If Your Broker Leaves, What Should You Do?


It is prime hunting season at Bear Stearns (BSC). While JP Morgan (JPM) has yet to announce what it plans to do with the 550 Bear Stearns brokers it gained in last week’s fire sale, employees of the newly acquired investment giant are slowly being picked off by rival firms.

Last week, a U.S. Federal judge temporarily blocked former Bear Stearns executive director Douglas Sharon from recruiting clients and co-workers to join him at Morgan Stanley, (MS) after the competitor hired 12 of Bear’s brokers.

"When a broker bolts for a competitor—usually late on a Friday afternoon—there is a scramble while the broker contacts all of his clients to try to get them to move over to his new firm," says David Gardner, an investment advisor with Yellowstone Financial based in Boulder, Colo. "Brokers will often receive lucrative offers to move over to other firms and competition can be fierce over the best brokers."

Meanwhile, the jilted brokerage firm also makes an effort to keep clients. "The old firm will usually offer some inducement for clients to stay, whether it’s reduced fees or discounted transactions,” says Gardner.

Even if your investments aren't with Bear Stearns, your broker could be contemplating a switch. According to the National Financial Broker and Advisor Sentiment Index, the number of brokers and advisors who are considering leaving their firm doubled last year to almost 10%. Meanwhile, 42% of brokers stated "finding new customers" as the number one challenge when starting at a new firm, making it clear that keeping clients is a top priority.

The first thing to do if your broker decides to move is to ask why. "You want to find out whether the decision is being made because the advisor wants to do it, or because the firm is asking him or her to find another home," says Neil Elmouchi, president of Summit Financial Consultants, in Westlake Village, Calif. You can always verify that there’s no questionable motivation by asking to see their Form BD, which requires disclosure of relevant criminal, regulatory and civil proceedings.

If they are leaving for legitimate reasons, then it is time to evaluate whether you’re happy with your broker's investment management. "The loyalty is generally with the advisor and not the firm,” says Phil Carrasco, a certified financial planner at Cornerstone Wealth Management, based in Hagerstown, Md. If you are not happy with your broker, take the opportunity to make a switch. If you are content, moving your portfolio with your broker shouldn't be more than signing a couple pieces of paper. "For the client it’s a painless in-kind transfer," says Elmouchi. "The investments are electronically picked up and moved to the new broker dealer."

Moving with your broker can get complicated, however, if your investments are with a big house that manufactures its own products, like a Morgan Stanley (MS) mutual fund. Proprietary mutual funds often cannot be moved from one broker to the next, which means you must liquidate those investments and pay the capital gains tax. "Some places do that intentionally to make it more difficult to leave," says Elmouchi. "It comes back to if your relationship with the advisor, adds Carrasco. "If it’s a real relationship, the tax issues aren’t going to be a driving force."

Also, find out if there is a different fee structure at the new firm, and what changes there will be to your account once it is transferred. "Most of the time, the advisor isn’t going to a place where the expenses are any different for the client," says Elmouchi. "There is a possibility, but it’s not like your fees are going to go from $1,000 to $3,000." And if you do decide to move with your broker, keep the following in mind: When your assets are being transferred, you might not have access to those funds for several days. If you need money out of your account, access it prior to the transfer to avoid any issues.

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