The exact expense of changing financial advisors can vary depending on factors like account types, investment holdings and advisory agreements. When switching advisors, common expenses can include exit fees, which some firms charge when transferring accounts, along with potential tax consequences if any investments are sold during the process. New advisor fees may also arise, as each advisor has their own pricing structure, which can range from an hourly rate to an annual fee based on a percentage of assets under management. Before changing advisors, it is important to have an idea of the cost involved so you’re prepared for the impact.
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Costs You May Incur When Changing Advisors
Switching financial advisors can carry varying costs depending on the specific advisors and firms involved. It's helpful to understand both the fees that your current advisor might charge and any potential tax implications that could arise from transferring assets.
Potential Fees Charged By Your Current Advisor
When leaving a financial advisor, you may face specific fees tied to transferring or closing your accounts. Many firms impose exit fees for clients moving their investments, which can range from $50 to several hundred dollars per account. These fees may apply to individual brokerage accounts, retirement accounts or both, depending on the firm's policies.
Additionally, advisors who manage assets may require a notice period before ending the agreement. Failing to adhere to this notice can sometimes result in a prorated fee for any remaining term, especially if the advisor bills quarterly or annually. Understanding these potential charges can help you budget effectively for a smooth transition.
Tax Consequences of Changing Advisors
Transferring assets to a new advisor may also have tax implications, depending on how investments are managed during the switch. For example, if assets are sold as part of the transfer, this could trigger capital gains taxes if the investments have appreciated in value.
For taxable accounts, this is particularly relevant, as the IRS will require reporting of any realized gains, potentially increasing your tax bill in the year of the transfer. On the other hand, retirement accounts, such as IRAs and 401(k) plans, may be transferred without immediate tax consequences through direct rollovers, so long as no distributions are taken during the process.
If minimizing tax impact is a priority, consulting with both current and prospective advisors about their approach to handling asset transfers could be worthwhile, ensuring you have a clearer picture of any financial impact.
New Advisor's Fees
When switching to a new advisor, clients may encounter new fees structures and higher rates than what they were paying with their previous advisor. Some advisors may also have minimum asset requirements, potentially leading to additional fees if those minimums aren't met.
It's important to consider the new advisor’s ongoing fee structure-whether it's a percentage of assets under management, an hourly rate or a flat fee. Some advisors may also charge additional fees for specialized services like estate planning or tax strategy, depending on their offerings. Reviewing these costs with the new advisor in advance can provide clarity on what to expect financially.
Other Expenses to Consider When Changing Advisors
Switching advisors can sometimes lead to additional expenses related to specific investments, particularly with mutual funds and annuity contracts.
For mutual funds, clients may face redemption fees if shares are sold within a certain period after purchase, typically within 30 to 90 days, depending on the fund's rules. These fees generally range from 1% to 2% of the redeemed amount, discouraging frequent trades. Additionally, funds with back-end load fees impose charges when shares are sold, usually decreasing the longer they're held.
Annuity contracts can also carry surrender charges if they're withdrawn or transferred before a set holding period, which can last from several years to over a decade. These charges often start around 7% of the annuity value and decrease annually. Transferring annuities may also incur administrative fees for paperwork and processing. It's worthwhile to review the fine print of these investments with both your current and prospective advisors to avoid unexpected costs.
Cost of Changing Advisors: A Hypothetical Example
Consider a client who decides to switch financial advisors after several years. They currently hold a brokerage account with $200,000 in mutual funds and a $150,000 annuity.
When the client initiates the transfer, their current advisor charges a $150 account closure fee for the brokerage account. Their mutual funds include shares bought within the past 90 days, which incur a 1% redemption fee, amounting to $2,000.
For the client's annuity, they face a 5% surrender charge, as it's only been seven years since it was purchased. This translates to a $7,500 fee on their $150,000 annuity. Additionally, their new advisor's ongoing fee is 1% of assets under management annually, which would be $3,500 based on their $350,000 portfolio. So, if the old advisor's ongoing fee would amount to $2,000 per year the net ongoing increase of using the new advisor would be $1,500.
In total, the client's one-time switching costs add up to $9,650, plus $3,500 annually with their new advisor. This shows the potential impact of transfer and surrender fees, highlighting why it's helpful to review all associated costs before making a change.
Bottom Line
Switching financial advisors can involve a variety of expenses, from exit fees and tax implications to new advisor fees and investment-specific charges. These costs can vary widely based on the types of accounts held, the policies of the current and prospective advisors and the specifics of any mutual funds or annuity contracts involved. By carefully reviewing these potential expenses, individuals can make informed choices about the financial impacts of changing their financial advisor.
Tips for Financial Planning
- A financial advisor can help you set and reach different goals for your financial plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to build your savings up consistently, consider setting up automatic transfers from your checking to your savings accounts. This approach could help you make saving a routine part of your financial life.
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