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Change for the Sake of Change - Or Not

In the midst of all the discussion about the best interests of investors and all the related opinions on the topic, another common issue popped up again recently. An investor was approached by an adviser who sought the investor’s business, asking the investor to move his assets over to the adviser for investment management and other services. The adviser touted the size and experience of his employer firm as well as its mission to serve its customers well in all their financial doings.

One of the first questions the adviser posed the investor was the makeup of the investment portfolio. Not surprisingly, the adviser felt that the securities he and his firm would recommend would be superior to the securities the investor currently owned. As part of the presentation made to the investor, the adviser talked about several investments highly recommended by the firm and noted that the firm’s policy was to liquidate the portfolios owned by new customers and to then reinvest them according to what they felt appropriate for the particular investor.

The investor queried my firm about this approach – before moving to this new adviser and following the advice – wanting to know what the advantages and disadvantages of the move might be. The main investment accounts in the portfolio were two brokerage accounts invested in a variety of mutual funds and stocks as well as a third qualified retirement plan account which was somewhat smaller in size and value. The clear disadvantage to the move was the intention of the adviser to liquidate the current holdings without, apparently, any consideration for the income tax consequences of the action. If there was to be a significant tax burden on liquidation, likely given the low basis of many of the holdings, then moving to the new portfolio of recommended securities might be a losing strategy even if the recommended holdings performed better than the current ones.

Our advice was to evaluate the tax consequences of a total liquidation as a first step and then request that the adviser address how his firm would solve the income tax issues in a thoughtful manner. If there was no flexibility in a move to this adviser and liquidation would occur in any event, then the perceived and anticipated value of the move would be reviewed against the tax cost and a determination made whether to proceed with this adviser and obtain a more useful plan to address the taxes or to decline the offer and either stay with the current adviser or seek a new, third party adviser with better advice.

This investor decided not to make the move since the costs were too high in the near term and the adviser had no flexibility in his recommendations that might serve the investor’s best interests.


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