From US News -- Most investors know the value of diversification – spreading money among various stocks and bonds to reduce risk. But what about diversifying among financial service providers? Would it pay to have two or more in case one runs into trouble?
Experts' views are mixed. If you rely on your firm for advice or asset management, it could pay to have another for safety and a second opinion.
"If a client has over $1 million in investable funds I generally recommend splitting between two advisors," says Blake Christian, a partner at Holthouse Carlin & Van Trigt, an accounting and business management firm in Long Beach, California. "Each advisor has different style, expertise and biases."
But if you run things yourself and use a provider only for executing trades and holding your investments, then relying on a single provider like Vanguard, Fidelity, Schwab or T. Rowe Price should be just fine, many experts say.
"There are a lot of benefits to aggregating your assets under one custodian's roof, such as easier account monitoring, simplified account repositioning, and greater assurance of proper account registration and beneficiary updates," says Jennifer E. Myers, planner with SageVest Wealth Management in McLean, Virginia.
"We frequently see individuals with so many accounts that they can't answer a simple question of how they're invested because it's too cumbersome to monitor and track," Myers says.
Ryan Fisher, president of White Coat Wealth Management in Fort Wayne, Indiana, says it definitely makes sense to use more than one provider for products like annuities and life insurance. Insurance companies are regulated by the states, and each state has its own rules for protecting policy holders from loss if the insurer fails.
The gold standard in safeguarding assets is a bank with protection from the Federal Deposit Insurance Corp. The FDIC protects deposits against losses up to $250,000 at each bank at which the depositor has an account, even if the bank goes under. The insurance covers principal and interest on checking and savings accounts and some retirement accounts, but not losses on stocks, bonds, funds and other securities, even if they were purchased at the insured bank. It's been a rock-solid system since it was set up in 1933 during the Great Depression.
Credit unions have similar insurance from the National Credit Union Administration, another federal agency.
Brokerages, mutual fund companies and other financial services firms are covered by the Securities Investor Protection Corp. (SIPC). Unlike FDIC, SIPC is a non-profit membership corporation. It was created by federal statute in 1970.
SIPC covers up to $500,000 per customer for all accounts at the same institution, including a maximum of $250,000 for cash. But that does not include routine losses from price declines, just losses from fraud, the institution's collapse or other untoward events.
Not only is the SIPC coverage limited, not every financial firm belongs, though reputable ones do.
"If you are holding any of your investments with a firm that is not covered by SIPC, you have most likely sought them out directly or entertained a phone call from a boiler room operation and blindly gave your money away to someone without asking any questions," says Matthew E. Gaffey, senior wealth manager atCorbett Road Wealth Management in McLean, Virginia.
Illegal boiler rooms sell worthless stocks with cold calls to inexperienced investors.
Independent advisors and wealth managers may not have SIPC coverage themselves but typically keep clients' assets at the big-name firms that do, Gaffey adds.
But SIPC does not insure against losses from ordinary price declines, poor fund management or bad advice from advisors.
So, if you rely on advice it would be prudent to spread your eggs among two or more baskets in order to get multiple opinions. Spreading money around would be especially sensible if you empower your advisors to trade in your accounts on their own authority. That's how sophisticated investors like college endowments do it.
But there is a downside to having multiple advisors. Scott A. Stevens, an advisor at California Wealth Transitions in San Diego, points out that money managers may take on too much risk if they know they're competing with the client's other professionals.
Gaffey adds that investors using more than one advisor or manager should be careful that the firms do not duplicate one another, leaving the investor too heavily committed to certain investments. Many funds holding large-capitalization stocks mirror the S&P 500, for instance.
"Consolidating your assets to one firm can have its benefits as well – one simplified log-in online, one account statement, one place to track your progress and plan for your future goals, Gaffey says. "These are all things that may help you get a better grip on your overall financial picture."
Stevens says investors should look for a firm that offers low fees, comprehensive financial planning, is responsive when contacted and has easy-to-use online systems for monitoring accounts.
Ryan Repko, an advisor withRuedi Wealth Management in Champaign, Illinois, says that consolidating investments with a single firm can reduce fees and charges for things like rebalancing the portfolio when the asset allocation gets off target.
"Over a period of decades, small savings in trading and investment costs can really add up to significant compound returns," he says.
Using a single firm also simplifies tasks for older investors who aren't as sharp as they once were, and can make matters simpler for heirs, Repko says.