Stay-or follow your advisor?

Zoomer | January 1st, 2006

I recently did a CBC commentary on what to do if your financial advisor switches firms and tries to persuade you to come along (as most will do). It generated a lot of interest, so I thought it might be useful to summarize the highlights here, along with a comment I received afterwards from an Internet Wealth Builder member that is worth noting.

The CBC item was originally prompted by a call from a friend who said that his broker, who had been with a major company, had left to join a small firm that was affiliated with a credit union.

The broker asked him to switch his account, worth about $150,000, mainly in an RRSP, to the new company. He was told the company the broker had left was phasing out its small retail clients and my friend wouldn’t get good service from them. The broker went on to stress that he knew the account well and had done a good job. Obviously, he wanted the business.

At about the same time, my friend got a call from a new broker at the original firm. Of
course, they wanted to keep his business. There wasn’t even a hint that his account was too small and that he should take it elsewhere.

So my friend brought his dilemma to meShould he move with his old broker or stay where he was, with a new person handling the account?

Questions to ask
There’s no hard and fast answer in this situation, but here are some questions to ask:

  • Are there any costs involved in moving the account? Often there are closing fees or
    transfer charges. Ask if the new firm will pick up those expenses. You shouldn’t be
    out-of-pocket if you decide to move.

  • How long will the transfer take? Your account is effectively frozen until the paperwork is done. Usually, these things take longer if you do them at a peak period, like RRSP season.

  • If the account is an RRSP, how will the valuations be handled? Often when an account
    is transferred, the receiving firm resets the book value of all the securities to the
    current market value because they don’t have the previous history.

    That can create a serious problem for RRSPs, because the foreign content limit is based on book value. If that value is reset, you could suddenly find yourself over the limit and subject to penalty.

  • What commissions you will be charged? Compare both companies. You’re in a position to negotiate favourable terms.

  • What is the product range offered? A small brokerage firm may not be able to offer the variety of bonds available from a larger company, just to give one example.

  • How good is the research? A smaller company may not have much to offer in this regard.

  • What are your statements like? Ask to see a sample statement from the new company and compare it those you are currently receiving. Make sure it contains all the information you want.

    • Meet the replacement
    Also, ask to meet the replacement broker at your current firm. At that session, find out more about his or her investment philosophy.

    • Is the person on your wave length? If the new broker is very aggressive while you’re a conservative type, it’s going to be an uncomfortable fit.
    • Ask the new broker to assess your portfolio. Say that you want to know what he or she would do differently and if any changes would be recommended. See if you agree with the conclusions offered.

    One experience
    That was the gist of my advice. Now for the IWB member comment:

    “I had a bad experience after following my broker, who moved to another firm after many years.  I was mistakenly under the impression that the advice I would get would be the same as what I had grown used to.  However, the broker was, I believe, subject to more pressure to get me into riskier investments than at the previous firm, and in retrospect the record of recommendations and bad performance subsequent to the move proves it.  One of the recommendations was to fill out a new account application form, which was not needed. That allowed him to talk me into specifying more tolerance for risk.  I didn’t question this because I placed trust in the relationship. That was a big mistake.” – J.C.

    Keep that warning in mind if you ever find yourself in the same situation. Protect your own interests first!

    The Internet Wealth Builder is a weekly e-mail financial newsletter published and edited by Gordon Pape. For a free sample issue and information on how to become a member, go to: http://gordonpape.fifty-plus.net/newsletter/iwbnl.cfm