5 Questions to Ask When Your Broker Changes Firms

Brokers, like many of us, move on to new job and career opportunities for a number of reasons. The new firm might, for example, offer higher pay, different products and services, or a chance at a higher level position—or the broker might have some other reason for leaving the old firm. For investors, it can be a surprise to learn that the broker you have worked with over the years is leaving your current firm. It can also be confusing if you receive correspondence both from your current firm, notifying you that your account will be serviced by someone else, and from your broker's new firm, requesting that you move your account assets to continue the relationship you have established with your broker.

Beginning November 11, 2016, FINRA will require brokerage firms to deliver a new educational communication to former customers who are contacted about transferring their assets when their broker changes from one broker-dealer to another. Framed as five questions, the document highlights important conflict-of-interest and cost considerations of transferring your assets to a new firm, which might not otherwise be brought to your attention in a timely manner. It also encourages investors to make further inquiries to reach an informed decision about whether to transfer their assets to the broker's new firm.

Here Is What the Educational Communication Will Say

If you're thinking about whether to follow your broker or stay with your current firm, it's a good idea to examine the key issues that will help you make an informed decision. A good relationship with your broker is surely valuable to you, but it's not the only factor in determining what's in your best interest. Before making a final decision, talk to your broker or someone at your current firm about the following questions, and make sure you're comfortable with the answers.

1. Could financial incentives create a conflict of interest for your broker? In general, you should discuss the reasons your broker decided to change firms. Some firms pay brokers financial incentives when they join, which could include bonuses based on customer assets the broker brings in, incentives for selling in-house products or a higher share of commissions. Similarly, some firms pay financial incentives to retain brokers or customers. While there's nothing wrong with these incentives in either case, they can create a conflict of interest for the broker. Whether you stay or go, you should carefully consider whether your broker's advice is aligned with your investment strategy and goals.

2. Can you transfer all your holdings? What are the implications and costs if you can't? Some products, such as certain mutual funds and annuities, may not be transferable. If that's the case, you'll face an additional decision if you follow your broker to the new firm: whether to liquidate the non-transferable holdings or keep just these holdings at your current firm. Either way, there could be costs to you, such as fees or taxes if you liquidate, or different service fees if you leave some assets at the current firm. Your broker should be able to explain the implications and costs of each scenario.

3. What costs will you pay—both in the short term and ongoing—if you change firms? In addition to liquidation fees or taxes if you sell non-transferable assets, you may have to pay account termination or transfer fees if you close your current account, or account opening fees at the new firm. (Even if the new firm waives its fees as an incentive to transfer, that wouldn't reduce any transfer or closure costs at your current firm.) Moving forward, the new firm may have a different pricing structure for maintaining your account or making transactions (such as fee-based instead of commissions, or vice versa), which could increase or lower your account costs. Your broker should be able to explain the pricing structure of the new firm and how your ongoing costs would compare.

4. How do the products at the new firm compare with your current firm? Of course, not all firms offer the same products. There may be some types of investments you've purchased in the past or are considering for the future that aren't available at the new firm. If that happens, you should feel comfortable with the products they offer as alternatives. If you tend to keep a lot of cash in your account, ask what investment vehicles are available at the new firm for the cash sweep account and whether the interest rate would have an effect on your return.

5. What level of service will you have? Whether you follow your broker to the new firm or choose another broker at your current firm, consider whether you'll have access to the types of service, support and online resources that meet your needs.

Tying It All Together

If your broker contacts you to tell you he or she changed firms, you have some homework to do. Before making a decision to stay at your current firm or move to your broker's new firm, find out why your broker is changing firms. Ask your broker about potential conflicts of interest he may have based on financial incentives he may have received to move.

Also, keep this in mind: You may have the option of leaving a portion of your assets at your current firm and moving the remainder to your broker's new firm. If you do change brokers, make sure to review the background of your new broker on FINRA's BrokerCheck. And if you stay with your current broker, use the opportunity to review BrokerCheck to see if there is any new information about him.

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