January 19, 2021

Article at Investopedia

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How to Switch Online Brokers

Note: The original version of this piece was published on Investopedia in October, 2018. It has since been removed from the site, so I have edited it and republished it here.

If you’re terribly unhappy with your online broker, you may be considering moving your account elsewhere. But the process appears daunting. What is the best way? Almost all U.S.-based online brokers let you 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.

Here are possible tripwires that you should prepare for:

  • Only listed securities and cash can be transferred from one brokerage to another. That means your fractional shares and cryptocurrency holdings cannot be moved. Fractional shares will be sold, possibly creating a taxable event, and crypto assets will be left behind.
  • Proprietary mutual funds, annuities, and some other nontraditional assets held in a brokerage account are unlikely to transfer easily. Check with your new broker before initiating the transfer.
  • Pay off your margin loans before beginning the transfer. While it is possible for a margin loan to migrate with you to the new broker, it's more likely that it will send up a red flag and make your new broker turn down your application.

Read on.

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, the transfer will be held up until everything lines up correctly. You may end up having to go through the account opening process again to get it right.

I’ve switched brokers a few times myself over the last 25 years of writing about this industry, and the main reason for the change was the access to additional asset classes that can be traded online, or for specialized research and tools. In the very early 2000s, I became extremely interested in trading options, but my full-service broker at the time did not allow any transactions online and was actively discouraging me to jump into that asset class. So I found a different broker, and made the switch. Then that broker was acquired by another firm, and most of the great research and trading tools I’d been using for a decade got zapped. Once again, I found a new home for my investments.

Account transfer messes account for a huge number of investor complaints filed with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Seemingly small problems, such as an incompatible mutual fund, or problems with cash balances end up causing big delays in the transfer process, which prompts investor disputes with one (or both) of the brokers involved. Being aware of potential issues before you transfer an account can make the whole experience much easier.

How to Transfer a Brokerage Account

Start the ACAT (automated customer-account transfer) process with your new broker by opening an account. When you get to the account funding portion of the process, say that you are transferring an account from another broker. You’ll have to specify the broker you’re leaving, and provide a copy of your most recent statement. Some brokers want you to mail them a printed copy, while others accept a .PDF file.

The firm you are leaving is 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. Some securities, such as options contracts nearing expiration, cannot be transferred between brokerages. If you’re planning a transfer, study your expiry dates and make sure they are at least a month or more in the future.

Several brokers told me 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.

Moving cash can be relatively easy. Most brokers say the best way to transfer cash is to write a check or initiate a wire transfer from your old account to your new account. Letting the cash move along with other securities when you initiate an ACAT request can take longer, especially if there are any other problems along the way.

It’s a good idea to reduce your margin balance to zero before making the transfer, which might mean closing some positions at your old brokerage. You can transfer positions and margin loans to a new broker, but your new broker might slow the process by requesting more information, especially 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.

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 many years ago from a large, full-service broker. I had opened this account in the early 1980s, before online brokers existed for retail investors. It contained a couple of mutual-fund holdings that were not handled by the new broker. The broker didn’t cooperate initially with my requests to sell that mutual fund, so I included it in the ACAT process, which took more than three weeks to be completed. My new broker had said I could hold that fund if I wanted to, but would not be able to add to the position. I decided to complete the liquidation I’d tried to initiate before the account transfer.

Selling that mutual fund at the new broker was a lot less expensive, even if I had to wait almost a month. The one piece of good fortune was that the fund gained enough in value during the delay to offset my expenses, which included an outgoing account transfer fee. 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.

Will I Pay Brokerage Transfer Fees?

The short answer to this question is, yes, you will pay the broker you’re leaving for the time it will take them to send your assets to the new broker. This fee usually runs $50-100, and is deducted from your cash balance before your assets are transferred. Be sure to leave enough cash in your old account to cover the account closing fee. A large majority of brokers will refund you this fee when your account is set up at its new home, however.

Brokers who are looking for your business will go out of their way to smooth the process for you, especially if you’re bringing in a big chunk of change. Check with your new broker to see if they are offering any incentives to switch accounts, such as free trades or a cash bonus. Your new broker wants to make the process easy for you, so feel free to ask for help if you need it.

Should I Keep Records From My Old Account?

Absolutely. ACATs usually 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 and try to assign accurate costs for each of them. So hang onto any records that tell you your cost basis so you can accurately report your gains and losses to the IRS when you close the position.

If you do sell any assets at your old brokerage prior to the transfer, be sure you’re aware of whether you sold them for a gain or a loss. 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. Wash sales cancel out any tax advantages of selling a position for less than the purchase price. 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.

Account Transfer Checklist

Here is a checklist to follow when you initiate your transfer. Be prepared for all the complexities before you pull the trigger.

  1. Have a copy of your most recent brokerage account statement handy.
  2. Cancel any open orders at your existing brokerage.
  3. Look over your options positions and close any that have expiry dates in the next month.
  4. Sell any fractional shares as they will not transfer.
  5. Sell cryptocurrency holdings for the same reason.
  6. When opening a new account, make sure to use the exact same name as the old account.
  7. Make sure the new account is the same type as the old account (IRA, trust, solo account holder, joint account holder, etc.).
  8. Take a look at your mutual fund positions and check with the new broker to see if they can all be transferred. Liquidate any that cannot be held with your new broker.
  9. If you hold any international assets, be sure your new broker can accept them.
  10. Print out a cost basis report for all positions you are transferring, especially those that have multiple tax lots, from the broker you’re leaving. You may be able to update the cost basis at your new brokerage.
  11. Have patience! It will take at least three business days, and more likely five to ten, before your assets will show up in your new account.