Should I diversify between different financial institutions?
As a high net worth individual, should I diversify between financial institutions or should I just diversify within one organization such as Wells Fargo or Chase?
It's always good to have accounts at different institutions primarily for risk, service, and product offerings.
- Risk- SIPC coverage is limited to $500,000 per customer, including up to $250,000 for cash. Rights under SIPC protection. Some broker/dealers also have excess coverage from 3rd parties. Here is an example from Interactive Brokers Protection and excess coverage.
- Service- Although consolidation is good, it's always good to have multiple accounts in case you get bad service from one provider.
- Products- The product offerings may vary at each institution which will have a factor on what type of portfolios are built out and/or products pushed.
It is always a balancing act. Most people have too many accounts to effectively manage. The goal of money is to enjoy time, not take up time.
That being said, there are two main reason to diversify institutions: 1) Risk & 2) Access To Investment Types
- A company could fail (and not be bailed out)
- NCUA/FIDC insurance has limits of $250,000 per depositor for banks/credit unions
- SPIC for $500,000 equity investments/$250,000 of which is cash
- Even if "covered" it could take time and you would have to trust the insuring agency
- Do you really want your account tied up during a 2009-type event?
- The idea that a company could hide losses is not new and not out of the question
- The health of a company could be hidden until it is too late
- The risk is small but it is not a silly thought, concern, or question
- Many do have excess coverage, usually from Lloyds of London
- Many of my clients hold assets at Vanguard, here is their coverage:
- To offer greater protection and security, Vanguard Marketing Corporation has secured additional coverage from certain insurers at Lloyd's of London and London Company Insurers for eligible customers with an aggregate limit of $250 million, incorporating a customer limit of $49.5 million for securities and $1.75 million for cash. Coverage provided by SIPC and certain Lloyd's of London and London Company Insurers does not protect against loss of market value of securities. The policy provided by certain Lloyd's of London and London Company Insurers is subject to its own terms and conditions.
- A company could fail (and not be bailed out)
- Investment Types
- The access to investment types is the main reason why I use different institutions for clients. I use Vanguard for some things and I use Dimensional Funds within a TD Ameritrade account for others.
Find the balance that lets you 1) manage effectively 2) sleep at night 3) have access to the investments you need to make the most out of life.
Mark Struthers CFA, CFP®
The answer is really up to you and if the advisor, their team, and back office are responsive to your needs, keep you on target towards your goals, while providing advice and recommendations within your tolerance for risk.
I usually find most higher net worth people have several financial advisors from reputable companies while they are working and tend to consolidate accounts when they back away from work. While working, they may have two or more investment advisors in addition to other key people (CPA, Lawyer, property and casualty insurance agent). Clients compare results, appreciate the different specialties/ niches of the investment professionals and their contacts, as well as the information they provide. Remember, they work for you and the end result is their services should help you live the life you want while providing the information you need to make educated decisions and keeping you on track to achieve your goals.
A down side of the two or more brokers may be some costs and possible break points for higher amounts.
Most brokerage firms have the additional SIPC insurance coverage in case of bankruptcy, but ask the question to ensure your accounts and any cash are covered in full.
A final thought, consider having someone like a CFP help you oversee your entire financial picture. Sometimes, the advisors you have do not worry about your big picture, just their slice of your life. The CFP can act as a quarterback for your financial life and help evaluate the advisors you have while keeping the big picture and your goals on target.
Assuming that you are looking for a financial advisor to assist you with financial planning and investments, you would be best served by finding a Registered Investment Advisor who is also a Certified Financial Planner. The latter is required to provide service that puts your best interest first.
Although the big banks project an impressive image, their records over time have been less than stellar. And don't forget the kinds of problems they had only a few years ago. The granite and marble that decorates their offices will do nothing to enhance your situation. A competent CFP will be a far better choice.
The National Association olf Personal Financial Advisors is where you should be looking. You can find a list at:
From my experience, diversifying between multiple institutions, especially if you are a high net worth investor, can create issues.
By adding another institution into the equation, you are likely paying more, and creating potential for errors in communication. A few examples:
- You give institution A your taxable account, and institution B your IRA. This limits each institution's ability to create tax alpha through asset location.
- If one or both institutions are providing financial planning, are they able to incorporate each other's accounts on a real time basis to provide you with recommendations based on accurate data?
- Most firms have declining pricing models (the more they manage, the less you pay as a % of assets). By using two firms, you will likely pay more in total than using one firm.
In my opinion, the reason to diversify firms is if one firm does not implement a diversified portfolio, or is making large tactical changes to your portfolio. Having two firms would reduce your "manager risk" in this instance.