Your advisor doesn’t call.
Your funds don’t perform.
You pay 2.5% in management fees for no service and no performance.
You love reading about financial news and looking at stocks. But it’s impossible for you to make any investment decisions when you are in mutual funds.
How much longer can you handle this situation?
For many individuals, investing in mutual funds through a financial advisor is the best thing they could do. Lack of time, lack of knowledge, lack of interest or lack of emotional control are four very good reasons to not manage your portfolio on your own. Don’t be influenced by the media telling you that MERs (management fees) are the worst plague of the 21st century. If you have no idea and no intention of managing your portfolio, mutual funds are still in your best interest.
I know nothing about cars. I like to drive mine and that’s about it. Every time there is something wrong with it, I call my mechanic and he bills me. He can practically tell me anything he wants as I have no clue what he is talking about. I’m definitely paying too much for my oil change and my tires when compared to doing them myself. But I have no interest, no time and no knowledge to do that myself. This is why it’s okay to pay sometimes.
But for those who want to take over their portfolio, there is a major obstacle in front of them; they don’t know how to move away from mutual funds and start investing by themselves. Calling your financial advisor to tell him that you want to sell his commission away your mutual funds may not be the best way to get clear information either ;-). This is why I thought of writing a quick guide to selling your mutual funds and start building your own portfolio.
Step#1 Check Your Mutual Fund Statement
The very first thing you must do is to look at your current holdings. Do you have mutual funds? Bonds? Individual stocks? Certificates of deposit? Etc. Bonds and individual stocks can be transferred in kind and then sold one by one through your own brokerage account. We will take a look at this step later on in the post. For now, we will concentrate on mutual funds. Make a list of your current holdings with the name of the fund, the code (if it’s written on your statement), the book value (how much you paid for them) and the market value (how much it’s currently worth).
Note: if you are looking to sell non-registered mutual funds (i.e. funds held outside your retirement account RRSP or TFSA for Canadians and 401(k) and Roth IRA for Americans) you must identify your tax impact (gain or loss).
Step#2 Call Your Financial Advisor
Now that you have all your information in hand, it’s time to call your financial advisor. Before you trigger any transaction, you must have a talk with him. There are 3 questions you must ask him:
#1: What fees are involved if I sell my mutual funds today?
#2: (if there are fees) Which portion of my mutual funds can I sell without any fees today? (usually 10% +)
#3 Can I transfer my mutual funds “in kind” to an online brokerage account? (meaning transferring your current holdings to an other account)
After asking these three questions, your advisor will probably ask you to meet with him and discuss your investment strategy. This is up to you to accept or not but he is more likely going to try to do some damage control. This totally makes sense as most people are not able to manage their money properly.
With regards to fees attached to your mutual funds upon selling, this varies greatly from one firm to another. Some companies do not have any selling (called back-end fees by advisors) fees. These are usually when the financial advisor is paid according to an hourly wages. Back-end fees are generated when the financial advisor is commission based. This ensures that the firm is being reimbursed (by the client) for the financial advisor commission.
These fees are usually regressive. The highest I’ve seen was 7%, reduced by 1% annually. So you might not be able to switch away from your mutual fund today but you will eventually be able to do so!
Step#3 Evaluate Your Options
After you have taken a serious look at your current holdings and you now know what fees are involved to each fund, it’s time to evaluate your options.
Option #1: Sell your mutual funds and transfer over to an online broker
This is a good option if you have no sales fees attached to your mutual funds or if the penalty is under 3%. Since you are going to save roughly 2% in management fees, any penalty under 3% worth thinking about it. We will cover the choice of an online broker in step #4.
Option #2: Sell some of your mutual funds and start investing with an online broker
If your penalties are too high, a good decision would be to sell only the free part of your mutual funds to start investing with your new broker right away. Each year, you can transfer roughly 10% of your holdings to your new brokerage account.
It will be a pain to manage 2 accounts at the same time but it’s better to start investing on your own as soon as you can instead of waiting 4-5 years to have all your money and finally start with your own investing strategy.
Option #3: Keep your mutual funds and start investing new money with an online broker
If your penalties are too high or your financial advisor is doing a good job at keeping you on board, another option is to stop investing with your financial advisor and open a new account on the side. You will be in a better position to compare your own performance with your mutual funds held in another account. This is a transition period that can last a few years. However, it’s better to make up your mind fast and pick your financial advisor or your own investing strategy. Racing two rabbits at the same time is never a good idea…
Step #4 Open an Online Brokerage Account
The choice of a new brokerage account is crucial as you don’t want to enter into another expensive investing strategy. Trading fees, investing tools and the trading platform should be at the center of your preoccupation. In order to help you make your choice, I researched the Top 8 Online Brokers (US brokers). You will see the strengths and weaknesses of each online.
For Canadians, I recommend QuestTrade since they are the cheapest on the market. They are not only the cheapest but they also allow US RRSP brokerage accounts which is a great plus. Finally, if you open your account with them, they currently offer $50 worth of trades for free.
Step #5 Transfer Your Account – Will You Pay Taxes?
At this stage, you understand your current holdings and the cost of selling your mutual funds. You have also made your choice and opened your online brokerage account. It’s now time to transfer your mutual funds to your new investment account!
Will you pay taxes? If your mutual funds are in a registered account (Roth IRA, 401(k), RRSP or TFSA), there are forms to complete in order to transfer your mutual funds with no tax consequences. You can either transfer them “in kind” or “in cash” depending on the information gathered in step #2. Both kinds of transfers are not taxable if you complete the form correctly. It is usually pretty user friendly but if you require any help, your new online broker will be very happy to help complete it. Since it means new money for them, they will facilitate the transfer and take care of everything for you if you wish. Therefore, do not hesitate to call them and fill out the form with a representative.
If your mutual funds are in a non-registered (or taxable) account, you will pay taxes on capital gains but you can also use your capital losses to offset it. This is why it’s important to calculate your potential gains or losses before making the transfer.
If you have any questions in regards to the transfer process, the best tip I can give you is to call your new online broker and ask them how they work. The “usual” process is quite simple: you complete the transfer form, you select “in kind” or “in cash” and the new broker sends it to your financial advisor. The rest of the process is being handled by the new broker and you eventually see the money in your account.
Step #6 Start Investing as a Free Investor!
Now that you have set yourself free from MERs, the real work starts! It’s fun to manage your own money but it could be very risky at the same time. For starters in your “new investor life” I suggest you establish an investing strategy. You can find a detailed example in my book sold on Amazon: Dividend Growth – Freedom Through Passive Income. This is probably the best book for someone who wants to start investing with a serious approach.