him on twitter at @PreetBanerjee