Strategies for avoiding fees when leaving your brokerage
— -- Q: I'm sick of my online brokerage firm and its fees, and want to switch. How can one "quit their broker" without getting hit with fees?
A: Most of the uproar over fees charged by financial institutions has been targeted toward banks. Charges for using debit cards, for instance, have especially raised some consumers' ire.
But brokerages, too, hit investors with fees they might not even be aware of.
Many investors make the mistake of only looking at the trading commissions brokerages charge. But, most brokerages also charge a bevy of other fees ranging from getting paper statements to closing an account. Many brokerages will charge you $50 or more to transfer your investment to another brokerage.
And that's why if you're fed up with your brokerage, you'll need to be careful how you exit less you trip over some fee tripwires. There are a few strategies to leaving a brokerage firm without incurring big fees including:
•Threaten to leave first. You've probably heard of people threatening their utility companies with leaving to get a better deal elsewhere. Sometimes the utilities will cut the rates to keep the customer. The same thing can work with online brokerage firms. When you call a brokerage and say you're leaving, some will forward you to a customer retention department that will try to talk you out of it and may offer cutting some fees.
•Think about selling out. If your portfolio is filled with investments you're losing money on, that makes it easier to escape a brokerage. You can sell all the investments and incur the capital loss for tax time. Most brokerages will then allow you, for free, to electronically transmit the funds to a checking account. That way, you can empty the account without worrying about transfer fees.
Be careful, though. This trick only works if you're losing money on the investments. If you're up on them, and have capital gains, you could incur a hefty bill at tax time. Also, remember if you sell, you'll need to wait at least 30 days before buying the investments back in your new brokerage account.
•Check with the brokerage you're moving to. If you're hit with fees on the way out of a brokerage, all is not lost. Many brokerages, even ones that don't advertise this, may reimburse you any fees you incurred while moving your account. Some other brokerages might also pay you a chunk of money for being a new customer, and you can apply that cash to paying for your closing costs.
Just be aware there can be some hidden downsides to switching. For one, if you have many investments that were bought years ago through the older brokerage, if you switch, it'll be up to you to track your cost basis on those investments. The new brokerage isn't required to do this for you. This can be a huge headache at tax time. You can consider using software like Quicken to help you track cost basis on investments even if you move to a different brokerage firm.
But don't feel trapped. You can move your money, and you should move your money, if you're getting hit by fees that are eroding your portfolio.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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