Investing is more popular than ever and there are many high-quality choices available to investors when it comes to selecting an online brokerage. And with so many brokers vying for a piece of the huge investment pie, many have slashed fees and offered strong bonuses to new customers.
Thanks in part to all this competition, online brokers offer investor-friendly benefits. Most offer no commissions on stock and ETF trades, and many let you buy fractional shares – in some cases as small as one-hundred-thousandth of a share. So you don’t have to spend $1,000 or more for one share.
Therefore, you may want to consider switching brokers, especially if you have accounts with an older broker that still charges high fees. However, simply selling your shares with your current broker and transferring cash to the new broker can lead to a number of problems. While the process isn’t always easy, it can be worth it if you pay high fees.
When should you consider switching brokers?
Switching brokers is no small decision, especially if you have a large portfolio. But there are many reasons why you might want to switch. Your existing broker may have a number of problems:
- High costs/commissions. Many agents today have very low or no commissions. The same goes for monthly fees, inactivity fees, and minimum balances. If your broker is burdening you with any of these burdens, it may be time to look elsewhere.
- Poor or minimal customer service. If your broker doesn’t charge fees at all, they may not provide much customer service. For some traders and investors, that is not a problem. But if you need customer service assistance occasionally or often, it’s important to work with a broker who offers it.
- Outdated website or a shaky app. User experience on broker websites or mobile apps can vary greatly. Some offer advanced trading tools, an easy-to-use interface and extensive educational resources. If your broker’s website is secretive and difficult to use or your financial app keeps crashing, it might be time for a change.
- Limited investment opportunities. Not every broker is created equal when it comes to investment opportunities. In addition to the usual domestic stocks and ETFs, some also offer international stocks, cheap options trading, mutual funds, and other more mysterious things like cryptocurrency, but not all of them do. If the investments you want to make aren’t available from your broker, you may want to shop around.
- Own funds. Some companies offer some of their proprietary mutual funds only to clients of their brokerage firm. So if you’re looking for a specific fund, it may only be available from a specific broker. Alternatively, if you change brokers you may not be able to continue buying those funds elsewhere, so there can be cuts on both sides.
A new broker may offer more favorable options for all of the above, which would be an added benefit of switching. So before you pull the trigger, do your own research and, if necessary, consult a tax professional.
How to transfer brokerage accounts
Switching brokers is not uncommon for a number of reasons, including those mentioned above. If you decide you want to switch, you can move your money in two ways.
Cash transfer
The easiest way to move your investments from one broker to another is a cash transfer. If you have an investment account, this is not that difficult. You simply sell all your securities and then move the money to the new brokerage. You may not even need any help as you can withdraw the money. Then you can invest the money as you wish with your new broker.
However, if you have a lot of securities, this approach can be cumbersome and may involve tax on any capital gains when sold. Even relatively modest profits can make it more advisable to opt for an in-kind transfer so that you can avoid the tax consequences.
Transfer in kind
Fortunately, there is a way to transfer your shares without having to sell them. There is even a special clearinghouse just for this process called Automated Customer Account Transfer Service (ACATS). These transfers are commonly referred to as transfers in kind.
When your account undergoes an in-kind transfer, it essentially means “as is.” In other words, all your shares, buying/selling history and cost basis will be transferred to the new broker, just like with the old one.
The easiest way to complete an in-kind transfer is to move an account to a new account of the same type. This means that if you have a taxable investment account, it must be transferred to another taxable investment account. The same goes for a traditional IRA, Roth IRA, and so on. While it is possible to switch to a new account of a different type, this can slow down the process. Additionally, in this situation, you may be required to provide additional documentation proving ownership.
It is also important to have the correct paperwork if you change brokers. You must complete a transfer initiation form with the new broker, also known as the receiving broker. This ensures that you not only avoid unnecessary costs, but also that the process is not delayed.
When completing your transfer initiation form you will need important information such as:
- Name
- Account number
- Citizen service number
- Information from the previous broker
- Whether it is a full or partial transfer
Another thing to keep in mind is that as this form goes to the new broker, it must match the recorded information with the old one. For example, if you have had a name change, you should use the name known to the old broker. If necessary, you can always change this later with the new broker.
To complete an in-kind transfer, contact your new broker to start the process. These are the steps involved:
1. Contact your new broker
The new broker will be more than willing to help because he wants your money invested with him. Ask about their process and let them know what you plan to move. Also ask about any incentives or promotional bonuses they may have. If they offer a bonus, it may be a good time to open an account with them if you don’t have one yet.
2. Gather information from your old broker
You will also need your most recent account statement from the old broker, as well as your purchase/sales history. The latter is important because it helps you avoid tax problems if information is lost during the transfer. You also need the cost basis of your existing securities.
3. Wait for the new broker to move your account
Thanks to ACATS, you don’t have to do anything while your account is being moved. Normally the process takes three to six working days. Please note that during the transfer you will not have access to the effects being moved.
4. Get to know your new account
If you had opted for a cash transfer, you may still have quite a bit of work to do with your new broker, including purchasing your investments. But with an in-kind transfer, you may only have a few basic things to take care of: like making sure your bank account is linked and setting up direct deposit.
Be careful with transfer costs
Something that is often overlooked when requesting a transfer in kind are possible costs. Maybe you are focused on the negatives of your old broker and how the new broker will be much better. Whatever the reason, many brokers charge fees if you decide to transfer your account. Not all of them do, but you may be charged a fee of up to about $150 for leaving your old broker.
On the other hand, some brokers offer incentives that encourage people to switch. While your existing broker may charge a fee for moving your account, the incentive the new broker offers can more than make up for those costs. Some brokers offer bonuses of several hundred dollars and may even offer to pay the old broker’s fees if you incur them. Read the fine print carefully on the new broker’s site to see exactly what is required to qualify for these promotional incentives.
Tax consequences of transferring your investment account
One of the biggest reasons to have your new broker handle the account move via an in-kind transfer is the tax implications. If you opt for a cash transfer and sell all your securities, you can generate capital gains. And if you sell securities you’ve owned for a year or less, you may experience short-term capital gains, which come at an even higher rate than the tax rate for securities you’ve held for more than a year.
In addition to the risk of selling securities for cash, there are also tax implications if you transfer retirement accounts. Special rules apply to these accounts when transferring, including a retention obligation. And if you are under the allowable retirement age, the transfer could be treated as a distribution if not handled properly, resulting in taxes and penalties. And if the transfer is not completed within 60 days, this can also lead to a payment.
As you can see, there are quite a few tax considerations when moving your accounts. Your new real estate agent knows the process and how to approach it properly. Usually the best way to avoid costly mistakes is to let the broker handle the transfer.
In short
There are many reasons why you might want to switch to a new broker, including high fees, poor customer service, or a frustrating website or app. Whatever the reason, you can transfer your account via a cash transfer or an in-kind transfer.
If you’re working on an in-kind transfer with your new brokerage, the process shouldn’t be too difficult. Make sure you do your research and have all the information needed to make the switch. Fortunately, your new real estate agent will do most of the heavy lifting once you start the process. And once they do, you’re ready to start using your new and improved account.
— Bank interest Brian Baker contributed to an update to this story.
