Checkbooks and Balances

Why can’t we have instant, convenient ACATS transfers?  Because we in this age of sophisticated cyberthieves, we also want a layer of protection.

When I solicited questions from the Inside Information audience about what we could talk about in a roundtable with custodial executives, one suggestion came up more than any other: Why couldn’t they make the ACATS process simpler?  In this magical electronic age, why does it still take days to transfer a client’s assets from the other custodian to mine?  Why couldn’t we get seamless straight-through processing of client accounts, and streamline the paperwork, and have it all handled with online signatures?

The unstated question was clear: Are the custodians dragging their feet because they fear that advisors will move their assets en masse if there’s an easier transfer process?

While I was at the T3 Enterprise conference, I spent some time talking about this topic with Peter Mangan, CEO of Shareholders Service Group in San Diego, and later he agreed to an interview.  The gist of it is that Peter is skeptical, not only that we are ever going to get to same-day transfer of assets and an easy-peasy ACATS processes, but whether advisors actually WANT these things once they understand some of the client protections that we would have to give up to make this happen.

“The answer is: you probably CAN do all those things,” he says.  “But I’m not sure that would be beneficial to the profession.”

Mangan explained the ACATS transfer process in greater detail than I’ve ever heard before and invited me to suggest improvements or streamlining.  He started with the preparation of an account for transfer.

“Since you actually have settlements going on in a brokerage account that are not instantaneous, you can’t really have instantaneous transfer of that account,” he says. 

Meaning?  Every brokerage account is at least potentially engaged in buying and selling activities, and those purchases or sales have to be settled before the account can be moved.  “There are clearing processes whenever a trade takes place, where you have to have confidence that the buyer and seller are in place,” says Mangan.  If you insist on moving the account now, this instant, then whatever trades haven’t settled WON’T settle, because the account is no longer there.  That undermines the entire securities transaction system, having accounts suddenly vanishing from one place and reappearing in another. 

Bottom line: there has to be some kind of check to make sure there are no trades involving all the various accounts that might be moving on any given day—not just as a matter of tidying up loose ends, but as a matter of maintaining the integrity of the entire market system. 

“All the open orders have to be cancelled and any checkbook privileges have to be disabled,” says Mangan.  “If there are checks that are being cleared, you have to have a stopping point on those, and somebody has to make sure there isn’t anything outstanding.  Maybe there’s an ATM card on that account that has to be cleared.  The banking side of the brokerage account is part of what the brokerage firm is insuring as well.”

And of course there are checks and balances to make sure the money isn’t heading off to a lending institution in Nigeria.  “If you really want instantaneous movement, you have to give up some of those checks and balances,” says Mangan.  “Somebody looks at the account and discovers that the name of the receiving account doesn’t match, but by then the money is long gone.” 

He notes that the Fed wire system IS instantaneous, but the banks have actually written into law that they aren’t liable if a mistake occurs.  “They are not required to see whether the names are the same, or whether it has gone to the right name at all,” says Mangan.  “So if somebody sends in the wrong account number, that’s on you, even if the receiving account doesn’t say Bob Veres.”

There are two parties in the ACATS transfer: the sending and receiving institution.  The sending institution has to be alerted that the account is transferring, so it can stop trades.  The receiving broker has to check that the signatures are the correct ones, the account names match, and to know that the recipient is the right person.  “When they do the transfer of assets, it’s the receiving broker’s job to make sure they aren’t going to a thief,” Mangan explains.

Mangan says that it is not uncommon for thieves to get hold of account numbers, and find out who owns the account.  “The question I would ask you,” he says, “is do you want the money to transfer without somebody putting their eyeballs on the details of the transfer?  Do you want us to stop the process of manually verifying those things?”

Well, couldn’t the transfer paperwork at least be handled via electronic signatures?

Here, Mangan agrees.  “But remember, as clients set up that electronic signature, they have to give us quite a lot of information about themselves—which we can follow up on to verify that it is actually the owner of the account,” he says.  “You get the email address, the computer IP address, date and time, and you also get the trail as to how this document got into that person’s hands in the first place.  If it came from the advisor, you know that the document came from the advisor, and you know that the email address matches the email address that the customer has given you.  You can check: is there such a person living at the address that they say is there on the new account form?”

And this is in addition to what is on the form: name, address, birth date, Social Security number etc.  “We always get a copy of an ID as well,” says Mangan—which can be a driver’s license or a passport.

The question, in Mangan’s mind, is: in this age of increasingly sophisticated cybercriminals, is it worth taking three to five days to transfer client assets safely from one custodian to another?

But wait; it doesn’t always take just three to five days; many large brokerage firms can take twice that long.  That represents stall tactics, right?

Mangan says that there are a variety of perfectly innocent things that can hold up a transfer at the existing custodian.  “The client or broker may’ve hired outside managers that need to be turned off,” he says.  “The client may have authorizations on those assets that need to be notified or turned off. There may be billing or payments the client has agreed to, that the firm has to settle up with.”

And there may be unusual assets in the account—proprietary mutual funds, illiquid interval funds, alternative investments that don’t have a liquid market—that would have to be liquidated before the account can transfer.  “You might think the brokerage firm is dragging its feet,” says Mangan, “but the delay may be because of what the client owns.”

Bottom line: Mangan believes in the value of instant transfer of monies where you want to send money to your cable company, or you want to get money to a son or daughter who is away at college.  But he doesn’t think we want instant transfer of someone’s entire net worth. 

“Your entire net worth deserves more protection and care whenever you’re shifting where it’s held,” he says.

Hmmmm.  I’m (reluctantly) convinced.  Are you?  If not, why not?