Making A Change

The day to fire your financial advisor is the first day you think you should

If you’ve decided to fire your financial advisor and move your money into a self-managed account or a robo advisor account you need to consider the tax implications of the move.  Changing one advisor for another is a lot simpler–they will handle all the details and (hopefully) give you advice on the tax implications and other costs. A fee-only advisor might do this for you, but may charge you an hourly rate for all the work. But it’s a one-time fee. If you change to another fee-only advisor there shouldn’t be any transition issue. You just change the name of the advisor on the custodial accounts. It’s not all that difficult, but there are a few critical steps.

Managing these transitions are not all that difficult, but there are a few critical steps.

1. Decide where your investment is going

Let’s say you’ve decided to switch eighty percent of your funds to vanguard, and twenty percent to Betterment. Contact the firms you intend to use and tell them what you’re planning. You can open an account and resolve any technical issues. Depending on your investment level the new firms may offer concierge service to help with your decisions about fund transfers. They can inform you of any issues with your existing funds.

2. Inventory your funds

Once you choose the firm you’ll work with you should provide them with your most recent brokerage statement. They can tell you what investments can transfer “in kind” which will eliminate any tax consequence. They can also give you clear information about funds that cannot be directly transferred. Some proprietary funds will have to be sold to move them. Some assets may be illiquid products or have sales penalties. Annuities often have penalties for early sale. It may make sense to hold them until the penalty expires but you need to do a careful calculation to decide this–the insurance company that provides your annuity will have their bases covered–the additional amount you’ll pay in fees over the holding time will look a lot like the surrender costs. There are low-cost annuities that don’t suck you dry like the variable annuities do. If you have a substantial gain in the annuity you hold, then you’ll probably pay ordinary income tax on the gain. That hurts. If you transfer “in kind” to a low-cost annuity you can avoid that, but the underlying question is “do you really need an annuity” and the answer in many cases is no. If you choose to retain your current annuity until the surrender charge expires, consider canceling the guaranteed income rider and any other bells and whistles. This can be a substantial expense with little benefit. It’s almost always a separate and optional charge that you probably didn’t know you could avoid. A typical cost for the rider for a $1million annuity might be $10,000 per year. There may be some useful tax strategies to consider, and your new firm might make suggestions, but run them by your tax advisor. It’s no fun talking to the IRS about some clever scheme that you never really understood.

Transfer “in kind” means that you transfer your specific investments over to the new company without selling and buying which triggers a capital gain or loss.  You can only do an “in kind” transfer if the investment you own is available at both financial institutions.  Most stocks and many ETFs would be available at all brokerages. The people at your new home handling the transfer can give you specific advice on the best way to manage the transfer and minimize tax consequences

The  benefits for an in-kind transfer are:

  • No tax consequences.
  • No trades.
  • No sale/purchase fees.

3. Terminate your advisor in writing

If you’ve done an analysis of what your investment advisor was costing you, then by now you are probably hating them a bit. Don’t let that color anything you say or do. But you don’t want to terminate your advisor over the phone in any case. Do it in writing by registered letter and save a copy of the letter. Make your letter short and civil. There’s a good chance you will need to contact them in the future for documents or information. Any financial advisor is used to being fired–it happens all the time, but they won’t be helpful if you’ve abused them. Remember, they didn’t force you to do business with them–you chose to. Even if they screwed you, you probably signed every contract that they used to abuse your money. It’s not their fault you didn’t read and understand it. Well…  …okay, it is, they abused your trust, but be pragmatic.

4. Terminate trading

If you are going to move on this process quickly, you should terminate your advisor’s permission to trade on your account. Don’t drag your heels, especially if you hold a lot if individual stocks or high risk funds. You might want to wait until you are nearly ready to pull the trigger to terminate your advisor’s trading right, but if you have reason not to trust them. terminate now.

5. Talk to your tax advisor

Once your strategy for transfer is in place, talk to your tax advisor about what you plan to do. If you don’t have an accountant, get one, if only to have them look over this transfer. A relationship with a good CPA is an important thing to have. More important in my opinion than having access to a lawyer and infinitely more valuable than most investment advisors. Any assets held in a taxable account that cannot be transferred in-kind should be examined for losses to offset capital gains. You probably have a mixture of gains and losses, so a careful examination of what accounts to sell that have losses to be harvested can minimize taxes.

6. Be careful with IRAs and 401Ks

Non-taxable assets should be handled as a trustee-to-trustee transfer. If the transfer is screwed up you can incur early withdrawal and tax penalties that will take a HUGE bite out of the account. On the plus side you can move the funds around as you like–there’s no tax involved as long as everything stays in tax-free accounts.

There’s always some worry and trauma associated with making big changes, but if you proceed with caution and good advice, this will probably be the best thing that ever happened to your retirement.


The Retirement Trap Copyright © by Bill Babcock and Babcock, William. All Rights Reserved.

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