For brokerages in an increasingly competitive landscape, customer experience is everything. It’s more important than ever to deliver a fast and easy customer experience for everything from account openings to investment transfers.
The Automated Clearing House Transfer Service (ACATS) streamlines the process of transferring funds from one brokerage to another. While it saves investors from the tax burden of selling and repurchasing their holdings, it's still far from perfect.
In this article, we'll explore what ACATS transfers are, how they work, and the challenges they present. We’ll also examine how Plaid is helping to reimagine ACATS by streamlining the process for both users and financial providers.
What is an ACATS transfer, and what are the benefits?
The Automated Clearing House Transfer Service (ACATS) allows investors to transfer holdings and securities from one brokerage to another without selling and creating a taxable event. Managed by the Depository Trust and Clearing Corporation (DTCC), investors use ACATS transfers to transfer part or all of an account to the same type of account at another brokerage.
An everyday use case for ACATS is consolidating accounts by moving your existing IRA or brokerage assets to a new provider. Rather than selling your assets, receiving dollars, and depositing those dollars into your new brokerage account (which creates a taxable event), ACATS can streamline the transfer and avoid a taxable event.
ACATS offers significant benefits to investors, brokerages, and the broader financial system, including:
Tax efficiency: ACATS's most significant advantage is that it allows investors to transfer investments without selling them, which prevents the creation of a taxable event.
Convenience and speed: ACATS, though imperfect, simplifies and speeds up an otherwise highly complex and cumbersome process. Without it, investors would need to manually sell their assets, transfer cash, and reinvest. With ACATS, they can directly transfer assets.
Avoids loss of assets due to market disruptions: Since ACATS moves investments without requiring liquidation, investors avoid leaving the market during the transfer period, ensuring they don't miss out on market gains.
Better customer experience: Offering ACATS transfers improves the customer experience of brokerages and wealth management firms. Direct, seamless transfers reduce friction in an otherwise complicated process.
While the process has many benefits, the current system is less than ideal. We'll explore the challenges with the current system and how Plaid can improve the transfer process.
The current ACATS process requires substantial manual effort and multiple verification steps. Here's a breakdown of how the process typically works:
1. Initiation
The process begins when an investor decides to transfer their holdings. Investors submit a request to transfer holdings, specifying whether it’s a full or partial transfer of their holdings. This requires details such as account type, number, ownership information, and account holdings.
2. Verification
After the investor submits a transfer request, both the sending and receiving brokerages must verify all account details. This includes confirming that both accounts are the same type and ownership and that all assets are compatible. The sending brokerage could reject the transfer request if there are any discrepancies, including accounts holding different kinds of assets, such as mutual funds, options, or specific securities.
3. Submission to DTCC
The receiving brokerage submits the initial request through the DTCC system, which then goes to the sending brokerage. The sending brokerage verifies details, and if all the details look correct, they send the assets via the DTCC system.
4. Settlement
Upon approval, the transfer settles, and the holdings move to the new brokerage account. The settlement process typically takes several business days; however, more complex transfers may require additional time depending on the intricacy of the transfer and the efficiency of the brokerages involved in processing the transaction.
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The current limitations of ACATS transfers
The way the ACATS settlement process works today creates some problems for the brokerages, financial institutions, and wealth management firms that rely on this system.
Highly manual processes can introduce errors
The current ACATS process requires users to fill out a form manually. The form fields include name, full or partial transfer, account numbers, institutions, account type, and more. For partial transfers, users often have to manually indicate the positions and quantities to transfer one by one.
Due to manual processes, incorrect data is often encountered. These include account name mismatches, account type mismatches (usually IRA vs. brokerage), and account numbers that don’t match. Not all brokerages support the same kind of assets, so there can also be issues with unsupported holdings.
High rejection rate
Because of the issues caused by the manual process and common errors, ACATS transfers are frequently rejected after submitting a request to the DTCC. According to our customer conversations, between 30% and 50% of ACATS transfers are rejected. A failed transfer requires brokerages to re-initiate the process or use an alternate method, such as liquidating and repurchasing assets.
High customer support burden
High rejection rates increase the number of customer support inquiries, straining support teams. Additionally, more unsuccessful transfers can decrease assets under management (AUM) over time.
Potential for fraud
Financial institutions are seeing increased fraud rates in ACATS transfers. Bad actors attempt to use stolen personally identifiable information (PII) to open fraudulent accounts and move assets into them via ACATS. Plaid can help mitigate this by verifying that users possess the account they’re moving assets from before the ACATS transfer is submitted.
How Plaid is improving the ACATS transfer process
Plaid's Investments Move product enhances the ACATS process by streamlining and automating what has previously been a highly manual process using open finance APIs. Our system automates the collection of account and transfer information through Plaid Link and preemptively mitigates the leading reasons for rejection. Let's look at how Plaid improves the process in more detail.
A simplified, low-friction flow
The Plaid Link flow for gathering account and transfer information reduces the need for manual data entry. Users no longer need to download brokerage statements and copy/paste or type information into a form. Instead, there is an automated and streamlined process for gathering and initiating the transfer via Plaid’s open finance APIs.
The Plaid Investments Move ACATS transfer flow
Investments Move also uses the high-converting Plaid experience that customers are familiar with. Over 100 million people have used Plaid to connect to an app or service.
Streamlined ACATS submission and reduced error rates
Just like other Plaid wealth management products, Investments Move retrieves data from the highest quality source, the brokerage itself. Through the Plaid Link flow, Investments Move provides broker-sourced data for the following ACATS fields:
Full account number
Names of account holders
Institution name
DTC (Depository Trust Company) code(s)
Account information
Holdings and securities data
CUSIP (Committee on Uniform Securities Identification Procedures) number
Plaid retrieves the required broker-sourced data and provides the insights and data needed to confirm there are no mismatches or unsupported holdings between the two accounts. Then, Plaid delivers all the data needed to initiate an ACATS transfer through the DTCC. This process dramatically reduces the error rate for ACATS transfers because Plaid checks for errors before submission—effectively stopping errors before they happen.
Fallback flows
If Plaid can’t get the data automatically, we have several fallback options to ensure that 100% of brokerage accounts are covered. Investments Move can retrieve external account information through one of four supported flows:
Full Account Number: Plaid returns all information directly from the broker, including the full account number.
Account Number Match: Users enter their account number, and Plaid verifies the last four digits with the financial institution.
Stated Account Number: Plaid provides broker-sourced holdings data and the user-provided account number.
Manual Entry: Customer manually enters account number and holdings information.
Notable financial brands such as Robinhood have become early users of Investments Move and are already seeing results. Here’s what we’re seeing so far.
Increased success rates: Investments Move customers are quickly seeing a higher percentage of ACATS transfers successfully completed. Higher settlement rates will increase AUM over time as more customers onboard successfully.
Decreased support tickets: Customers are spending fewer operational hours processing transfers due to the decrease in support tickets.
An improved account opening experience: Account funding for new brokerage accounts is now a streamlined process. Rather than separate experiences to add new funds and move existing holdings, customers can use Plaid Link for everything.
Modernizing the ACATS process with Plaid
While crucial for the financial industry, the ACATS transfer process has long had inefficiencies that were ripe for improvement. Plaid Investments Move is improving this critical process by automating data entry, reducing rejection rates, and improving the customer experience.
Learn more about how Plaid can help you improve customer satisfaction and enhance the ACATS process.