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I recently asked a group of Canadian investors to describe their personal experiences in switching to lower-cost investing and to share valuable lessons learned along the way. Their responses led to this three-part series and may help you determine if making a similar change is right for you. In part one, I described real investor experiences with former advisors.
In this part, I’ve included the perspectives of investors with the account transfer process. My next article will share the overall level of investor satisfaction after switching to lower-cost investing and valuable tips for those considering doing the same.
This summary is insightful but is not a scientific survey. Also, while every investor can benefit from learning the basics, switching to lower-cost investing is not necessarily right for everyone. You ultimately have to decide what is best for yourself.
Comments came from investors who switched to do-it-yourself (DIY) investing through online brokers, moved to robo-advisors or found lower-cost advisors or mutual fund providers.
The actual transfer of funds was smooth for some, but others had to spend time getting their former firms to process the paperwork. In my experience, the banks and major brokerage firms are pretty efficient at transferring accounts, while smaller firms and the life insurers are less so. Some investors were charged fees for closing and transferring their accounts, especially those who held deferred sales charge (DSC) mutual funds, which will soon be banished by regulators.
Many respondents found the transfer process to be smooth:
“I didn’t find the transfer process a hassle. There were a few forms to fill out and a lot of information to go over and agree to, but it was relatively painless.”
“The transfer process only took about two to three hours in total from an administrative perspective.”
“Our advisor was aware of the eventual objective early on. When the day came, he had all the paperwork prepared, knowing that was the intent of the meeting. The transfer was painless. Our advisor and our bank made it so.”
Others I asked had to spend more time processing the paperwork. The degree of difficulty was often linked to the complexity and number of accounts:
“I started the paper transfer with my bank’s online broker and, as I had several accounts, this took almost three months. I had to devote a lot of time to help with this transfer, to get account numbers and go back and forth with my previous advisor.”
“It was definitely a hassle, since I had accounts with five different companies. I didn’t realize the switch had to come from each of them and not just from my advisor’s independent firm. It took five months for all the accounts to be sold and switched over.”
“The actual transfer process was quick and easy when everything went well, but a few unexpected things did happen. I didn’t realize that positions in a full account transfer could arrive piecemeal at the destination account, and I was unaware that certain fixed-income investments couldn’t be moved because they could only be held with certain firms. Also, account ownership details must match exactly.”
Some of the investors incurred costs in the form of DSC mutual fund redemption penalties, capital gains taxes or missed market upswings in the midst of transfers:
“The transfer process was anxiety provoking as I missed market gains while my funds were temporarily in cash. That was hard to deal with at the time.”
“We needed to liquidate a number of positions and some of these were in taxable accounts. I instructed my advisor to do the sells over Dec 2020/Jan 2021 to spread the capital gains over two tax years. I also wanted to do the sells of old positions and buys into the new positions before leaving the advisor so that everything was transferred in-kind. I didn’t want to be holding cash or be out of the market in any way during the transfer process.”
Another way to ensure you are not “out of the market” if you are switching to an online broker is to move your assets over as they are “in-kind,” then, once your assets are in your new accounts, sell what you want to get rid of and buy your new lower-cost assets at the same time.
“I lost money paying fees because I was invested in DSC mutual funds, but I have made that all back ten-fold by investing myself into low-cost ETFs.”
“I had to take a big hit in capital gains.”
Note: Investors who face penalties on redemption of DSC mutual funds must weigh the one-time cost of penalties against the long-term benefit of lower costs. Similarly, investors facing capital gains tax on sales of mutual funds in unregistered accounts must consider the benefit of long-term cost savings and the reality that, if they hold on for now to avoid capital gains tax, capital gains will be ultimately taxable at a future date.
Keep an eye out for the next article in this low-cost investing series, which will describe the overall level of respondent satisfaction after switching to lower-cost investing and valuable tips for those considering doing the same.
Larry Bates is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing and an investment advisor with Aligned Capital Partners Inc.