Want to know how to switch stock brokers? Here’s a tutorial on what to do, how to prepare for a transfer and what to look for in your next broker.
The 2010s was a great decade for retail traders.
Discount brokerages eliminated commissions, software offerings improved, minimum deposits went down, and brokers made more products available.
Late 2019 was the real game-changer, when Schwab decided to follow in Robinhood’s footsteps and cut commissions to zero. They forced the rest of the industry, other than Interactive Brokers, to follow suit.
Because most discount brokers cut their commissions to zero, they’re all trying to compete for the new business by sweetening their offerings.
As a result, us retail traders have a lot of great choices for brokers and because of the frequent industry developments, we might want to change our brokers more frequently than we’re used to.
So this article will tell you everything you need to know about how to switch stock brokers. The different ways to do it, why you might want to do it, and where you might want to take your business.
How to Switch Stock Brokers: Two Methods
There are two main methods to change stock brokers: the ACAT (Automated Customer Account Transfer), or simply withdrawing your cash from your broker and depositing it into a new brokerage account.
Keep in mind that there are tax implications for liquidating your positions and opening a new account, so always talk to a financial or tax advisor before moving any money.
ACAT (Automated Customer Account Transfer)
The ACAT method is best if you have a large portfolio. It leaves your portfolio intact, allowing you to switch brokers without liquidating your portfolio.
So your securities are essentially transferred from one broker to the next without ever changing ownership. This is hugely beneficial because when you sell, you have to pay capital gains taxes on your gains.
Using an ACAT typically comes with a fee, though. Most discount brokers charge you between $50 and $100 to initiate an account transfer.
So, if you’re a short-term trader, it might make sense to just change brokers when all your positions are flat, rather than use an ACAT.
TopRatedFirms maintains a list of ACAT fees for major brokerage firms. It’s worth contacting your new broker to see if they’ll cover your ACAT fee.
Also keep in mind that the ACAT process can take several days. If you tied up most of your capital in the ACAT, you could be locked out of the market for a few days.
For short-term traders, it usually doesn’t make sense to pay the ACAT fee or to sit through the waiting period.
Most of the time, it’s better to flatten your positions and do a direct transfer of funds from your current brokerage account to your new brokerage account.
Sometimes this is possible, but in other cases, you might have to send your funds back to your bank account, then into your new account, adding some extra delays.
Because US-based short-term traders are going to pay short-term capital gains taxes on trading profits no matter what, they typically don’t benefit as much from utilizing the ACAT process.
If you use a wire transfer, you can probably make the transfer in one day, possibly with the ability to trade on the same day.
But wire transfers cost around $25 each through most banks, and if you can’t directly wire from one brokerage account to the other, you might have to perform two transfers.
So, if you prefer to use the free ACH transfers offered by most brokers (which typically take around 3 business days to settle), it might be better to transfer your cash in a few transfers.
Perhaps you have a $100,000 account, it might make sense to transfer $30,000 over, wait for it to settle, then transfer the remaining $70,000 over to your new account. This way you continue trading.
If you intend to keep your old brokerage account open, make sure you cancel any platform or market data fees that you pay monthly.
Depending on the type of brokerage account you have, it might be best to contact your broker to freeze or park your account.
Some higher service brokers might charge a monthly fee of some sort, for activity or lack thereof, which you might be able to waive for parking the account.
When it comes to discount brokers, it’s probably best to leave a small amount of capital in the account and cancel all market data and platform fees.
This way, you have a backup account in case something goes wrong with your new broker. Even the top brokers like TD Ameritrade have downtime sometimes.
Why Switch Stock Brokers?
The landscape is quickly changing and everyone’s trying to get your business. It’s worth seeing how the offerings have changed.
Depending on your trading style it could make complete sense to switch brokers. Here’s a few reasons why you might consider doing so.
Trading on margin is typically a bad idea. Short-term trading is already a zero-sum game without factoring in commissions and other fees. Trading on margin adds the additional cost of paying interest on the borrowed funds.
Then there’s the problem of margin calls and significantly increased risk.
However, trading on margin makes sense for some low volatility trading strategies, and the cost of your margin loans is a major factor in the strategy’s profitability.
The major discount brokers like Schwab charge very high interest for margin. Schwab, for example, currently charges up to 8.325% even in today’s near-zero interest rate environment.
Schwab caters to long-term investors who by-and-large don’t trade on margin, so this makes sense.
Interactive Brokers, on the other hand, who counts all manner of traders among their clients, charges up to 1.59% for IBKR Pro clients, a fraction of Schwab’s rates.
If you utilize lots of margin regularly, low margin rates can be a massive cost saver for your account. Be sure to shop around the industry.
Direct Market Access
Most discount brokers offer free commissions because they receive payment for order flow, essentially meaning they route your orders to large market makers. It doesn’t make a big difference for most, except short-term traders.
Your cost difference won’t be significant, but your execution quality will be lower.
This is why most short-term traders trade with a broker that allows them to route their order to whichever exchange they’d like, allowing them to directly interact with the liquidity in the market.
The drawback to this is that brokers will charge you commissions for routing your orders due to the additional associated costs. Typical prices are around $0.004 per share unless you do a lot of volume.
An example of when direct market access might help is when you’re trying to buy a stock at key support level.
There’s an adverse selection at play here. When you’re trading without DMA, you’re more likely to get filled when the stock breaks through support, and less likely to get filled when support holds.
If you route your order directly, your order priority is probably better because it’s resting on the limit order book, rather than on a market maker’s servers.
It probably doesn’t make a night-and-day difference for non-day traders, but it can a real difference maker for highly active day traders.
Trading Platforms and Software
Most brokers nowadays have free desktop software for active traders but they dramatically vary in quality.
Some have several different screeners, scanners, advanced charting, and other analytical tools, while others hardly offer anything you can’t get on FinViz or another free website.
Some of the better offerings in the discount brokerage industry right now are TradeStation’s desktop platform, Interactive Brokers’ TWS, and TD Ameritrade’s Thinkorswim. Both are packed with features and might take a few weeks of trading to really get comfortable with.
TWS and TradeStation are best suited to multi-asset traders who require active trading tools.
For example, here’s the app menu within TradeStation’s platform.
Best for Multi-Asset Active Trading:
- Interactive Brokers TWS (Trader’s Workstation)
- TradeStation desktop platform
Best for Options Trading:
- TD Ameritrade’s ThinkOrSwim
- TastyWorks’ desktop and web platforms
Best for Active Investing:
- Fidelity’s Active Trader platform
The product offerings vary by broker.
Some brokers see themselves as full-service, offering nearly everything, while others hone down on a specific niche.
TastyWorks, for example, targets options traders. You can trade stocks through them, but all of their effort is on options trading.
Robinhood keeps it simple with stocks and options. Many people start with such a broker only to learn about other products.
IPO allocations also differ among brokers.
If you do any unconventional trading, you’ll very likely require great and quick customer service.
It’s easy to undervalue customer service if you buy and hold stocks or even do simple swing trading, but when you have a question about an esoteric security you receive in an arbitrage trade, you probably won’t find the right information on the internet.
Talking to your broker is the best bet.
Some brokers employ highly knowledgeable licensed brokers to act as customer service. They can actually teach you things!
Also, some traders may have bad customer service experiences with their current broker, motivating them enough to completely stop doing business with them and find a new broker.
No broker is perfect and sometimes errors will occur, which is why you should expect timely customer service from your broker if there are any problems.
Beyond trading platforms, fees, and whatnot, it makes most sense to choose a broker best suited to your trading style including the assets you trade, your timeframe, and your specific strategy.
For example, some traders employ risk arbitrage strategies that require lots of voluntary corporate actions, but most brokers charge high fees to perform these actions, which will significantly eat into your profits.
Which is why most retail traders who employ these strategies trade with a broker like Fidelity, who doesn’t charge any fees for voluntary corporate actions.
The assets you trade matter too.
Options traders are going to struggle with a platform that is optimized for directional technical trading, but will be more happy with brokers like TastyWorks and TD Ameritrade which cater specifically to options traders.
The ThinkOrSwim platform was actually created by two options traders, Tom Sosnoff and Charles Cottle, in order to help retail traders create options spreads in the late 1990s. Years later, Sosnoff went on to create TastyWorks!
Here’s a list of general strategies followed by brokers which are more suited for traders employing these strategies.
Of course, do your own research because you might find that a broker not listed here might be even better for your purposes.
Before You Make The Switch: Promotions and Bonuses
Just like credit cards companies, brokers will sometimes pay you bonuses for your business. Most offer cash bonuses, commission credits, and waived platform fees for new clients.
These offers change all of the time, so it’s not worth listing them here. BankRate maintains a list of the best promotions across the industry.
Most promotions are simple cash awards like a free $100 for deposits of more than $10,000 and so on. But some brokers like Webull and Robinhood incentivize new customers with free shares of stock.
There’s typically a lottery aspect to the promotion too, as you’ll usually have a chance to get a high-priced stock like Apple, while more often receiving a few shares of lower priced stocks in the $5 range.
These are pretty genius marketing campaigns but most of the time the pure cash bonuses are more valuable.
Generally, the more money you have, the juicer the offer. Just as there are “credit card churners,” who mass-apply for credit cards looking for the latest and greatest promotions, there are folks who constantly move their money from broker to broker for the best promotions.
Keep in mind, however, most promotions are contingent on leaving your deposit in the account for something like 6 months.
These promotions change everyday, but one of the best bangs for your buck right now is from TastyWorks.
Most traders go through several brokers before they find the one that suits their needs.
Now that brokers can’t compete on commission prices (because most trade commissions are zero), they’re making additional efforts to differentiate themselves through software, research, customer service, and product offerings.
The best course of action is to talk to traders who utilize similar strategies to you and see which broker they prefer.
Some traders have accounts with almost everybody, so they can offer priceless knowledge.
Credit: Warrior Trading