Your adviser's switching firms. Should you?

Even if you're happy with your financial planner, a change of address is a good time to re-evaluate the relationship.

By Dennis Murray
Senior Editor

"For personal and professional reasons, I've decided to leave my employer, ABC Securities, effective Oct. 1. Enclosed are the forms you will need to complete and return to me so that I can continue to service your account."

hances are you'll receive such a notice sometime during your investing days. The National Securities Clearing Corp., which processes investment transactions, says that about 17,000 accounts change hands each day in this country.

Brokers and financial planners switch companies for all sorts of reasons. The key question for you, though, is: Will moving with your planner benefit you?

If you have assets significant enough to make the broker or planner take notice, you may be able to negotiate reduced fees or lower commissions in exchange for your loyalty. But don't leap just for lower fees. If the adviser's performance has been lackluster, his move could signal the perfect time for you to end the relationship.

Following your adviser isn't without risk. The greatest number of complaints to the SEC in 2000 involved botched account transfers. Occasionally, the adviser and his or her old firm battled over the accounts, which were frozen until the dispute was resolved. Sometimes the client filled out the wrong paperwork or failed to provide certain information, which also messed up the works. Here's what you should know before deciding to move your account, and how to avoid paperwork pitfalls if you do switch.

Do a little legwork before you follow

No matter how fond you are of your broker or planner, don't sign over your account until you investigate his motivation for leaving the old firm. If it's to claim a "signing" bonus, you ought to be skeptical. A bonus could make your adviser feel obligated to push financial products his employer wants, even if they aren't necessarily the best ones for you.

"I've known some brokers to jump ship once a year to collect hiring bonuses, which can be as large as $25,000," says financial consultant Gus Franco, of RTD Financial Advisors in Philadelphia. "When someone hops around that much, you have to question whether he's looking out for himself or for his clients."

Moreover, no matter how well you think you know your adviser, it's still best to confirm that he wasn't booted out of the old firm for malfeasance. You can easily get that information on a broker by searching the public disclosure database of the National Association of Securities Dealers (pdpi.nasdr.com/pdpi). There you'll find details on more than 675,000 registered securities dealers, including licensure data and whether the adviser has a history of complaints, disciplinary actions, or both.

If you can't find your broker in the system, you can try the SEC's "Investment Adviser Public Disclosure" site (www.adviserinfo.sec.gov). The SEC posts information on which states an investment advisory firm is registered in and whether there have been any disciplinary actions taken against it and key personnel. The SEC typically regulates advisory firms that manage more than $25 million in assets; for those that handle less than $25 million, follow the links from the IAPD's home page to that of your state's securities regulator. (Click on "Other Helpful Links.")

Another useful source of information is the Certified Financial Planner Board of Standards, which licenses and oversees about 39,000 planners. It discloses its own disciplinary actions online at www.cfp-board.org. Click on "Consumers," then scroll down to "Public Disciplinary Actions" to view a state-by-state listing of permanent license revocations, temporary suspensions, and letters of admonition.

If your broker comes up clean, ask if he has any agreements with his existing firm that could limit your ability to access your investments. "Often, problems with account transfers can occur if the broker or adviser signed a noncompete clause," says Craig E. Carnick, of Carnick & Rainsberger, a financial planning firm in Colorado Springs.

If the parting wasn't amicable, the firm may have filed a temporary restraining order against your adviser to block him from moving his accounts. Then, your assets could be frozen for months, until an arbitrator settles the issue. Don't let this happen. Complain loudly and often to your adviser's former supervisor or the firm's compliance officer, and make sure you get results. "Ultimately, the customer decides where the account goes," said Merrill Lynch president and CEO Stan O'Neal, in comments he made to a financial-services trade organization.

What are the new firm's advantages over the old one?

Many things will change when the adviser switches firms, so you need to find out how you'll be affected. Some questions to ask: Will you have more or fewer clients? If more, how will you find enough time for all of them? Are you going to research and select investments yourself, or will someone else do that for you? What responsibilities will you have that you didn't have before?

Consider, too, the size of the new firm. Many small advisory firms specialize in high-net-worth clients, so their planners are often better versed in estate planning and strategies to minimize tax liability. However, a small firm may not have in-house specialists to handle all of your financial needs—insurance products, for example. It may have to use other brokers who specialize in selling these products. If so, what do you know about these other brokers and their credentials? What will your adviser's financial relationship be with them?

"Most investors don't give enough thought to the firm that employs their financial adviser," says Lawrence M. Elkus, an attorney with Bull and Bear Securities Law Center, a law firm in Farmington Hills, MI. "They should. The employing firm supervises the adviser, provides him with educational resources, establishes the necessary contacts with outside specialists, and, ideally, has the deep pockets to compensate the client if something goes wrong."

More important, although your adviser may still value you as a client, his new firm may not. Many small firms require large minimum investment amounts—as much as $1 million, which means you may not be able to follow your adviser even if you want to. Or, you may be presented with a new fee structure and end up paying more in annual or per-transaction fees. If you've been a loyal client with sizable assets under management, ask what incentives are being offered to retain your account. Some independent advisers will discount their fees for, say, six months to a year.

In short, don't be afraid to speak up. After all, it's your money, and you have the most leverage when two people are vying for your financial affections.

If your adviser's new gig takes him out of state, find out how he plans to keep in contact with you. Although financial planner Howard Rothwell moved to Overland Park, KS, after marrying CPA Kathleen Stepp in 1997, he kept his office in Philadelphia and travels there every six to eight weeks to meet with clients. He also provided them with a toll-free telephone number and his e-mail address. "We travel to each of our other out-of-town clients at least once a year," Stepp says.

No matter how much pressure you get, there's no need to rush to transfer your investments. If you don't follow your adviser, your account will remain with the old firm, which will assign a new adviser. And you can always switch later. "Two former clients joined me nine months after I left my old firm," says Gus Franco, formerly of Prudential Financial. "They weren't comfortable transferring their assets from a well-established firm to a smaller one until they had checked the new place out and knew what it was capable of."

Tips for expediting your account transfer

Most investment-account transfers are completed in two to three weeks, but some can take a month or longer. "There's no excuse for a lot of delays, especially when the investor doesn't owe the firm money," says Sacramento attorney Vincent DiCarlo, who represents clients in matters of suspected securities fraud. "The NASD is very specific about how—and how quickly—account transfers must be handled."

You can help ensure that the transfer process goes smoothly. First, make sure you use the correct forms. Some brokerage firms allow you to use a single form, while others have separate forms for different types of investments (securities, annuities, etc.). Ask your adviser which forms you're required to fill out. The same goes for paperwork related to margin accounts or authorizing automatic deductions from a brokerage-held account.

Next, review each form carefully and provide all the information requested. Something as simple as a missing middle initial may delay the process. If you're transferring only some of your holdings, be sure you've listed the correct ones. You may not be able to transfer some types of securities—proprietary mutual funds or money-market accounts, for instance. You'll either have to leave them with your old firm, or cash out and reinvest the proceeds with the new firm.

Moreover, to avoid confusion, the old firm may "freeze" your investments while your account transfer is being processed. During this time, you won't be able to make any trades—something to consider if you own volatile investments. "That can present a nightmare if, say, a stock rises or falls sharply during the blackout period," says Robert M. Doran, a financial adviser in Wantage, NJ.

Transferring annuities can also get sticky. "We often hear of problems when the adviser's new firm doesn't have a selling agreement with the annuity company," says Craig E. Carnick, of Carnick & Rainsberger, in Colorado Springs. "To get around this, the adviser suggests a tax-free exchange into an annuity that his new firm sells. While the client owes no tax on the transaction, he or she may have to pay a withdrawal penalty, take on new, longer surrender periods, or both." (Annuity owners who cash out before the end of a surrender period—a specified minimum holding time that can be as long as seven or eight years—must pay a penalty.) If you're happy with your existing annuity, it's probably best to leave it with your adviser's old firm.

Dennis Murray. Your adviser's switching firms. Should you?.

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