6 Signs That You Need to Switch to a New Brokerage
Your brokerage is the center of your investing life. You can use the account to purchase stocks, bonds, and mutual funds.
It's also where you’ll hold your retirement accounts.
Because your brokerage plays such a large role in your financial life, it’s important that you choose the right one.
Unfortunately, it can be difficult to know which brokerage is right for you until you actually experience their services.
Here are some signs that you need to find a new brokerage.
1. Poor Investment Options
The whole point of opening a brokerage account is to invest your money in stocks, bonds, mutual funds, and other investment vehicles.
With most brokerages, you can invest in any investment available on the market.
However, many brokerages provide benefits for investing in their products.
For example, Vanguard will let you purchase Vanguard Exchange Traded Funds (ETFs) without paying a commission. If you want to buy other firms’ ETFs, you’ll pay a trading fee.
2. High Expense Ratios
Another thing to consider when choosing a brokerage is the expense ratio of the investments it offers. Mutual funds and ETFs let you invest in multiple securities by purchasing a share in a single fund.
This makes it very easy to diversify your investments. Mutual funds can focus on specific market sectors or the entire stock market.
To account for the cost of managing a mutual fund or ETF, these funds carry an expense ratio.
What is the expense ratio?
This ratio is quoted as a percentage and indicates the cost of owning the fund over the course of a year.
For example, if you own $10,000 worth of shares in a mutual fund that has an expense ratio of 1%, you’ll pay $100 in management fees over the course of the year.
Keep in mind that these fees are taken out of the value of the mutual fund on a daily basis.
You’ll never see a dollar amount deducted from your account to cover the fees. Instead, the fee is baked into the changing price of the fund.
Look for funds with low expense ratios. You can find many mutual funds and ETFs with fees as low a 0.25% or less.
3. Limited Mutual Funds/ETFs
If you open a brokerage account with a specific company, you’ll be best off investing in that company’s mutual funds and ETFs.
This is because most brokerages will charge lower fees if you invest in their funds.
Some companies offer more and more varied funds than other brokerages.
If you want to invest in a specific sector of the market, like health care or utilities, your brokerage might not offer a fund that covers those companies.
You’ll have to find a new brokerage that offers the kind of fund.
4. Account Fees
Some brokerages charge regular account maintenance fees.
These can really eat into the value of your investments if you let them go unchecked, so do your best to avoid them.
Generally, there are ways to avoid these fees.
One common way to get the fees waived is to sign up for electronic statements. You can also avoid fees by having a certain amount invested with the brokerage.
If you’re being charged excessive account fees, look into other brokerages where you could save money.
5. Expensive Trade Commissions
Nearly every brokerage will charge some form of commission when you buy or sell an investment.
Often this fee is waived for transactions involving the brokerage’s own funds, but buying or selling stocks will almost always incur these fees.
Depending on your investment strategy, these fees can make a large impact on your overall returns.
If you want to just invest in commission-free mutual funds and ETFs, trade commissions won’t affect you. If you like to buy and sell stocks regularly, you’ll have to pay close attention to these fees.
If you notice that trade commission fees are eating into your returns, look into other brokerages.
Some brokerages specialize in low-cost trading, while others have a focus on mutual funds and ETFs that don’t charge commissions.
6. Advisory Services That Don’t Meet Your Needs
One valuable service that is offered by many brokerages is investment advisory service.
Usually, you’ll need to pay for this service or having a minimum amount invested to qualify for this service.
Depending on the type of brokerage you’re working with, this service might have a very different focus, and may or may not be what you need.
At a brokerage that focuses on long-term investments, the advisory services will be good if you need help creating a retirement plan. They can also help you focus on other long-term goals.
If you’re working with a brokerage with a larger focus on fast-paced trading, the advice will likely focus on earning short-term gains.
Depending on your investment goals, you’ll need different types of advice.
If your brokerage doesn’t offer the advice you need, you should look elsewhere.
Step-by-Step Guide for Switching Brokerages
If you’ve decided that you need to look for a new brokerage, the process can seem daunting.
Here’s a step-by-step guide on how to move to a new brokerage.
Research new brokerages
Of course, the first thing that you need to do is decide which brokerage you want to start using. Use the advice above to think about what you need in a brokerage.
Do you want custom-tailored advice, or do you want to handle your investments yourself?
Do you want to trade stocks and bonds regularly, or buy and hold mutual funds and ETFs?
How much trouble do you have with meeting the requirements to get account fees waived?
Decide what part of a brokerage account is most important to you, then look for brokerages that emphasize that portion of their services.
Look into fees for closing your account
Another thing you need to do is to look at the fine print for your current brokerage account.
Brokerages have a vested interest in keeping you as a customer.
One of the ways that some brokerages try to keep your business is to make it difficult to transfer your account to another brokerage. One common tool that they use is account closure fees. Look into whether your brokerage charges these fees, and be ready to pay them if necessary.
Keep in mind, investment management is a lucrative business, and customers don’t often move from brokerage to brokerage.
They tend to choose one brokerage and keep their money there.
If you have a significant investment balance, brokerages will fight for your business. Sometimes, a new brokerage will be willing to cover fees charged by your old brokerage, if you agree to transfer your whole account.
Don’t be afraid to ask if your new brokerage will help with the account closure fees.
Contact your new brokerage to begin the transfer
Once you’ve decided which brokerage you’ll be using in the future, contact your new brokerage to begin the transfer.
Because your new brokerage will be excited about getting your business, it will do its best to help you through the process.
Usually, the first thing you’ll need to do is open an account at the new brokerage. You’ll have to fill out all the required paperwork and send the necessary documentation to do so.
This process can take a week or more, so make sure to plan for that.
Once you’ve opened the new account, you’ll have to contact your old brokerage to begin the transfer process.
Start by downloading all of your account documents from the old brokerage. This includes statements, trade history, and the like. These documents can be a big help if you ever run into tax issues.
Then, explain to your old brokerage that you’ll be transferring your account to a different brokerage.
Ask what the process for a transfer is, and follow the steps as closely as possible. You’ll likely have to fill out a lot of paperwork to authorize the transfer and close out the account.
Once the paperwork is done, your old brokerage will transfer your account to the new brokerage.
This process can take a week or more, so be ready to be unable to access your money for that period of time.
Decide on a cash or in-kind transfer
When you are transferring your brokerage account, you generally have two options for how to make the transfer.
The first is to transfer the account as cash. To do this, all of your investments are sold and a lump sum of cash is sent to your new brokerage.
Once the new brokerage gets the cash, you can use it to purchase whatever investments you’d like. This is good if you want to change your investment strategy, but selling your investments can incur taxes, so be ready for that.
The second option is to perform an in-kind transfer. This transfers your investments exactly as they are to your new account.
So, if you had 25 shares of Coca-Cola company in your old brokerage, you’d have 25 shares of Coca-Cola in your new brokerage after the transfer.
This is the best choice if you don’t want to change your investments and don’t want to incur taxes.
Your brokerage account is the hub of your investing life.
Use these tips to determine whether you should look for a new brokerage.