Financial advisors are supposed to help you save and make money, but if you’re not careful, they can also cost you. If you’re dissatisfied with your current advisor or have other reasons for wanting to transition to a new firm, the cost of changing financial advisors is important to consider. Here’s what you need to know before you make the switch.
#1 Taxes and Your Investment Portfolio
When changing financial advisors, there will likely be adjustments made to your investment portfolio. You’ll owe taxes whenever you generate capital gains from investments. The taxes you owe will depend on whether you’ve held these gains for longer than a year.
Gains Held Less than a Year
You’ll owe ordinary income tax for asset gains held in your portfolio for one year or less.
Gains Held More than a Year
You’ll likely owe capital-gains tax for gains held in your taxable accounts for over a year.
Capital Gains Tax
Capital gains tax is the profit made when investments are sold.
Here’s a general breakdown of the capital gains tax in 2022, per the IRS.
Your capital gains tax rate will likely be 0% if:
- Your taxable income is equal to or less than $40,400 and you file as single
- Your taxable income is equal to or less than $80,800 and you’re filing jointly or as a qualifying widow or widower
Your capital gains tax rate will likely be 15% if:
- Your taxable income is more than $40,400 but equal to or less than $445,850 and you file as single
- Your taxable income is more than $80,800 but equal to or less than $501,600 and you’re filing jointly or as a qualifying widow or widower
- Your taxable income is more than $54,100 but equal to or less than $473,750 and you’re filing as head of household
- Your taxable income is more than $40,400 but equal to or less than $250,800 and you’re married but filing separately
You’ll likely have a capital gains tax rate of 20% if your taxable income is greater than the cap for the 15% rate. In some cases, you may owe more than 20%. These are specific cases that apply to individuals who own particular business stock or are selling collectibles or specific types of property.
It’s important to know these details before you hire a new financial advisor, as you should have a comprehensive understanding of the potential tax implications that could affect your portfolio.
A good financial advisor working in your best interests will help you determine actions that either minimize or eliminate the consequences of various taxes.
#2 Transaction Fees
With a new advisor comes a new investment strategy. And a new investment strategy, while potentially beneficial in the long term, can cost you upfront.
Let’s say you have one IRA account and one taxable account. In each of these accounts, you’re holding ten positions. Your new financial advisor wants to liquidate your current assets and purchase 20 new holdings as part of their new investment strategy.
In reality, this amounts to 40 transactions, and transactions come with fees. While the trading costs vary according to security and custodian type, you could end up paying thousands of dollars to transition to a new portfolio.
To mitigate these costs, ask your new advisor to waive the transaction fees for the first month or two while they implement their new strategy. You can also ask for fee reimbursement.
#3 Back-End Load and Surrender Charges
It’s also possible to accrue additional fees when making changes to your portfolio, such as back-end loads and surrender charges.
Back-End Load
A back-end load is a fee you pay when you sell off mutual fund shares. It’s usually calculated as a percentage of the shares’ total value.
Surrender Charges
You’ll pay surrender charges if you sell or withdraw money from an annuity outside the predetermined policy time. Back-end load and surrender charges shouldn’t hold you back from selling positions, but you should be aware of these charges and factor them into your decision-making. Your new financial advisor should also acknowledge these fees and be able to provide you with sound reasoning for why it’s worth it to sell off your positions.
Finding the Right Financial Advisor
We hope you enjoyed this blog on the cost of changing financial advisors!
Remember, just because there are expenses associated with changing financial advisors doesn’t mean it’s not a good idea. Staying with the same unsatisfactory financial advisor can cost you more in the long term than simply finding a new one. Financial advisors play a key role in your future, so you don’t settle. Choose a firm that demonstrates goodwill and has experience in helping clients work toward their goals.
If you’re in the market for a new certified financial planner in Charleston, SC, don’t hesitate to contact our team at Good Life Financial Advisors of Mt. Pleasant. We hope to help you soon!
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.