The basic setup

In an ideal world, transferring an account would be a straightforward process involving just three entities: you, your old brokerage firm (the delivering firm), and your new brokerage firm (the receiving firm)

Enter the facilitator

Here's the first twist: when you transfer your account, the brokerages don't communicate directly with each other. Instead, they go through a central organization called the Depository Trust & Clearing Corporation (DTCC), which facilitates transfers within the United States using a system called the Automated Customer Account Transfer Service (ACATS). We could write a book on the complexities of the DTCC and ACATS (and we might in the future!). For now, think of them as the essential middleman that sits between all the brokerages.

The regulators

As with most financial processes, there needs to be oversight and regulation. In the United States, the Financial Industry Regulatory Authority (FINRA) is the primary regulatory body, governing ACATS transfers through Rule 11870. This rule keeps your old brokerage from giving you a hard time when you decide to leave, assuming all entities follow the proper procedures. According to the rule, your old brokerage must respond to any transfer requests from your new brokerage that come through the DTCC's ACATS system within one business day, and the transfer should be completed within three to five business days.

With these five entities - you, your old brokerage, your new brokerage, the DTCC, and FINRA - we can successfully complete a simple customer account transfer. However, this process only works under specific conditions:

1. Both brokerages must be members of the DTCC.
2. You must be a retail customer, meaning you don't have a financial advisor managing your account.
3. The account transfer must involve only simpler assets, such as stocks.

These conditions hint at the potential complexities that often arise in account transfers. Let's dive deeper.

Self-clearing vs. introducing broker dealers

All US brokerages must use the DTCC to handle essential workflows like account transfers. However, not all brokerages are DTCC members, especially newer ones. When a brokerage firm is not a DTCC member, they partner with one who is.

For example, Cash App Invest, the investing arm of Cash App, is not a DTCC member. Instead, they partner with a DTCC member called DriveWealth. In this arrangement, Cash App Invest is called an "introducing broker-dealer" because they introduce you, the end client, to DriveWealth, which is known as a "clearing firm". While you may never interact directly with the clearing firm, they play a crucial role in transferring your account.

When you transfer your account from one introducing broker-dealer to another, the process becomes more complex because there are now two additional entities involved. Each introducing broker-dealer has its own clearing firm, rather than handling these functions in-house as self-clearing brokerages do.

Financial advisors

If you work with a financial advisor, this can introduce up to two more entities into the account transfer process: the financial advisor you're leaving and the new one you're hiring. The complexity of the transfer process can vary depending on the type of firm your financial advisor works for.

Some financial advisors work for self-clearing brokerages, such as Schwab advisors. In this case, the transfer process may be simpler since the brokerage itself is a DTCC member and can handle the clearing and transfer processes in-house.

Other financial advisors work for introducing broker-dealers, such as Citi Wealth advisors. In this case, the introducing broker-dealer (Citi Wealth) uses a clearing firm (Pershing) to handle the clearing and transfer processes, adding another entity to the mix.

There are also financial advisors who start their own firm, known as a Registered Investment Advisor (RIA). These RIAs can store and trade their customers' assets on either a self-clearing brokerage (e.g., Schwab) or an introducing broker-dealer (e.g., Shareholders Service Group, who introduces for Pershing). The complexity of the transfer process will depend on the type of firm the RIA uses.

Transferring more complex assets

In addition to simple assets like stocks, investors may hold more complex assets in their portfolios, such as mutual funds, options, and annuities. Transferring these assets involves additional steps and entities, making the process more intricate than transferring stocks.

Mutual funds

When transferring mutual funds, an additional entity is involved: the mutual fund company itself. For example, if you hold Vanguard mutual funds at Schwab and want to transfer them to Fidelity, you'll need to instruct Vanguard, the mutual fund company, to re-register the mutual fund assets.

Options

Transferring options introduces another entity into the process: the Options Clearing Corporation (OCC). When transferring options, both the sending and receiving brokerages must be set up to work with the OCC. ACATS also checks with the OCC to make sure the option is still valid and tradable. If these conditions aren't met, the option transfer might be delayed or rejected, requiring additional steps to complete the process.

Insurance (annuities)

Similar to mutual funds, transferring an annuity involves re-registering the asset with the insurance company. This adds the insurance company as another entity in the transfer process, as they must be notified and involved in the re-registration of the annuity.

The grand finale

Let's wrap it up with a real-life example of a complex portfolio transfer involving all 12 entities. You just decided to get a new financial advisor - Griffin Black - and you're moving all your assets including your options, mutual funds, and annuities from your old financial advisor, Fairhaven Wealth Management.

1. You initiate the transfer request with Griffin Black, who uses Shareholders Service Group (SSG) as their custodian.
2. SSG, as your new custodian, processes the request and forwards it to their clearing firm, Pershing.
3. Pershing, upon receiving the request, sends it through the DTCC to facilitate the transfer.
4. The DTCC routes the request to your old clearing firm, Wells Fargo, and FINRA oversees the transfer to make sure it complies with industry rules and regulations.
5. Wells Fargo receives the transfer request and notifies your old custodian, TradePMR.
6. TradePMR, in turn, informs Fairhaven Wealth Management about the transfer request.
7. As your portfolio includes a mutual fund and an annuity, the respective mutual fund company and insurance company are notified about the transfer so your assets can be re-registered with your new clearing firm.
8. Your portfolio also has some options, so the OCC needs to be involved to move those positions.

Wrapping up

Account transfers are more complex than most people think. But the customer shouldn't have to worry about all these moving parts. Ultimately, it should feel simple, and it's the job of the clearing firm to abstract away all this complexity. If you work at a clearing firm and want to learn more about how to make transfers feel simple, reach out. We're here to help you turn these complexities into delightful client experiences.