The Cost of Changing Your Financial Advisor

A recent survey on financial advisors found that approximately 26% of Americans say their most reliable source of managing finances is their financial advisor. The survey concludes that the value of professional advice has increased in the last year, possibly due to the pandemic which also created financial turmoil across the globe.

People need trustworthy advice in such unpredictable times; and, they turn to experts like financial advisors/firms. A good financial advisor can help ensure minimum risks and maximum returns while creating strategies to take advantage of market opportunities to add to client corpus when things are well.

The Harris Poll study also saw a 10% increase in the number of respondents who said they are currently working with a financial advisor compared to the numbers before the pandemic. An additional 15% of respondents did not have an advisor before the pandemic but stated that they plan to work with one in the future. If you manage your finances on your own and are unsure if you’re on the right track, consult a financial advisor who can develop a suitable financial strategy for you.

What are some benefits of working with a financial advisor?

1. Chalking out an investment plan according to the needs and resources of the clients

A financial advisor has in-depth knowledge about different investment products, different schemes, and benefits. Thus, the advisor can build an investment plan keeping in mind various client-specific factors like age, income, and the client’s financial goals. Financial advisors help you set SMART goals – Specific, Measurable, Achievable, Realistic, and Time-bound.

2. Financial expertise

One may plan to manage his/her wealth on his own, but he/she cannot match the expertise that a financial advisor has; thus having a financial advisor would enable better financial decisions in addition to lowering the anxiety and effort of the investor.

3. Regular assessment and monitoring of your portfolio

A financial advisor helps you monitor and reassess the investment performance as you may not always have the time to do so. Continuous monitoring of one’s portfolio is important to ensure that one’s investments are in line with their financial goals.

4.  Periodic portfolio review and re-balancing

Review and reallocations are required in an investment portfolio as per the dynamic market changes and investor needs. In such situations, an advisor would suggest revisions based on his expertise and market tracking.

The role of a financial advisor is similar to the role of a fitness coach – both carry expertise, both ensure sound planning – whether financial or physical and ensure the effective progress of the plan for the long term.

When to consider changing your financial advisor

According to the Spectrem study, approximately 60% of investors switch advisors over the course of their lives. Among the oldest investors surveyed for the study, those 69 years of age and older, only 38% have never switched advisors.

There are various reasons due to which investors change their financial advisors. The most common reason is poor communication. Investors expect their financial advisors to be in regular contact with them, to keep in the loop about new opportunities in the market, and be informed of the planning and process. Poor communication could also lead to poor investment behavior, such as entering and exiting the market at the will of the advisor, adding to transactional charges for the client. Such a gap might also give a poor impression about the financial advisor, and the client might feel that the advisor is ‘asleep at the wheel.’

The reason most often stated (24%) among investors who have switched advisors was that the advisor was not proactive in contacting the investor when there was information the investor could use.

Next on the list was investment performance related to the stock market as a whole (22%) and advisors who did not provide sound advice and ideas (23%).

Other deal breakers are – low performance of the portfolio compared to the fees charged by the advisor/firm, advisors being unable to understand the goals and needs of their clients, lack of attention, use of technical jargon, lack of transparency amongst others.

Another key result of the research was that investors who are self-educated and up to date with market knowledge are more likely to change their advisors than those who do not have such knowledge.

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What is the cost of switching your financial advisor?

If, after considering all the points stated above, the investor decides to change his/her advisor, there are some unavoidable costs that would have to be incurred.

The following points are the costs that an investor should be aware of while switching to a new advisor to undertake steps that might help mitigate some costs:

1. Taxes

Often, when one decides on a new financial advisor or an investment firm, there might be changes in the investor’s portfolio size and allocation/shareholdings. Such changes might result in capital gains changes, and therefore, capital gains taxes. In addition to capital gains tax, there might be costs such as withdrawal penalties and other specific taxes that the investor has to bear in order to change to a new advisor.

Investors who are a part of the top income tax bracket could incur a huge tax expense if they move a huge amount(portfolio) to a new firm.

Suppose your previous advisor was managing taxes via a custodian such as Schwab or Fidelity. In that case, you might not owe any taxes at all. Thus, understanding the tax implications that you may face when you change your financial advisor is necessary to minimize such costs if possible.

2. The Financial Advisor’s Fees

The best way to make sure you’re getting unbiased financial advice, in your best interest, is to hire a fee-based advisor and not a commission-based one. Although little expensive, fee-based advisors have a greater incentive to grow their clients’ assets and thus have the capacity to provide quality service.

Another thing to remember, in order to avoid unnecessary costs is upfront loads. Upfront loads are commission and sales charges that investment managers/ funds charge. Your new financial advisor could develop a new investment strategy for you, which could involve liquidating sizable portions of your previous portfolio and shifting funds from one account to another. Such activities will lead to increased transaction fees.

Some investment arrangements incorporate termination charges. One should check if such a fee is included in their agreement and the cost of the same. Likewise, numerous advisors are fee-based, and one should check if such fees can be customized.

3. Other charges

Various financial products incur charges when they are sold. For instance, variable annuities carry surrender charges if they are sold before a predetermined time. Although surrender charges decline with every passing year, the rate starts at 10%; thus can still be a substantial amount.

Mutual funds also carry backend load, i.e., a percentage of fund value that needs to be paid when the mutual fund is sold. For example, if you have a mutual fund worth $100,000 and it comes with a 5% backload, the investor will owe $5,000 after selling the mutual fund. This backend fee is on top of capital gains tax and the transaction fee, if any.

Thus, your financial advisor should be able to provide a detailed explanation as to why you are better off selling these investments.

Things to do before changing your financial advisor

1. Keep your documents in order

According to rules, your previous advisor should transfer all the historical records of your securities to your new advisor. Even though advisors need to transfer this information, it’s better to retrieve a copy of the transaction history before you ask for the transfer. This way, you’ll have the records on file in case something goes wrong with the transfer.

Usually, investment firms do give their clients the full transaction history and records of their portfolios, which are password protected on their websites. While you are transferring taxable investment accounts, it’s especially important to keep records of the cost basis of those securities.

The cost basis is the value of the amount you paid to purchase securities adjusted for stock splits, dividends, and return-of-capital distributions.

It is wise to compile all the data mentioned above for your own records to prevent any problems and to also be ready with information that comes in handy when you file your income taxes.

2. Check whether any of your investments are proprietary

You might need to sell some investments offered by the previous advisory firm which were proprietary in nature (these investments would have been offered only through that particular firm).

This can be a positive change as you can start afresh with the new advisor’s investment strategy.


The saying ‘change is not easy, but it is necessary’ is very much applicable to changing one’s financial advisor. The change might incur costs, but it might be a necessary step that one should take in order to remain financially sound. Investors should make efforts to be aware and alert about the market environment, costs of changing investment advisors, and ways to minimize costs and ensure a hassle-free engagement with the new advisor.

Dissatisfied with your current financial advisor? Use Paladin Registry’s free advisor match tool to get matched with 1-3 qualified financial fiduciaries who may be better suited to help you with your specific financial requirements

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