I get that we should invest in multiple stocks and bonds and other things, diversifying, not all the eggs in one basket.
But should we apply that to the wealth management companies, too? If you have an IRA with some company, who has your investments spread over multiple stocks and bonds and things, is that responsible money management? Or should you have multiple IRAs each at a separate company (and of course each of those IRAs would be diversified within)? In other words, diversification at one layer or at two layers?
This is kind of like asking if one diversified portfolio is enough, or should you have multiple portfolios.
What problem are you trying to solve? That a single IRA may not have adequate diversification for the types of assets you own? Or that a single wealth management company may itself present a risk due to fraud, poor business practices, etc. (Billy Bob’s Investments and Ribs, established 2023)?
I think it’s best to have everything in the with the same wealth management place. Tax stuff can get complicated and someone needs to be aware of all of the details
I think it’s vanishingly unlikely that investments at a large firm like Fidelity would be at any risk from fraud etc.
But for me, a compelling reason to have at least two active brokerage accounts and two bank accounts is the fact that their computer systems may fail temporarily at critical times when they are trying to process huge volumes of trades or money transfers in a financial crisis.
I don’t know if these are franchises or branches or what, but there’s a big multinational bank with their name on this (UBS), and then a local office with people’s names on the door and the multinational bank logo included on the letterhead. Actually, now that I think about it, I’m surprisingly ignorant about this detail. Though, I have an online account, and it’s at ubs.com, so I guess that clarifies who I’m trusting ultimately.
I want to achieve due diligence. So far I haven’t actually found anybody saying multiple wealth management places is an important component of diversification. Reading the Wikipedia article on diversification, I’m only picking up on the stocks/bonds/otherthings layer of diversification.
We compromise. All my investments are with one bank, my wife’s with another. We also keep some cash and liquid assets in another facility for emergencies.
Bank failures happen. There’s been a few of them this year already. First Republic, National, and Silicon Valley banks have failed this year. Depositors over the FDIC limit will take a haircut, most likely. Eight other banks failed in 2019 and 2020.
Also, remember that you are only protected up to the FDIC limit, so it can be smart to open multiple accounts, each of which gives you full FDIC protection, if yo7 think the banks are becoming vulnerable.
The biggest thing to watch for, though, is fees. A 2% management fee in this environment is likely to wipe out any investment gains. My wife let her pension fund manage her private retirement investments, then pulled it all when she found out that her total return over 5 years was 1%, and all the rest of the gains were eaten by management fees. You should shoot for an MER (Management Expense Ratio) of .2% or lower. Spreading your money across multiole accounts coupd kill you on management and banking fees if you aren’t careful.
Yes! In fact, I didn’t mention it, but I’m considering consolidating three other wealth management places into the diverse accounts at the one with the most holdings. I think this would give them about triple the account balance they have now for me, and (I guess) about triple the return for their management fees. But other than executing the transfers when I make the change, it wouldn’t be any more work for them. In fact, they already deposit money in my checking account monthly (since I cut back hours), so even that would stay the same except for a larger deposit amount. So I think it’s practically ZERO extra expense for them, all gravy, if I consolidate. I’m thinking of asking them for a percentage fee reduction before I commit to moving the funds. Actually, I did ask for a fee reduction a few years ago, and they gave it to me (and I wasn’t making any further investment with them).
With a bank account, but not with a segregated brokerage account. Your investment assets are not mingled with the assets of the broker / wealth manager, they are not at risk in bankruptcy.
If your account is with a major firm like Fidelity, Vanguard, Schwab, Merrill and the like you are ok. If your guy is like a Bernie Madoff or a Sam Bankman-Fried, then perhaps not.
I am just finishing up the process of moving 4 different retirement accounts and another 3 different bank/credit union accounts into one Fidelity account. Well, I’m actually keeping one local C.U. account for convenience and super-liquidity).
I am not at all worried about any risk, this is what my Certified Financial Advisor advised (and what he does).
Anyway, it’s a lot of work setting it all up, but it will be so nice to have all my stuff in one place.
SVB was one of the larger banks in the U.S. It was not a fly-by-night. It failed because it was clogged up with 10-year treasuries earning almost no interest, and tying up their money. They had 230 billion in assets. Signature bank, which also failed, was a large bank woth 90 billion in assets.
Guess who else is doing similar things? Most other banks. There is a potential crisis on the horizon: Ten years of, “Hey, we should borrow as much money as possible at low interest!” has left the financial system clogged with low interest debt.
Another hammer that may fall is commercial real estate. Banks hold huge amounts of loans secured by commercial real estate, or commercial real estate itself, and its value has plummeted. As these loans roll over and mortgages come up for renewal, all this real estate will have to be financed at much higher interest rates, and defaultswill have to be sold off into a terrible real estate market. And as the value of those assets drop they could trigger margin calls and foreclosure of the assets they were securing.
Banks are up to their eyeballs in commercial real estate. Large banks hold about 900 billion in commercial real estate, but small banks have 1.9 trillion, according to the Financial Post. Those trillions represent huge unrealized losses right now, as commercial real estate is down 15-20% in most places. 1.5 trillion in commercial paper has a renewal date within three years.
Another potential crisis is that when the bank rate goes up, people expect higher returns on their money. But if a bank is holding legacy debt at 2% but people expect 5% on their deposits, the banks either have to cough up the extra momey or risk depositor flight to money market funds or T-bills.
In all, this is a risky time for banking. Maybe everyone will make it through fine, but the way to bet is that there will be more bank failures coming.
A comment could be made concerning the $500,000 U.S. SIPC insurance limit:
However, that limit has never been a practical issue; when brokerages fail, the investors have, every time, been fully protected.
If you want to be super cautious, you could consider the limit. But the risks of market crashes, which of course are not part of SIPC protection, are so tremendously greater that hardly anyone bothers.
Note: By contrast, bank account money, over the FDIC limit, has sometimes been lost to savers, albeit not recently. I would just pay attention to that, if you are lucky enough to be what we used to call rich.
Yes, and to be crystal clear here: we’re talking solely about protection of your ownership of the assets that the broker was supposed to be holding in custody for you if the brokerage goes bust. If the broker was following the law and just went out of business, 100% of your account is fine - your account is segregated from the broker’s business operations, the broker’s creditors have no right to take your assets. The SIPC gives you further protection from your assets vanishing through fraudulent activity, with a theoretical limit of $500,000.
This ownership protection is a completely separate issue from market risk, that the market value of your assets might decline; and also separate from the risk of relying on bad advice or bad wealth management that may result in you owning assets that decline in value significantly.
This is the best reason. UBS isn’t going anywhere, so using it as a single account isn’t an issue. Temporary access issues, however, are always possible
It’s for that reason that I have three checking accounts and two savings accounts spread among one national bank, one local credit union, and an online bank. The number of times in the last 25 years where I needed to rely on this redundancy due to any single one of them having a problem is zero. But I will still maintain these accounts for this reason. Silly, but I am used to it now.
I do agree it is important to maintain multiple bank accounts for checking and debit purposes. I used to keep 3, and late one Friday afternoon the debit/atm card for one got disabled, followed quickly by a second, leaving me with only the third until Monday (which only had a few hundred in it). I found out later the reason the first one got disabled was that I used it at a gas station followed by a pharmacy; the bank said “Well, that looks like suspicious behavior! You shouldn’t do that!”
I still maintain two. But now I also keep a few thousand in a safe. If greenbacks get disabled I have bigger issues anyway.
I don’t think this is an issue for the kind of “wealth management” institutions the OP is talking about. AIUI, they are referring to investment houses like Fidelity, Vanguard, Neuberger-Berman, Charles Schwab, T. Rowe Price, and the like. If you have enough money invested with any one of them you may qualify for free investment counseling, but I’m not sure that extends to tax advice; if that’s the case, then having someone other than you be aware of the details of your entire portfolio isn’t necessary. If you know what to do with a single 1099 form at tax time, then you also know what to do with half a dozen of them; it’s not that much more complicated, it just takes you a few extra minutes.
This. “Don’t put all your eggs in one basket” can and should be implemented on multiple levels, particularly where your nest egg is concerned. Sprinkle your wealth across a variety of investments to guard against market risk, and even then sprinkle it across a variety of investment houses to guard against fraud, mistakes, identify theft (it shouldn’t be possible for a criminal to access your entire portfolio with a single stolen password), and system malfunctions (viruses, floods, lightning strikes) that could cause problems with your accounts at any single one of these places.
This is an extension of other practices that have been discussed here on the Dope with one’s daily finances, e.g. keeping enough in your checking account to cover several months’ worth of living expenses so you’re not screwed if you lose your job and/or the market tanks your investments, and also keeping enough physical cash in your home to cover a week or two of living expenses in case there are problems at your bank, which could range from bank failure to identity theft to system malfunction.