These calls tend to elicit a mix of surprise, confusion, and curiosity. You may start to wonder why you weren’t informed earlier, if anyone is in legal trouble, if your assets are safe, and who is monitoring your accounts.
You probably resisted the urge to ask these more pointed questions in favor of a more courteous, “Wow! What happened?” But this question can still tell you a lot. Depending on the answer to that question, you must decide whether to:
1. Follow your Advisor to their new firm.
2. Stay with the old firm and be assigned to a different Advisor (the default decision if you do nothing).
3. Find a completely new Advisor and firm and move your accounts there.
4. Do it yourself—move your accounts to a self-service platform.
Certainly, there are pros, cons, benefits, costs, and considerations for each of the above decisions. To help you choose, consider asking two follow-up questions beyond, “What happened?”
Question 1: What motivated you to switch firms?
Most Advisors change firms because of the client service experience, money or legal issues, or a combination thereof. By asking why they decided to switch firms, your goal is to assess which of these factors came into play, since they may impact whether you want to stay with the advisor.
If you’re comfortable asking pointed questions, consider the following:
· Were there any legal issues that caused you to move firms?
· Were you fired?
· Was your resignation acrimonious? Is there any chance your old firm will sue?
· Were you paid to switch firms?
· Does this move benefit you, me, or both of us?
· If not money, why did you leave?
(Note: Finding out your Advisor is moving at the perceived last minute probably doesn’t indicate legal trouble; most advisors have a duty of loyalty until the second they resign, meaning they legally can’t forecast a potential exit to clients.)
You may also want to check the disclosures for both the old and new firm on www.brokercheck.com. This website hosts the Financial Industry Regulatory Authority (FINRA) compliance records. Any reportable transgressions appear on this website, and you should ask the Advisor to explain any issues disclosed.
If an Advisor moves from one wirehouse to another (the four largest wirehouse firms are Morgan Stanley, Bank of America/Merrill Lynch, UBS, and Wells Fargo), it is fair to assume that they were paid handsomely to do so. Advisors are typically paid two- to four-times what they earned over the previous 12 months to move client relationships from one firm to another. This can be a very large check that is immediately deposited into the Advisor’s bank account.
It's worth noting that the taxes on this size deposit are often large; to ensure the Advisor stays with the new firm, the new firm tends to pay the tax on the signing bonus with a loan that’s forgiven over a five- to 12-year period, depending. If this is the case, the Advisor is at least likely to stay put at the new firm for the foreseeable future.
Many Advisors moving from wirehouses to RIAs (e.g., Registered Investment Advisors, like Rockefeller or First Republic Bank) are also offered large checks to move.
Money is not a bad reason to move—but when it is the only reason to move, it can be a red flag. To figure out whether it’s a red flag or not, end any conversations about compensation with a simple question: Does this move benefit you, me, or both of us?
Assuming you got satisfactory answers to the legal and money questions, it benefits you to know why your Advisor decided to switch firms. For instance, we left a wirehouse to form Quorum Private Wealth because we wanted to provide a better client service experience.
Changing firms is a lot of work—it’s stressful and comes with a high level of risk and uncertainty. Figuring out what motivated someone to take that kind of risk tells you a lot about the type of Advisor you work with. For us, our clients were the only thing that justified that kind of risk. We wanted to serve them better. Period.
At our old firm, we spent too much time on the firm’s agenda, and not enough on our client’s agenda. Our clients are busy, successful people with complex financial needs. Often, we asked for exceptions or accommodations because firm policies were designed for the masses, not high net worth clients. When the firm became more obstructive than accommodative, we explored other options.
If you had asked us the questions above, we’d have answered that not only did we not take money to move, we left a substantial amount of money on the table in the form of deferred compensation. And then we turned around and paid startup costs to launch Quorum. And in our (professional) opinion, this was the right call and provides a high return on investment in how we’re able to serve our clients.
Question #2: Why is this new firm better for me?
Once you understand the motivation of your Advisor, determine how the move will affect you.
Start this conversation with a discussion about safety and security. Ask where your assets will be custodied—this refers to the institution that holds your investments, and you want the answer to be either a major wirehouse or one of the big three custodians—Schwab (which now owns TD Ameritrade), Fidelity, or Pershing.
Next, ask about the new firm’s structure. If the Advisor decided to open up their own RIA firm from a wirehouse, they may be subject to different regulations and, depending on the size of the firm, be in charge of their own compliance. We shied away from opening an independent RIA because of this. We wanted third-party objective compliance and supervisory oversight, which is why we chose Sanctuary.
Ask what motivated the Advisor to select the new firm. Typically, Advisors are excited about new capabilities or services. For us, we were able to handle 1031 real estate exchanges, add services for international clients, access non-proprietary structured notes, and offer creative alternative investments. Ask what your Advisor can do to enhance your experience.
It’s also helpful to ask about the structure of the new firm—is your advisor working with a team? If so, you may be working with these folks, too. If your advisor’s whole team moved with them to the new firm, that speaks volumes. If the Advisor is folding into an existing team, try to understand how many are veteran team members who know the system versus new hires—should you expect a lot of turnover?
You also want to spend time discussing logistics when it comes to your money. Two issues that tend to come up when an Advisor moves to a new firm are taxes and fees. The big question is: Can you move your investments in-kind (that is, without selling them) to the new firm?
If you have to change investments in non-IRA accounts—i.e., sell them in one place in order to buy them again at another—that can have a substantial impact on taxes that you need to understand upfront. (Note: This doesn’t impact IRAs or other qualified accounts because there are no taxes incurred by selling.)
We took great pains when contemplating a new firm to make sure that client investments could transfer in-kind. It’s hard to justify any move that comes with a significant tax bill.
Fees are another issue to have a candid conversation about. Will overall fees change at the new firm? If yes, do some research to see if the fees at the new firm are competitive and fair. Depending on how much the advisor wants to keep you as a client, you may even be able to negotiate fees. This is the time to revisit the pricing of your accounts.
What happens if you don’t follow your advisor
If you stay with the existing firm, it’s likely you will get a new advisor who will be briefed on your accounts, but won’t have the background knowledge about you, your family, your goals, your fears, and your risk tolerance like your previous Advisor.
To figure out if this new advisor is a good fit, we’ve once again compiled a list of top questions to ask. These are the same questions you can ask if you decide you don’t like the replacement advisor at your current firm and want to find an entirely new advisor.
· What are your qualifications? Ask about education background, prior work experience, tenure in the industry, and professional designations.
· What is your team structure? Many clients expect and deserve a team, so if the advisor is a sole practitioner, you want to ensure they can still meet your needs. If your Advisor goes on vacation, there should be a robust team structure to help you accomplish your objectives. Teams are very important for succession planning as well.
· What is your investment approach? Make sure you understand and agree with the investment approach that your Advisor espouses. At Quorum Private Wealth, for example, we use separately managed accounts and hire third-party managers to make individual security decisions. We hold these managers at arm’s length and fire them if necessary. If an Advisor uses their own strategy, how do they hold themselves accountable and/or measure performance?
· Who is your typical client, and what do you do for them? Be sure that you are a good fit for the Advisor’s practice in terms of asset size, age/stage of life, and financial situation.
· What are your fees? Price matters, particularly as it relates to value. Ask what services are included with whatever fee is being charged; a lower fee may mean fewer services.
Finally, you could do it yourself. But we don’t generally recommend this. And it’s not because we’re financial advisors. It’s just that the more wealth you accumulate, the more complex managing that wealth becomes.
Consider the old legal adage: Folks who represent themselves in court have a fool for a client. Like finance, understanding the law is a full-time job. Laws, regulations, products, strategies, and market conditions are constantly changing. Why task yourself with diligently monitoring these things…in addition to your other jobs and responsibilities?
However, if you must manage your own investments, we suggest focusing on three things: cost, capabilities, and safety. Invest at a brokerage that offers the lowest cost products (commissions and fees), with the broadest capabilities (a great user experience) that complies to the highest safety and security standards.
While the “I’m moving firms” call from an advisor can be jarring, it doesn’t have to be. The key is to break down the decision by asking a series of pointed questions that, in the end, can help you better understand your advisor as well as your own finances and goals.
Ultimately, you should select an advisor that you are not only comfortable working with, but who you trust to be an advocate for you and your finances. We hope these questions help you get there and find that person. If you think Quorum might be that firm, please contact us, we’d love to connect.
