Moving your entire block of client accounts from one custodian to another could become an overwhelming task unless you plan effectively for the transition.
The services and support provided by custodial firms impact almost every aspect of a Registered Investment Advisor's business. Adding a new custodian for future accounts is relatively easy as your staff has time to learn the new custodian's processes and procedures gradually as new accounts are added. Replacing one custodian with another is much more involved, even for a small firm.
We'll skip the reasons for a wholesale change in custodians, but every advisor would agree that such a decision is never made lightly. Once the decision to move has been made, there are three important steps to insure a smooth transition: Communicating the change, establishing new accounts, and finally the transfer of assets. For a smooth transition, it all comes down to timing.
Communicating the Change
Send a letter to all clients the month before you anticipate having the application packages ready and explain your reasons for making the change and outline the process (establish new accounts, transfer assets in-kind, close old accounts). In the letter:
A week before the packages are ready, call or e-mail all clients and ask if they want overnight delivery of their forms or to make an appointment. Be sure to ask if they want the delivery carrier to require a signature or leave in the doorway. Remember that these forms contain enough information to really cause an identity theft problem if they fall into the wrong hands.
When your packages are ready, write a brief instruction memo explaining the purpose of each form and whether the client needs to attach anything such as a copy of a trust agreement or a voided check.
Once the new accounts have been established and verified, send an e-mail reminding clients of the blackout period and then deliver all the ACATs to the new custodian at one time. If you are holding back a few accounts to avoid fees from your current custodian, remember to hold back those ACATs.
Begin with the date that you want all client assets to be available for trading on the new custodian's platform. You will work backward to determine implementation dates for the other tasks. There are several important issues to consider in setting this date:
Next Billing Date: You will want to be able to complete your next billing on one platform so if you bill at the beginning of a month or a quarter, you'll want assets to transfer after the fees are collected or well before the next billing date.
Next Performance Report Date: Calculating performance and preparing reports is also easier when only one set of accounts needs to be considered. If assets are moved immediately after, or long before, a performance reporting period, it will be relatively easy to append performance history to the new accounts to preserve your inception to date returns.
Monthly Account Withdrawals: Recurring monthly withdrawals usually take place at the middle and the end of the month, so transferring assets in the first week of the month will allow time for the next month's withdrawals to be set up. A good idea is to double up on the withdrawals the month prior to the transfer so the new custodian has plenty of time to set up the automatic withdrawals. Also prepare your clients for a "black-out" period where they likely will not have access to funds while the ACATs are being processed.
Time Needed to Prepare New Account Forms: Don't underestimate this beast. Even for a small firm with less than 300 accounts and significant help from our new custodian, it took us over two months just to have the new account packages ready for signature.
Time Needed to Collect Client Signatures: As the new account applications are being prepared for signatures, determine which clients can deal effectively with a stack of forms and little sticky flags on their own, and which will need an appointment to sign with you in person.
Brian Jones of CJM Wealth Advisors in Fairfax, Va., recently changed custodians and warned us early that 80%-90% of their clients had signed applications within a couple of weeks of having them signature-ready. They spent almost six months chasing down the rest.
Most custodians are more than willing to pay for overnight delivery and return of the application package and for those clients who were willing to handle this by mail, it was very quick. Many other clients wanted face-to-face time to discuss the change and sign in person.
After six weeks of intensive scheduling and following up, we only have three outstanding.
Your Current Custodian's Reaction: This would be a good time to reread the actual client agreement your current custodian provides to every new account holder. Many custodians reserve the right to charge a "termination" fee for accounts. If so, you will need to prepare your clients for this cost unless your firm, or even better, your new custodian will reimburse this cost to your transferring accounts.
Some custodial firms reserve the right to impose a fee on the advisor if their AUM drops below some threshold. Know what this threshold is and plan to hold back a large account or two until all the other accounts have transferred successfully to avoid this fee. Reread your contract with your current custodian for any mandatory notice periods or other little surprises that could gum up the process.
Establishing New Accounts
The bad news about establishing new accounts is that it forces you to create and verify new applications for every account and to contact every client. Even with assistance from the new custodian, this is a tedious and time-consuming task. Your current custodian may be able to provide a data feed with much of the information needed to open new accounts. Many custodians can process a spreadsheet where you compile all the information and they provide signature-ready documents. The least attractive option is that you or your staff manually complete all new paperwork for every account.
The good news about establishing new accounts is that it forces you to update all account information and to contact every client. Managed well, and with a compelling reason for the change, clients will likely view this as a proactive service. In the process, you will confirm all contact information, employer information, and beneficiary designations. If client check writing on investment portfolios has been a problem in the past, this transition provides a chance to eliminate the checkbook in favor of standing instructions to transfer funds between the new custodian and their bank account of choice via ACH.
As the new accounts are established, don't forget to authorize online access for each client. They will want to check their accounts frequently during this transition period.
It is important to have the complete transition happen within one monthly statement cycle. When the monthly statement arrives, clients will want to see that all the money is in one place. There will always be some post ACAT interest deposits and the like that will require sweeping, but you should aim to have the entire transfer show on one month's statements between the two custodians.
One note: Unless you maintain a relationship with your current custodian, you will not have online access to 2010 1099s. Be sure to remind your clients to watch for them in the mail and hold on to them next February.