When you know it's time and how to make the change

When you know it’s time and how to make the change

Some relationships just don’t work out. That unfortunate truth applies to spouses, friends, business associates, and financial advisors.

Most likely, you have launched into a new advisory relationship with high hopes for wealth and financial independence. But if your wealth progress slows or communication with your advisor breaks down, a breakup may be in your future.

That breakup can be stressful. And you may incur financial costs in the process. Therefore, it is not a move to make until you are sure that another adviser can provide you with a better service.

Here’s how to know when it’s time to switch financial advisers, including answers to frequently asked questions and a step-by-step guide to transferring your assets.

When to change your financial advisor

There are many reasons why a partnership with your investment advisor may fail. Most of those reasons fall into four categories of red flags: poor communication, fee structure, business philosophy, and financial results.

1. Bad communication

As you manage communication with your advisor, pay attention to the frequency and quality of your conversations. You should interact with your advisor regularly. At a minimum, you can expect an annual financial review. A quarterly check-in is ideal, even if it’s just a quick phone call. Also, you should be able to contact your counselor within one or two business days when you have questions or concerns.

The quality of communication during those touchpoints is critical. It’s problematic if you don’t feel comfortable sharing concerns with your advisor, or if you don’t feel like your advisor listens and responds appropriately.

The relationship must be dynamic and fluid. After all, financial goals can evolve. Your advisor should be willing to discuss your changing needs, provide professional feedback, and adjust your plan if necessary. This does not mean that your adviser agrees with everything he says, but you should always be open to constructive discussion. If that’s not the case, you might be better off with someone else.

2. Surprise fees

You can’t avoid fees when you work with a financial advisor. You’ll pay ongoing management fees or absorb commissions when you buy funds and other financial assets.

Know that there are times when fees will exceed returns on investment. This does not automatically mean that your advisor is not working. If the entire stock market crashes, for example, you’re likely to see negative returns on your account, no matter how smart your advisor is.

However, problems arise when the fees are much higher or more frequent than you expect. If you initially asked the advisor to describe the fee structure and then experienced something very different, start asking questions. Do the same if the market is strong, but your performance net of commissions is flat.

3. Incompatible business philosophy

Some advisors are market timers who trade frequently to generate short-term profits. Others play the long game, choosing quality stocks that are set to appreciate for years or decades. Whichever approach you prefer, your advisor should share the same opinion. If there is a conflict in the fundamental investment approach, a breakout is imminent.

4. Disappointing results

Your personal finances should improve under the guidance of your advisor. If that’s not happening, identify the source of the problem. Could be:

  • The stock market is down. Unless your advisor has promised otherwise, you can expect your account performance to follow stock market trends. Ask your advisor to help you set expectations for the current market climate. If the results continue to be poor, you may be ready for someone new.
  • Your counselor is not giving you the guidance you need. You may be working with an investment specialist when you really need more extensive financial advice. Perhaps help with budgeting or paying down debt could help you allocate funds to invest, for example. In that case, a certified financial planner or chartered financial consultant might be a better option than an investment specialist.

Frequently asked questions about changing financial advisors

If you recognized any of the red flags above, you may already be asking some high-level questions about how a change of advisor would work. Five common questions are answered below.

1. Can I change my financial advisor?

Yes, you can replace your financial advisor. The timing and cost of the move may be governed by the contract language you agreed to when you first hired the consultant.

2. Do I have to withdraw my investments?

In general, you can switch to a new advisor without withdrawing your investments. However, there are exceptions. You would have to sell any funds or assets that your new company cannot support. You may own certain classes of shares that are owned by your old company, for example. Or you may own assets that are beyond the reach of your new advisor, such as leveraged or inverse funds.

Your new advisor can review your account statements and identify any positions that cannot be transferred in kind.

3. How much does it cost to change adviser?

The costs of replacing your advisor vary dramatically from situation to situation. Some advisors, for example, may charge termination fees. In addition to that, you could also incur costs from the sale of assets that cannot be transferred. Those costs may include realized losses and reimbursement fees.

4. How long does it take to change advisors?

Once you have selected a new advisor, you can usually complete the asset transfer within two to three weeks.

5. How do I tell my old financial advisor that I am moving?

The worst part of changing advisers can be breaking the news to your old financial partner. You have two main options:

  • Be frank. Your message can be as simple as “I’ve decided to switch to another advisor because…” Hopefully, the former advisor will take the news professionally and appreciate that you explained why.
  • Or, let your new advisor do the talking. If your new advisor is willing, you don’t have to say anything to your old financial advisor. Complete the paperwork and have your new advisor manage the asset transfer. Your former advisor or the company may contact you and ask for feedback, but you are not required to comply.

How to change your financial advisor, step by step

If you’re ready to replace your financial advisor, follow these five steps to avoid unpleasant surprises.

1. Read your agreement with the former adviser

Read the contract you have with your old advisor. He is looking for the rules that govern how and when he can leave the company and move his investment accounts. You may have to give notice, for example, or pay termination fees.

2. Find a new advisor

Finding a new financial advisor can take months. Take your time to identify the right person, offering the right products and services. Learn from what went wrong with the old advisor, so you don’t have to repeat this process.

3. Download your transaction history

Sign in to your account and download your entire transaction history if possible. At a minimum, document the cost basis and date of purchase for all assets. Please note that this information should flow through your new account if you transfer assets in kind. But it never hurts to have a backup. You’ll need your asset purchase history to report gains and losses on your tax returns.

4. Consult with your new advisor

Ask your new advisor to review your account statements and identify any assets owned by the old business or not transferable. You will have to sell them and transfer them for cash. Calculate the costs you will incur in that process.

5. Break the news to your old adviser (or not)

Ask your old financial advisor if any of the non-transferable assets have minimum holding periods or surrender fees. If so, see if your advisor will estimate the fees you may incur.

You can have this conversation while telling the advisor you are leaving. Or, if you prefer, position your questions as a fact search. You could say that you are trying to better understand what you own and how liquid those assets are.

6. Give your new advisor the green light

When you’re ready, give your new advisor the green light to proceed with the transfer. As noted, transferable assets will be moved as is. Non-transferable assets will be settled and transferred in cash. The transfer usually takes less than three weeks.

Towards a brighter and richer future

Replacing your advisor can be unpleasant, but it’s less awkward than working indefinitely with the wrong person. If someone else can give you better financial planning and investment advice, make the switch, even if you absorb some fees in the process. The right replacement can put you on a shorter, more enjoyable path to financial freedom.

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