How Investors Should Manage Their Money When Brokerage Accounts Close
Editors' pick: Originally published July 1.
Investors who chose to switch their brokerage accounts or are forced to close one when a company sells its wealth management unit can decide if they want to transfer or liquidate their assets.
This scenario presented itself to investors when Credit Suisse Group, the Swiss financial services company, sold its U.S. private banking operations to San Francisco-based Wells Fargo and when U.K.'s Barclays sold its unit to Stifel, a St. Louis-based brokerage firm.
But Liquidating assets before you move the funds to another brokerage firm is not always the best option. Some financial advisors recommend that investors move their equities "in kind" (meaning "as is") and that they only keep or divest them at a later date once they have switched accounts, giving them the option to pay a lower brokerage commission.
"Transferring securities 'in kind' can be a good option for investors that are forced to liquidate brokerage accounts," said Joe Sullivan, director of manager relations at Covestor, a Boston-based online investing marketplace.
When investors are forced to liquidate their entire portfolio, they face tax gains, costly commissions and market risk.
The majority of brokers charge up to $7 per trade which means liquidating a portfolio with only 40 positions would cost an investor nearly $300 dollars in trading fees, Sullivan said. Investors who were forced to close accounts at Credit Suisse would have had to pay $35 or more per trade.
"Moving securities 'in kind' might make more sense and save a substantial amount of money, depending on the brokerage firm," Sullivan said.
Investors have to be prepared potentially pay a large tax bill for the gains on any of the investments that are sold.
"Some short term gains could get taxed at 28%," Sullivan said.
When individuals have their money out of the market, they could miss opportunities to buy or sell their stocks.
"There is the risk of missing movements in the market while not being invested," he said.
Moving your money to another brokerage account might save you money in some instances because some have a relationship with a discount brokerage company. Investors who switch their accounts to Covestor can also open a brokerage account with Interactive Brokers, a Greenwich, Conn.-based discount brokerage company, which charges approximately $1 per trade.
Moving Securities "In Kind''
The advantages of choosing an "in kind" transfer include allowing the investor to select which equities or other holdings to sell and potentially get them at a cheaper fee per trade.
The tax implications could be greater than what many investors had estimated, said Matt Carbray, a partner at Ridgeline Financial Partners, an Avon, Conn.-based financial planning firm. One of his clients was a widow and she was uncertain on what to do with her husband's account where she was a joint owner. Before he passed away, she called the financial institution and asked them to close his account, believing that depositing the funds would avoid probate costs and any delays.
Instead, this action triggered capital gains and the widow was unable to take advantage of a step-up in cost basis.
"It was a painful lesson in unnecessary taxes paid," he said. It is undeniably better to transfer in kind to avoid any possible tax implications."
When an individual investor closes or transfers a brokerage account, he should use this opportunity to reexamine the assets in his portfolio and decide if any of them need to be divested, said Bill Walsh, president of Hennion & Walsh, a Parsippany, N.J.-based investment firm.
"Determine what the reassessment reveals and how out of line your securities are with your financial goals," he said. "Another important consideration is the short-term outlook for the investments. If a decline in value appears imminent and likely to occur before the transfer is complete, the investor would be wise to liquidate the holding."
Investors should also determine if all the assets can be held by the new firm, said Matt Hall, president of Hill Investment Group, a St. Louis-based investment firm.
"Make sure there are no silly transfer fees or closed account fees - negotiate them away if possible," he said. "Reconcile the amounts when the assets transfer and monitor for a complete sweep of the old account."