At this point, it’s likely not a surprise to anyone that the brokerage industry keeps finding new ways to put its hands in your pocket. Charles Schwab, to take one example, publishes a 14-page document outlining all of its fees. And although they do make this document public, we are still surprised by some of their tricks when it comes to fees.
But sometimes there is a practice that is so surprising, so despicable, it warrants a bit of attention.
Today, we’re going to talk about clawback fees.
Why It’s Called the Clawback Fee
Wealthfront has the benefit of seeing clients transfer their accounts to us from a wide variety of brokerage firms. This gives us a front-row seat to the lengths that traditional brokerage firms will go in order to extract a few more dollars from clients, no matter what the cost is to their long-term financial well being.
There are the usual charges that we all know about – commissions, account minimums, activity fees, and so on. But with clawback fees, brokerages have found a way to put their hand in your pocket even after you’ve left. Officially called an “Account Transfer Out” fee, these fees are applied by your old firm against your new account after you’ve left. Not all brokerages charge this fee, but for the ones that do, the cost is typically from $50 to as much as $200.
This means that for a $5,000 account, these brokers charge you between 1% and 4%, just for the privilege of taking your securities elsewhere.
The reason this particular fee is called a clawback fee is because of the dastardly way firms take this money from their former customers. When you transfer assets to a new firm, you use an industry-standard system called an Automated Customer Account Transfer (ACAT).
If your old firm charges a fee for this service, however, the fee isn’t withdrawn up front. Instead, the firm waits for the transfer to complete, and then “claws back” the amount. As a result, it looks to the customer like the new service is charging the fee for the transfer, when in reality, it’s the old firm pulling the money back. Less customer service hassle for the old firm, and pure margin for their bottom line.
The Largest Offenders
Over the past almost four years we have accumulated substantial data on these fees, and how much they are costing investors. You may find the numbers surprising.
Charles Schwab, not surprisingly, charges $50 for a full ACAT transfer. TD Ameritrade and Scottrade both charge $75. Some brokerages, like Vanguard and USAA do not charge a fee. A more complete list of the various ACAT fees charged by various brokers can be found here.
Watch Your Wallet As You Walk Out the Door
The reason they do this is simple – it’s one last grab for commissions. When you decide to close your account at a brokerage firm, they would much rather you sell all your securities first. They don’t care that this can be incredibly expensive from a tax perspective; they want to take one last commission on every security you own.
I can’t say that I’m really surprised to see Charles Schwab at the top of our list, given that they are the number one source of transferred accounts to Wealthfront. Still, they have taken over $43,000 from their former customers. Apparently it is just another way to pad their bottom line.
Most investors would be better served transferring their securities to their new firm to avoid the tax hit or and/or commissions. At Wealthfront, for example, we’ve designed our service to minimize the costs of moving your securities to us. We don’t charge trading commissions, and we’re also the only automated service to offer an automated tax-minimized brokerage transfer service, which ensures that your securities will be liquidated over time in a way that minimizes the tax hit.
Wealthfront Ends the Clawback Fee
At Wealthfront, our policy is to never charge a fee for an outgoing account transfer, and thankfully other automated services have followed our lead.
We’ve decided to take the next step. As of today, Wealthfront clients who notify us of a clawback fee from an account transfer will now be reimbursed. We’re proud to be the first service to make this commitment publicly.
Long term, we will work to prevent brokerages from charging this fee via the clawback process, and force them to be more honest about the fees they charge on supposedly “free” accounts. But in the meantime, we’re eliminating it for our customers.
It’s just one more way we can force this industry to change.