Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.
In today’s digital age, it isn’t unusual for brokerage customers to want to move their accounts from one firm to another. With an increasing number of online firms offering inexpensive trading platforms, it’s likely that changing firms can offer you a cheaper and more streamlined trading experience. To transfer the securities in your account, banks and brokerage firms use the automated customer account transfer service (ACATS) to electronically transfer securities from one firm to another.
To transfer the assets in your account, many brokers charge you what is known as an ACAT fee. The fee varies, and a few firms charge no fee at all, but many brokers charge as much as $100 for transferring the securities in your account to a competing firm. This fee typically applies to a complete transfer of the securities in your account. Some brokers charge a smaller fee (or no fee at all) for partial transfers.
The National Securities Clearing Corporation operates ACATS. The process takes between three and five business days from the time the new brokerage firm requests the transfer. While there are rules you must follow, forms you must fill out and rules brokerage firms must follow, nobody regulates the fees firms can charge you for making the transfer. That’s why it is always wise to ask both firms — the one you are transferring from and the one you are transferring to — what they will charge you to move your securities.
How much would you like to invest?
Most brokerage firms would say they are charging you for the costs they incur to complete the paperwork necessary to make the transaction as well as to transfer information about the purchase date, cost basis, etc., of securities in your account.
Consumers also should be aware of potential hidden costs. For example, your brokerage firm might charge you a $50 ACAT fee. But if the account you are transferring is an IRA, the firm also might charge you a fee for closing your IRA. This would be in addition to the ACAT fee. That means the costs of transferring your accounts can add up.
Sometimes you can offset the fee you have to pay to transfer your account to a new brokerage firm with bonuses and other discounts the new firm offers. While deals vary and may apply for a limited time, a new firm may agree to reimburse ACAT fees up to a certain dollar amount or may offer free or discounted trades for a certain period.
These benefits can offset some or all of the fees you have to pay to the firm you are leaving. Even if the new firm isn’t offering a promotion, its trade commissions might be less than those of the firm you are moving from. If that’s the case, you probably can earn back the ACAT fee over a few months by making less expensive trades.
As an example, let’s say Allison maintains an IRA at a well-known full-service broker. The account includes rollovers from 401(k) plans at past employers, so it has a current balance of $275,000. Allison is a relatively active trader and makes approximately 10 to 15 trades a year, mostly in individual stocks. Her current broker charges between $50 and $95 in commissions on each of these transactions.
Because she makes her own investment decisions, Allison decides she no longer needs the assistance of a full-service broker and begins shopping for a discount broker. One possible option offers no commissions for the first six months her account is open. Another charges a commission of $.005 per share with a minimum of $1.00 per transaction.
Allison’s full-service broker will charge her a $95 ACAT fee for transferring the securities in her IRA to her new broker. It will charge her an additional $95 for closing her IRA, for a total of $190. Based on 10 annual trades, Allison would save between $250 and $475 in commissions if she went to the broker offering free trades for six months (assuming five trades). If she went to the second firm, her savings would be even higher.
The main takeaway here is that, depending on the firm you choose, commission savings often can cover ACAT fees in a relatively short period of time.
There are some ways around ACAT fees. Brokerage firms generally don’t charge you for withdrawing cash and then closing your account. That means you could liquidate your portfolio and then simply withdraw the cash and move it to a new firm. But the obvious disadvantage is that you would have to pay income tax on any capital gains in your portfolio because you sold the securities. And you would no longer own the securities, which could have the potential to grow further. Buying the same securities at the new firm means you likely would have to pay additional commissions and still pay tax on the previous sale.
There are other ways to avoid paying full ACAT fees as well. Most firms don’t charge a fee (or charge only a nominal fee) for a partial transfer. For example, let’s say Allison (from the earlier example) also has a regular brokerage account with 100 shares each of three different stocks. To minimize the ACAT fee, Allison asks her broker to transfer 99 shares of each stock to a new firm. This leaves her account with one share of three stocks.
From there, Allison sells those three shares and transfers the cash, avoiding the ACAT fee and minimizing any income tax consequences since she sold only one share of each stock. But be careful. Not all firms exempt partial transfers from ACAT fees, and some charge a lower fee. Others require a minimum balance in the account. Ask your broker about what fees would apply to your proposed transaction before you execute it.
Many brokerage firms charge ACAT fees for moving your securities to another brokerage firm. Those fees vary in amount and in the circumstances in which they apply. However, unless you are moving from a discount broker to a full-service brokerage firm, it’s likely that commission savings and new account promotions will cover the fees in a relatively short period of time.
You also may be able to avoid the fees by selling the securities rather than moving them, but beware of the income tax consequences. The best move is to make sure you understand all the fees that apply to a transaction before you make it. Ask your broker or check out the firm’s website.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.