Preserving value: How to eliminate unnecessary brokerage fees in an estate account
As an attorney or fiduciary overseeing the transfer of assets in an estate account, one of your mandates is to protect the value of the account’s investments. Unfortunately, there are a number of insidious costs and fees that can erode an account’s value during settlement.
One of these costs – brokerage fees charged by the investment arms of large banks, which can be excessive and often are unnecessary – can take a large bite. Fortunately, once you know about these fees you’ll be able to avoid them, enabling you to preserve the account’s value and fulfill your role more responsibly.
Before we get started, let’s take a look at these fees and what can happen to an investment account held at a large bank when the account holder dies.
Full-service brokers charge full-service fees
When it comes to fees, there’s an important distinction between investment advisory accounts and full-service brokerage accounts. When a broker executes a trade on your behalf it charges a commission. At brokerages affiliated with a large bank, the commission to trade a single position may range from 1 percent to 2 percent. In other words, a $100,000 investment traded by a bank brokerage may incur a transaction fee of between $1,000 and $2,000.
Now, let’s say you’re looking to liquidate ten $100,000 positions. In this instance you might find yourself paying the brokerage a total of $10,000 to $20,000 to liquidate $1 million-worth of securities. That’s a lot of money – too much, in our opinion.
By contrast, investment advisory accounts – also available at large banks – typically charge an annual fee, a percentage of the assets managed, deducted from the account each month. If you have $1 million in an investment advisory account being charged, say, a 1.5-percent annual fee, you’re paying about $1,250 per month to the advisor. Consequently, remember this hypothetical cost difference: $10,000 (full-service brokerage) vs. $1,250 (investment advisory).
Why is a full-service brokerage prepared to charge you anywhere from $10,000 to $20,000 to sell $1 million of estate-account investments? The answer here, like so much of economics, is based on incentives.
Following an account holder’s death, it’s not uncommon for an estate’s new administrator to transfer assets out of the account and away from the legacy brokerage. In fact, banks have come to anticipate this. Consequently, a bank brokerage has an incentive to recommend liquidating positions prior to closing the account forever.
One, it can enable the brokerage to earn full commissions on these trades and, two, it can relieve the broker of the work required to evaluate the merits of each, individual investment position, and the bureaucratic red tape required to retitle the account.
What happens to an advisory account when the original owner dies
So, what happens at a bank brokerage when an investment account holder dies? After receiving an official death notice, the bank ceases all trading activity and often converts the investment advisory account into a full-service brokerage account . . . automatically. The bank’s registered investment advisor now no longer serves in a fiduciary role. Instead, the bank begins serving as custodian as it prepares to transfer or distribute assets to beneficiaries.
Accordingly, the bank stops assessing its monthly advisory fee. However, the bank now anticipates that the new account holder likely will transfer assets, which can present the opportunity for larger brokerage commissions. The bank brokerage – now serving as custodian rather than advisor – has an incentive to support liquidating the account’s holdings.
With the proliferation of online trading, many of us no longer have experience with full-service brokerages or their trading practices. When someone dies, however, we can get a crash course. In the trauma and confusion that can surround a death, a bank’s brokerage understands that a new administrator may not have the time or inclination to explore other, less-expensive options.
Here’s the secret many account administrators don’t know: there are three simple ways to avoid paying large custodial trading commissions. Unfortunately, those tasked with overseeing an estate’s investment account often don’t bother to explore one of these solutions, even though doing so could save the account money.
Solution 1: re-enroll as an investment advisory account
Leave the investments in the bank custodial account until two weeks before you plan to sell and distribute assets. Allowing the bank two weeks to process the change, convert from a custodial account back into an investment advisory account. This saves the account from having to pay the large commissions.
However, now the account will be assessed an annual advisory fee – often 1 to 2 percent (anything above 1 percent is expensive) – prorated according to the number of months or days that the account is open. Time it well and you may end up paying just a single month’s advisory fee . . . or less.
Depending on the types of investments held in the estate account, you can liquidate all the stocks, bonds and funds you want in under a month, and your cost may not be any higher than a single month’s fee – in this case, $1,250. When you’re finished selling, however, just don’t forget to close the account or terminate the agreement. If you don’t expect to distribute funds immediately, you may wish to instruct your advisor to invest the assets in a U.S. Treasury bill prior to termination.
Solution 2: transfer the account to a discount brokerage
Option two is to transfer the securities to an online discount brokerage. Then for a small fee – just $20 or $30 per position (or less) – you trade the assets yourself. It’s more work, as you’ll be responsible for establishing a new account and transferring assets to it, as well as evaluating positions and executing the trades.
This takes time and effort. But for many fiduciaries the savings is worth the extra work. In this case, you may pay just $200 or $300, in total, to liquidate ten $100,000 positions. We’re pretty certain you’ll agree, this is more attractive than paying a bank custodian $10,000 to do it for you.
If you’re an inexperienced online trader and are unfamiliar with market or limit orders, for example, this can take a great deal of time and energy (not to mention cause stress). You’ll spend a lot of time on the phone dealing with back-office customer service. You won’t enjoy the benefit of a single customer-service representative who takes ownership of the relationship and assists you through the process.
You’ll likely deal with a different person each time you call, may spend lots of time on hold, and may get bounced between departments in a call-center carousel. Transferring to an online brokerage is a good do-it-yourself solution – if you’re the sort who enjoys taking notes and keeping detailed records.
Solution 3: hire an advisor that specializes in estate accounts
A third option is to retain the services of an investment advisor that specializes in handling estate assets. Specialty firms like Court Investment Services advise attorneys and others navigating the complexities of court-regulated oversight.
While other investment firms may not fully understand the nuances associated with estate transfers, and may even lack the resources or willingness to devote resources to managing accounts with complex or restrictive mandates, CIS exists for this reason primarily.
CIS helps attorneys and administrators
Court Investment Services charges all estate accounts the same, flat 1-percent annualized advisory fee. We charge no commissions and we serve in a fiduciary capacity for the life of the relationship. Additionally, we absorb all trading fees and many other internal costs incurred during account transfer and liquidation. You’ll receive monthly statements, online account access, investor updates, performance reporting, and more.
We invest excess estate cash in securities that tend to be safer, more tax efficient, and higher yielding than a local bank CD, and there’s no penalty for early withdrawal.
Finally, because we’re independent, we offer unbiased advice based on what’s best for the account and your unique situation. We’ll save you the hassle of administering the account, and instill the confidence that comes with a dedicated guide who helps navigate the paperwork and bureaucracy.
At CIS, we serve the community of fiduciaries, attorneys and administrators who have been entrusted to manage an estate or transfer an estate’s investments. As we help you fulfill your duty to safeguard the assets entrusted to you, we work to earn your business as the investment manager on which you rely most to protect, preserve and enhance the long-term value of your accounts.
In the end, we recommend slowing down, not acting hastily, and considering numerous options before proceeding. A wrong decision, here, can cost tens of thousands of dollars . . . literally.
How to learn more about reducing estate account fees
If you have questions about brokerage fees, preserving the value of estate investments, or better fulfilling the role of fiduciary as it relates to buying and selling securities, please contact us at (800) 880-2760 or contact@courtinvestmentservices.com.
