How To Decide If You Should Switch Financial Firms
Taking your assets to a different firm can have a big impact on your long-term investments. Here’s how to consider if it’s worth it.
In 1 minute
Thinking about switching financial firms? Whether high fees are hurting your returns or your portfolio isn’t performing as well as you hoped, there can be plenty of good reasons to consider transferring your investments to a new firm.
The right financial firm can help you reach your goals and feel more comfortable with your investments. Thankfully, no matter how much you have invested, you’re never “stuck” with a strategy that isn’t a good fit or no longer appropriate for your goals.
Start with your financial goals. Are they decades away, or are you going to reach them in a couple years? For short-term goals, transferring isn’t always worth it. But with long-term investments, lower costs, increased tax efficiency, and automation could have an impact on long-term returns.
Before you make a decision, ask yourself these five questions:
- Will transferring allow you to invest in better assets? If other investment options may give you higher returns, transferring could be a smart move.
- Is your portfolio automated? Automation can help you avoid common investor mistakes, help keep your portfolio balanced, and may offer tools to maximize potential opportunities to save on taxes.
- Could you pay less in fees? Fees can be harder to notice than taxes, but they vary widely from one firm to another, and they can take a big bite out of your portfolio every year.
- How easy is it to adjust your asset allocation and keep your portfolio up-to-date with your goals? Your assets should fit the goals you’re trying to achieve. Some firms (like Betterment) are designed to take the guesswork out of asset allocation by recommending the appropriate risk level for your goals and keep you on track via automatic rebalancing and auto-adjust features if certain criteria are met.
- Do you own mutual funds in a taxable account that pay capital gain distributions? Even when a mutual fund’s performance is down, you may have to pay additional taxes from capital gain distributions.
Depending on how you answer those questions, you may want to consider transferring your investments.
In 5 minutes
In this guide we’ll:
- Discuss the main concerns with switching financial firms
- Explain situations where it could be smart to move
- Help you calculate the impact of transferring your assets
When you’re driving, sometimes it just makes sense to change lanes. The same can be true with investing. Sometimes the firm you’ve invested with has high fees and other costs that hold you back from reaching your financial goals. Or their guidance has led to lower performance than you expected.
In the right circumstances, transferring your investments could help you reach your goals sooner. But it’s not always the best strategy. Before you transfer, it helps to think through all the variables.
Let’s see if switching financial firms could be a smart move for you.
What’s your timeline to reach your goals?
If you plan on reaching your financial goals in the next couple years, transferring may not be the best choice. You may end up paying taxes, and your portfolio won’t be spending much time at the new firm anyway. The longer you plan to hold your assets, the more valuable a transfer could be.
Which is worse: taxes or fees?
While qualified retirement accounts can generally be moved to a new provider without penalties or taxes, that’s not always the case for taxable accounts.
One of the main barriers that keeps investors from transferring their taxable assets is that your new provider may invest in a portfolio that has different assets in it than your old provider. This forces you to sell some or all of these assets. If these investments are trading at a large gain—way above what you originally bought them for—then there may be significant tax implications of making the switch.
Over a long enough timeline, annual fees can hurt your investments more than taxes. But it can be hard to think of it that way. Some fees usually kick in before returns ever hit your accounts—you may be losing money you’ve never even seen. But when you transfer your assets, capital gains taxes put a dent in funds you already possess.
The decision boils down to paying more upfront in taxes to enable a switch versus staying put in a less optimal portfolio with higher expenses. Keep in mind: unless you gift your portfolio to someone else, you have to pay capital gains taxes someday anyway. But a difference in fees could quietly shave off value from your accounts every year. Tax deferral is worth something, but how much?
Could you invest in better assets?
Take a hard look at your returns in your current investments. Could they be better? For example, index funds tend to perform better over time than actively-managed funds. Those better returns could increase your account balance over time.
Are your investments automated?
If you or someone else has to manually maintain your portfolio, you can miss opportunities to improve performance. Betterment maintains your investments with features like rebalancing, dividend reinvestment, portfolio diversification, tax-efficient options, and more, that can be automated. Automation can also help you avoid reacting to market volatility and losing sight of your goal.
Could you pay less in fees?
Every financial institution has a different fee structure, and some cost much more than others. Between your annual advisory fees, trading fees, and other costs, you could be losing a lot more than you have to.
How easy is it to adjust your allocation?
As your goals change, you get closer to reaching them, or the market becomes more volatile, you may want to adjust your asset allocation. But how that works and how easy it is to do varies from one firm to another. At Betterment, you can easily make adjustments in the app, and we’ll even help you choose an appropriate allocation for your goals.
Some firms allow you to manage your account yourself and choose from thousands of investment options, but it can be challenging or time consuming to do so. Others offer managed accounts with limited options and flexibility and they may have transaction and commission fees. If your firm makes it difficult or confusing to change your allocation, you may want to consider switching to a firm that provides a better experience.
Do you own mutual funds in a taxable account that pay capital gains distributions?
Mutual funds invest in individual stocks and bonds. When a mutual fund manager sells investments in the fund, they may realize capital gains, which they’ll pass to individual shareholders—investors like you.
You pay taxes on these distributions. Less ideal: mutual funds can pay out capital gain distributions even if the fund’s overall performance is down for a year.
If the taxes you’d owe from selling your investments are lower than the taxes you’d pay on the annual, and likely ongoing, capital gain distribution from the fund, it could be wise to sell your shares before the distribution is paid out.
Need a second opinion?
Still not sure if transferring your taxable portfolio is worth the upfront costs? Our financial experts are here to help. And just as important, we’re a fiduciary, which means we’re obligated to give advice and take actions that are in your best interest.
Betterment’s Licensed Concierge Team offers support for individuals transferring assets to Betterment of $100,000 or more, and receives incentive compensation based on assets brought to or invested with Betterment. Betterment’s revenue varies for different offerings (e.g., Betterment Digital and Premium) and consequently Team members have an incentive to recommend the offering which results in the greatest revenue for Betterment. The marketing and solicitation activities of these individuals are supervised by Betterment to ensure that these individuals act in the client’s best interest.