Firing an Advisor

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kdmusic
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Firing an Advisor

Post by kdmusic »

A friend of mine needs to fire her advisor. She came to the conclusion herself at dinner this evening as we talked. What is beyond me, though is how she should handle the tax consequences etc. She is invested almost entirely in taxable, and in individual stocks at this point. The easy part is the firing. What I'm wondering about, and what is slightly beyond my ken, is how to go about selling the stocks and getting into a sensibly diversified portfolio in a tax advantaged space (she is not currently maxing roth or 403b), while minimizing tax consequences.

What questions do I need to ask her, so that the collective intelligence extant here can properly engage? Note that this is not a portfolio construction question. _That_ I can help her with, once the taxable investments are out of the advisors hands.

thanks,

Keith
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grabiner
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Re: Firing an Advisor

Post by grabiner »

Transfer the stocks to a discount brokerage, so that they will be less expensive to sell.

Find the tax basis of every stock.

Sell any stock which is more than 5% of your portfolio to get it down to 5%, independent of tax consequences; having too much in any one stock is an unnecessary risk.

Sell all stocks which have a tax loss, and all stocks which have a long-term capital gain. If this still leaves a net loss, sell stocks with a short-term capital gain up to the amount of the loss; there will be no net tax cost.

If this is enough to max out the Roth and 403(b) for 2013, wait for gains to become long-term (holding period of more than 12 months) before selling any other stocks. Note that Roth contributions for 2013 can be made up to April 15, 2014, so if there is a stock with a big short-term gain which was bought in March 2013, you can wait to sell it until March 2014 and still fund the Roth with it.

If you still hold some of the old advisor's stocks, count them as stocks in your overall asset allocation, presumably large-cap US stocks.
Last edited by grabiner on Sun Nov 17, 2013 11:11 pm, edited 1 time in total.
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MikeRes
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Re: Firing an Advisor

Post by MikeRes »

grabiner wrote:wait for gains to become long-term (holding period of at least one month) before selling any other stocks.
I'm pretty sure you meant to say "holding period of at least 12 months".
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grabiner
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Re: Firing an Advisor

Post by grabiner »

MikeRes wrote:
grabiner wrote:wait for gains to become long-term (holding period of at least one month) before selling any other stocks.
I'm pretty sure you meant to say "holding period of at least 12 months".
Fixed. (It's actually "more than 12 months"; if you buy on March 1 and sell on March 1 of the next year, that is still short-term.)
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kdmusic
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Re: Firing an Advisor

Post by kdmusic »

Thanks very much!
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kdmusic
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Re: Firing an Advisor

Post by kdmusic »

And discount brokerage-wise, Schwab ok, or . . .?

Keith
SteveKL
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Re: Firing an Advisor

Post by SteveKL »

kdmusic wrote:And discount brokerage-wise, Schwab ok, or . . .?
I think the idea is to A) get the holdings into an account which the now-fired or soon-to-be-fired advisor does not have trading authority on; and B) put the holdings somewhere that the individual trading (selling) fees are reasonable so your friend doesn't get socked with a lot of expensive transaction costs.

If the replacement holdings--whatever your friend is going to buy with the proceeds from the stock sales--are going to consist of low-cost index funds or ETFs, it might make sense to bring the account into a Fidelity or Vanguard brokerage account, and liquidate from there. Depending on the size of the account, there could even be an opportunity for reduced equity trades, plus assistance getting the account switched over.
LifeIsGood
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Re: Firing an Advisor

Post by LifeIsGood »

You may want to call some of the larger discount brokers (Schwab, Ameritrade, Fidelity, Etrade) and see what cash bonuses they are offering for new accounts. I just scored $1,000 for moving a $250K IRA to Etrade. Many offer a generous number of free trades during the first 60 days as well.
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Re: Firing an Advisor

Post by ddb »

grabiner wrote:Transfer the stocks to a discount brokerage, so that they will be less expensive to sell.

Find the tax basis of every stock.

Sell any stock which is more than 5% of your portfolio to get it down to 5%, independent of tax consequences; having too much in any one stock is an unnecessary risk.

Sell all stocks which have a tax loss, and all stocks which have a long-term capital gain. If this still leaves a net loss, sell stocks with a short-term capital gain up to the amount of the loss; there will be no net tax cost.

If this is enough to max out the Roth and 403(b) for 2013, wait for gains to become long-term (holding period of more than 12 months) before selling any other stocks. Note that Roth contributions for 2013 can be made up to April 15, 2014, so if there is a stock with a big short-term gain which was bought in March 2013, you can wait to sell it until March 2014 and still fund the Roth with it.

If you still hold some of the old advisor's stocks, count them as stocks in your overall asset allocation, presumably large-cap US stocks.
Please don't follow the above "rules-of-thumb" advice blindly. Each situation is different, and the best strategy to divest individual stocks (assuming this is even a sensible idea) will vary from investor to investor.

Assuming your friend wishes to invest on a DIY basis, then I do agree that transferring to a low-transaction-cost brokerage firm and making sure cost basis is on file for all holdings is a good first step. Beyond that...would need to provide a LOT more information before she could expect any useful advice.

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Re: Firing an Advisor

Post by JW-Retired »

Agree with ddb. Before acting on anything yet you/she should tell us the overall magnitude of this thing, and other tiny little details. For example, is this stock portfolio a few thousand dollars or a few hundred thousand, or millions? Are there just a handful of stocks or a big number? Does the "advisor" have discretionary authority for picking the stocks for her or does she do it? Does he get an AUM fee for management or is he just a broker? What's her tax bracket?

Why has your friend been investing in taxable account individual stocks when she is not maxing out her 403b?
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Re: Firing an Advisor

Post by abuss368 »

grabiner wrote:Transfer the stocks to a discount brokerage, so that they will be less expensive to sell.

Find the tax basis of every stock.
We did this over 15 years ago. It was difficult and the thought of being on your own. However we quickly got adjusted to it and never looked back. We then sold all of our individual stock holdings and went with an all index fund approach. No second guessing for us. We are thankful and plan to stay the course.
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robertalpert
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Re: Firing an Advisor

Post by robertalpert »

grabiner wrote:Transfer the stocks to a discount brokerage, so that they will be less expensive to sell.

Find the tax basis of every stock.

Sell any stock which is more than 5% of your portfolio to get it down to 5%, independent of tax consequences; having too much in any one stock is an unnecessary risk.

Sell all stocks which have a tax loss, and all stocks which have a long-term capital gain. If this still leaves a net loss, sell stocks with a short-term capital gain up to the amount of the loss; there will be no net tax cost.

If this is enough to max out the Roth and 403(b) for 2013, wait for gains to become long-term (holding period of more than 12 months) before selling any other stocks. Note that Roth contributions for 2013 can be made up to April 15, 2014, so if there is a stock with a big short-term gain which was bought in March 2013, you can wait to sell it until March 2014 and still fund the Roth with it.

If you still hold some of the old advisor's stocks, count them as stocks in your overall asset allocation, presumably large-cap US stocks.

Agree --- but change the order.

First and foremost: must be find the tax basis for every stock

Do this prior to firing / leaving your current advisor. The advisor may be able to help you obtain the tax basis (while you are still there). Transferring out prior to having tax basis in hand spells major trouble at tax time. You may need to have your annual statement from fired advisor from year one to present (to account for reinvested dividends).

Alternatively, you could sell literally everything in taxable account first --- and then transfer taxable account in cash to new broker. That way, previous advisor becomes responsible for producing basis statement at tax time. Even if it cost somewhat more in transaction fees, the benefit in basis reporting may be worth the cost.
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Re: Firing an Advisor

Post by placeholder »

robertalpert wrote:Alternatively, you could sell literally everything in taxable account first --- and then transfer taxable account in cash to new broker. That way, previous advisor becomes responsible for producing basis statement at tax time.
Only if the shares were covered meaning bought within the last few years.
Calm Man
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Re: Firing an Advisor

Post by Calm Man »

I would have your friend make the post and get the information as this can end badly if you are the new adviser.
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kdmusic
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Re: Firing an Advisor

Post by kdmusic »

Thanks for all the helpful replies.

Household salary is in the very low six figures. (married filing jointly) CA is the state.
Inherited portfolio is also very low six figures.
advisor is AUM. don't know the percentage.
don't know who picked the stocks, or how many there are -- I will find out.

Not planning on becoming the new advisor -- appreciate the caveat.

kdm
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Re: Firing an Advisor

Post by psteinx »

If this is an inherited portfolio (and the positions were established before the inheritance occurred), then the basis may be different (i.e. step up basis at death - I don't know the details on this. [EDIT - donall's post below seems to have slightly better information on this.])

Given that the stock market is way up since 2009 and even just for 2013 alone, it is possible that there are substantial embedded capital gains. If so, and especially if the stocks are reasonable (i.e. an assortment of large caps, rather than shots in the dark on internet companies or silver miners or whatever), then it may make sense to hold onto the positions.

In general, there are a lot of questions in determining what is the best course of action. Some of these involve the interest and knowledge level of the account owner, and their comfort level with various alternatives.
Last edited by psteinx on Wed Nov 20, 2013 1:20 am, edited 1 time in total.
hq38sq43
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Re: Firing an Advisor

Post by hq38sq43 »

"Firing" is such a harsh term. Why not "leaving" an advisor? Unless, of course, you believe the advisor has failed to meet reasonable performance or ethics standards, in which case "firing" would be appropriate. As a compromise, perhaps "dismissing" should be considered.
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Re: Firing an Advisor

Post by donall »

You need to know the basis of the stock to determine profit or loss. If these stocks are inherited, then the basis is the value of the stock at time of death or 6 months afterward. You can choose, but it must be consistent with all inherited.
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Re: Firing an Advisor

Post by dad2000 »

I agree with determining the cost basis ASAP.

Because we're in November, I wouldn't procrastinate because it may end up being tax advantageous to split the sales between 2013 and 2014.
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