Diversifying Your Investment: Using Multiple Platforms For Your Money

Deciding how many investment platforms to use is a crucial step in your investment journey. While it may be tempting to open multiple brokerage accounts, especially if you're just starting, it's generally advisable to stick to one account to simplify your investment strategy and avoid unnecessary complexities.

- Diversification: Having multiple accounts may give the illusion of diversification, but if the underlying investments across these accounts are similar, you're not truly diversifying your portfolio.

- Management Overhead: Juggling multiple accounts can be cumbersome and make it harder to manage your investments effectively, especially when it comes to rebalancing and risk reduction strategies.

- Tax Savings: By consolidating your investments into one account, you may be able to take advantage of certain tax-saving strategies, such as tax-loss harvesting, which may not be possible with smaller, scattered investments.

- Fees and Minimums: Some brokerage accounts have minimum deposit requirements or charge membership fees. By using a single account, you can avoid paying multiple fees and potentially save on management costs.

- Simplicity and Convenience: Using one platform allows you to monitor your portfolio more efficiently and makes it easier to keep track of your overall asset allocation.

However, there are situations where using multiple brokerage accounts may be beneficial:

- Access to Specific Investments: If your current brokerage firm doesn't offer certain types of investments or asset classes that you're interested in, opening an additional account with a different firm might be a viable option.

- Higher Investment Balances: Investors with larger investment balances tend to use multiple brokerage accounts to access a wider range of services and investment opportunities.

In conclusion, while using a single brokerage account is often the recommended approach, there may be instances where diversifying your accounts can provide benefits. It's essential to carefully consider your investment goals, risk tolerance, and the specific features offered by different platforms before deciding on the number of investment platforms to use.

Multiple brokerage accounts may not be more diverse

Having multiple brokerage accounts can be beneficial for diversification and managing risk. However, it is important to note that simply having multiple accounts does not necessarily equate to having a more diverse portfolio.

Andrew Westlin, a CFP at Betterment, observes that clients often mistakenly believe that holding four to five different brokerage accounts equates to diversification, when in reality, the investments owned at each firm are often the same or very similar. As a result, investors could inadvertently be hurting the overall performance of their investments.

In addition, multiple brokerage accounts mean more work, as investors have to manage additional emails, tax forms, platforms, and passwords. This added complexity can make it harder to track overall allocations, investments, tax strategies, dividends, and capital gains.

Therefore, it is essential for investors to carefully consider their financial goals and conduct thorough research before deciding to open multiple brokerage accounts. While diversification is important, it is also crucial to ensure that the benefits of diversification are not offset by the challenges and potential drawbacks of managing multiple accounts.

More accounts mean more management

Having multiple brokerage accounts means more work for you. It makes it much harder to manage your investments on an ongoing basis, especially when it comes to rebalancing and risk reduction.

With more accounts, you'll have to deal with more communication, such as statements and emails, and it may also prove more challenging to monitor your portfolio and your overall asset allocation.

If you have multiple brokerage accounts, you may also miss the threshold to take advantage of certain tax-saving investment strategies such as tax-loss harvesting. For example, clients must have invested assets of $50,000 or more before Charles Schwab's automatic tax-loss harvesting kicks in.

Some brokerage accounts may also require a minimum deposit to invest or charge a membership fee. Paying additional fees could potentially eat away at how much you have to invest.

If you're thinking of having multiple brokerage accounts, it's important to consider the extra management involved.

Multiple accounts may mean missing out on tax savings

Multiple brokerage accounts can be beneficial for investors, but they also come with certain drawbacks. One of the main disadvantages is that investors with multiple accounts may miss out on tax savings.

When you distribute your funds across multiple brokerage accounts, you may not meet the threshold to take advantage of certain tax-saving investment strategies, such as tax-loss harvesting. For example, Charles Schwab's automatic tax-loss harvesting service requires clients to have invested assets of $50,000 or more.

Additionally, some brokerage accounts charge membership fees or require a minimum deposit, which can eat away at the amount you have available to invest.

Furthermore, a higher balance in a single brokerage account can lead to benefits such as lower management fees for using a financial advisor, as well as higher returns from compound interest.

Therefore, while multiple brokerage accounts can offer certain advantages, investors should also be aware of the potential tax implications and additional costs that may arise from this approach.

Brokerage firms are insured by the SIPC

Brokerage firms are insured by the Securities Investor Protection Corporation (SIPC), which is similar to FDIC protection for bank failures. The SIPC is a non-profit corporation created by Congress 50 years ago to protect investors. It works to restore investors' cash and securities when their brokerage firm fails financially.

Here's what you need to know about SIPC insurance:

• SIPC insurance covers up to $500,000 in total per customer, which includes a maximum of $250,000 in cash coverage.
• If you have multiple accounts with the same brokerage firm, SIPC treats each account separately and insures each up to $500,000.
• SIPC protection covers cash in a brokerage firm account from the sale of or for the purchase of securities.
• Money market mutual funds are considered securities and are protected by SIPC.
• SIPC protects stocks, bonds, Treasury securities, certificates of deposit, mutual funds, and certain other investments as "securities."
• SIPC does not protect against the decline in value of your securities or losses due to a broker's bad investment advice.
• SIPC protection is only available if your brokerage firm fails and SIPC steps in; you must file a claim to receive protection.
• Most U.S. brokerage firms are required to be SIPC members.

One brokerage account is usually best

Diversification

Having multiple brokerage accounts may give the impression of a diverse portfolio, but in reality, if the investments across these accounts mirror each other, there is little diversification. In fact, you could be hindering the performance of your investments.

More accounts mean more work

Juggling multiple brokerage accounts can be inconvenient and challenging to monitor. It also means more communication, such as statements and emails, to keep track of. This makes it much harder to manage your investments, especially when it comes to rebalancing and risk reduction.

Missed tax savings

Distributing your funds across multiple brokerage accounts may cause you to miss out on tax-saving investment strategies, such as tax-loss harvesting. Certain strategies are only applicable when your invested assets reach a certain threshold.

Additional fees

Some brokerage accounts require a minimum deposit or charge a membership fee. These additional fees could eat into the amount you have available to invest. A higher balance is beneficial as it can help you save on fees and grow your money through compound interest.

SIPC insurance limits

The Securities Investor Protection Corporation (SIPC) insures cash and securities up to $500,000, with a $250,000 limit on cash losses. While this may be a concern for investors with large cash reserves, it is generally not something to worry about when deciding whether to use one or multiple brokerage accounts.

However, there may be times when investing in multiple brokerages is a good strategy. For example, if your current brokerage firm doesn't offer certain types of investments or asset classes, opening an account with a firm that does may be beneficial.

Frequently asked questions