Not all unions are made to last, including your relationship with your financial advisor.
Even if your choice of advisor seemed sound initially, there are many reasons you might want to move on. Your needs may no longer align with your advisor’s specialty. You may be concerned about your portfolio’s chronic underperformance or frustrated by a lack of communication. Maybe your personalities simply don’t mesh.
While parting ways may feel uncomfortable, it is far more common than you might think, particularly after periods of high volatility in the market when investors seek more assurance from advisors and can come away dissatisfied.
Here are steps you can follow to make it a clean break:
Dig out your contract. You probably signed an engagement contract after hiring your advisor. Typically a contract spells out fee structures and the scope of service, but it may also include a termination policy, such as 30 days’ notice. It’s rare for advisors to charge any kind of termination fee but not unheard of. Before having the breakup conversation with your advisor, know what the terms are.
Inform your advisor—then put it in writing. Have a brief conversation with your advisor to explain why you want to part ways. “Some people are worried the advisor will try to talk them out of it, but it doesn’t have to be a lengthy conversation,” says Matt McGrath, managing partner at Evensky & Katz/Foldes Financial Wealth Management in Coral Gables, Fla. “A polite call is respectful and professional.”
Follow up with a formal letter or email to make the separation official, McGrath says. Putting your decision in writing may not be necessary, but it provides closure for your files and the advisor’s. “Advisors often like a record of when the termination was effective—even if it is an email,” he says.
Manage your investments. You may have to sell out of some investments when you leave your advisor. For example, if your assets are in your advisor’s proprietary investment product or commingled with other clients’ assets in a fund, you will have to transfer them out.
“It’s possible that leaving an advisor means a large turnover in investments, so you have to expect a tax bill,” McGrath says. “These are taxes you eventually would have paid on gains, but you will be accelerating them.”
If your plan is to switch to another advisor, it can help to sign on with the new pro before leaving your old one.
“A new advisor can help you with the process of transferring accounts,” says Michael Finke, professor of wealth management at the American College of Financial Services. “By having this help, you may be able to minimize taxes and avoid mistakes—like transferring an IRA and making it a taxable event.”
If you aren’t planning on hiring a new advisor, don’t feel rushed to move your assets, McGrath says. “Let your current person know to leave things as is until you are ready.”
Request a refund for overpaid fees. If you paid advisor fees in advance, check what period you’ve paid through. If you are leaving prior to the end of that period, you can request a prorated portion of the fees be returned, McGrath says. Advisors aren’t obligated to provide a refund, “but most advisors I know honor the separation as of the date we are notified,” he says, “and excess fees are returned.”
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