I just received notification that low cost broker Loyal3 is shutting down, effective May 22 2017. Loyal3 was a decent commission free alternative for beginning investors who wanted to slowly build positions in their favorite brands, without paying any commissions. The brokerage allowed you to invest as little as $10 per transaction, and allowed buying fractional shares. At one point, Loyal3 also allowed a brief arbitrage opportunity where you could invest using a credit card, and earn rewards points. Loyal3 also allowed many investors the chance to participate in IPO’s at the offer price. Sadly, it looks like its business model has not gained enough traction. Alternatively, low cost broker Robinhood offers access to all US equities for a zero rate and does it in real-time. This may have been one of the reasons for the failure.
There are several options to existing clients.
1) Do nothing, and have all securities be transferred to FolioFirst.
Under the default option, investors would have their shares transferred over to FolioFirst on May 22. This other brokerage offers commission free trades on 200 companies. The catch is that you will have to pay a $5 monthly fee on your account balances. This fee will start on August 1.
I believe that most investors with a Loyal3 account do not have more than a few thousand dollars invested there. Therefore, that $5 monthly fee would be too steep for these account balances.
As far as tax documents, ff your account is transferred to FolioFirst, both your tax documents for i) the partial year your account was at LOYAL3 and ii) the partial year your account was at FolioFirst, will be available at FolioFirst.
2) Transfer your shares to another brokerage
If you have another brokerage account, you can move the shares to it. You have to initiate the transfer pretty soon, because Loyal3 has to have the transfer forms by May 15, 2017. Loyal3 will be waiving the account closure fee, which is pretty nice of them. Otherwise, you would have been charged $25 to close the account. If you have a sufficient amount of money, you may be able to open another brokerage account, and even earn an account opening bonus for that.
Loyal3 will not transfer partial shares, only full shares. You will receive the proceeds from the sale of fractional shares, which will be credited to your account, after you initiate the transfer to another brokerage. Transfers usually take about 7 - 10 business days to process.
What if you receive dividends after your account closes or transfers? For accounts that transfer to Folio, your dividends will be sent to your Folio account. For accounts that close or transfer to other brokers, your dividends will be sent to your bank account or to you via a check.
If transfer your account to another broker, you will receive tax documents from LOYAL3 for the portion of 2017 that you were at LOYAL3, and tax documents for the balance of 2017 from the new firm that holds your account.
3) Sell all shares, and withdraw money
The third option involves selling shares, and then transferring the money to your checking account. You need to sell those shares by 1:45PM ET on May 16, 2017. This is a clean and easy way to wind your business there. The only exception is that you will have to pay taxes on any capital gains you generate ( or get a deduction for any losses you realized). For shares held less than one year, your gains will be taxed as ordinary income. Only shares that have been held for more than one year will be eligible for a preferential tax rate on capital gains.
If you liquidate your account by selling all your shares and moving the proceeds to your bank before May 19, 2017, you will only receive 2017 tax documents from LOYAL3.
I would personally be transferring any assets from Loyal3 to another broker. I have less than 1% of net worth there. But it makes sense to initiate the transfer process as soon as possible, in order to avoid any potential issues. You may want to read up on all commonly asked questions related to the closure on the Loyal3 website.
I have been around for a decade, and have learned one thing about zero-cost brokers. The lesson is that zero-cost brokers are great for new investors with limited means to invest. However, these low cost brokers are usually a bait and switch scheme to attract a lot of clients. Sooner or later they start limiting the number of free trades, and then start charging for trades and introducing fees to their clients. This was the case with Zecco for sure a decade ago. Perhaps, these zero cost brokers are great for beginner investors. As the amount of money in your brokerage account increases however, it may make sense to migrate your business to a more established broker, who will likely remain in business for the foreseeable future. Personally, I find Interactive Brokers to be the best broker for serious dividend investors, who plan to put money to work every month for years to come. Other readers have enjoyed their experience with Merrill Edge, Charles Schwab, Tradeking, Fidelity and Vanguard.
Update: On May 25, 2017, my shares in Loyal3 were finally transferred over to Merrill Edge. I had started the process on April 20, 2017, so it took roughly one month. In Loyal3's defense, about a week was wasted by Merrill Edge, who claimed that the transfer forms I used were not legible or were not there. The most confusing part was with Merrill Edge, who sent me an automated message midway, telling me that my transfer has been canceled. When I reached out to the Merrill Edge rep, they informed me that this message is just standard. I wonder why they are not fixing it, and instead choosing to confuse their customers. I guess this is a "price to pay" for commission-free trades.
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