Transferring money to discount brokerages

As painful as it is, sometimes you need to cut your losses, pay the deferred sales charges and move to a new brokerage.

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Question

Our mutual funds have not increased in value hardly at all over the last 15 years. We have finally decided to transfer the money to our discount brokerage account and manage it ourselves. My question is: Should we transfer all of the funds at once? We are concerned with transfer fees from the fund company to our discount brokerage account and more losses in terms of deferred service charges. We have numerous mutual funds, which adds to the confusion.

Answer

No return in 15 years? Ouch. It’s no wonder that you’re looking at making a big change. Global stock markets have had tremendous volatility over that period of time, but they are generally higher than they were back then. The S&P 500, for example, is up 63% since 1997 which is a much better increase than the ‘hardly at all’ you received.

The simple answer on whether to go “all at once” is yes. As painful as it is, you don’t really want the stress of moving day to last for three months. Here are some other things to think about:

Don’t worry too much about transfer fees: Transfer fees may apply to move your portfolio over to a discount broker but they won’t likely be more than $100. Don’t delay your plan because of these fees—instead ask your discount broker if they will give you a rebate to cover them. Representatives often have discretion over these types of fees so be your most charming self when you meet with them.

Transfer your mutual finds in kind: For simplicity, I would recommend that you transfer your funds all at once, and if the discount broker offers the funds that you currently hold, you might transfer them over “in kind.” This allows you to decide later which you want to sell and when. If the funds are propriety to your current firm, or they belong to an “adviser” series versus an “investors” series that may not be possible—you will have to sell them as you move to the discount broker. A quick phone call will sort that out what’s what.

Minimize the cost of deferred sales charges: Before you tell your current firm you’re leaving, ask them to calculate the cost of the deferred sales charges on each fund you own. If you bought the funds recently, the DSC will be at its highest and if you bought them years ago the DSC may have even worked itself out already. Here are some ways to minimize the cost.

  • Free: Many funds allow you to sell 10% of your holdings “free” every year.
  • Matured: In some cases you can also sell the fully matured component without charge. How much of your portfolio does this apply to?
  • Family: Consider whether it makes sense to transfer your fund to another fund within the same family as you wait out the DSC. For example if you own a small, high cost, underperforming sector fund you might transfer it into a lower cost, better performing Canadian equity fund.
  • Benchmark: I did a non-scientific poll amongst advisers for a rule of thumb on when to sell and the consensus was that if the DSC was 3% or less than it makes sense to sell. Higher than that and you should consider the fund performance to see how bad it really is.

Cut your losses and move on: I have illustrated a few different ways to minimize the hit of deferred sales charges. But from the tone of your question, it sounds like you are more than ready to move on. It may be time for you to cut your losses, sell your underperforming funds and kick-start your new plan. My one caution is to avoid getting caught out of the market—unless you’re an expert in market timing (as if there such a thing). For example, you want to avoid selling your mutual funds in market weakness, sitting on cash for three months, and then buying back into the market after it has already rebounded, locking in your losses.

Create a simple, low cost portfolio: It is a big project to move out of mutual funds and into a portfolio that you manage yourself. MoneySense has a ton of resources on how to create a simple, low-cost portfolio so do a bit more reading to figure out your plan.

Good luck. May the next 15 years deliver you a more enviable return.

ask@moneysense.ca

5 comments on “Transferring money to discount brokerages

  1. Good for you. Get out of those rotten mutual funds. I took the short term pain of some losses about 10 years ago, it hurt but life goes on. Best decision I ever made.
    Doing it yourself is rewarding in more ways than one.

    Reply

  2. Using Indices as benchmarks can be an easy 'reference tool', but deceiving for individual investors. Advisor.ca recently commented on this and highlighting the findings of DALBAR;
    "Here are some surprising facts (for a 20 year period):
    – The S&P 500 Index had an annualized return of 9.14% for the period ending December 31, 2010.
    – The average equity investor only made 3.83%, ignoring taxes and inflation, in the same time period."
    From DALBAR's most recent study, "After conducting this year's Quantitative Analysis of Investor Behavior (QAIB), Dalbar found that in 2011, the average equity fund investor underperformed the S&P 500 by 7.85%."

    Interesting, as most individual investors (DIY and those using Advisors) use professional management and appear to still under-perform the benchmark indices.

    If it is any consolation, pension plans have not faired much better.

    Reply

  3. I am thinking of tranferring all my savings ( RRSP, TFSA and other savings to REIT which pays 8% annually for seven years. I am retired. My plan is worth below what it was worth in 2008.
    They tell me they will return my principal at the end of the term plus give me pay me monthly 8% of the amount. Any comments?

    Reply

  4. I retired about 18 months ago and invested my pension payout with Investors Group. Our 'financial consultant' promised us a 5 or 6% annual return, even though I thought he was being too optimistic. This all happened just before the last market meltdown (2011). I told him that I had a strong feeling that the stock market was about to crash but he assured me he had spoken to his top 'experts' in head office and NOW was the time to invest, otherwise I would miss out on some big gains; besides, I should trust his his advice since I was paying him for his 'professional' services. Well, that was one of the biggest mistakes I've ever made! Within 2 months I had lost over $60,000 by letting him invest my hard-earned money!

    Reply

  5. I filed a complaint with their compliance department but they sided with my consultant (they also work for Investors Group). He is still under investigation by the MFDA. I also found out that he had stuck almost all of my money in DSC funds and that if I want to transfer my remaining money out to another institution, I will have the pleasure of paying Investors Group a 5.5% penalty on the balance of my portfolio. Also note that I did not receive a prospectus until AFTER I was fully invested and when I asked for a copy of the booklet (probably a prospectus) that my consultant was referencing before I invested, he told me it was proprietary information.
    Is Investors Group legit or just some kind of a huge pyramid scheme? I am seriously nervous about this.
    Is it better for me to pay the DSC and get out of there, rather than wait out the penalty? (BTW – their mtutal funds have high MERs and lacklustre returns)
    Thanks

    Reply

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