Diversifying Investment Platforms: Is It A Smart Move?

There are several benefits and drawbacks to using multiple investment platforms. One advantage is that it can help to diversify your holdings and manage risk. By using multiple platforms, you can invest in a variety of assets, such as stocks, bonds, mutual funds, and exchange-traded funds. Additionally, if one platform experiences technical issues, you can still trade on another platform. Furthermore, some platforms may offer specialised services or have better tools and features.

However, using multiple platforms can also lead to unnecessary complications. It requires more work to manage and monitor multiple accounts, and there may be higher fees and expenses. It can also result in a fragmented view of your portfolio, making it challenging to accurately assess your asset allocation and risk exposure.

Ultimately, the decision to use multiple investment platforms depends on your financial goals and preferences.

Diversification of investments and management of risk

Diversification is a risk management strategy that involves spreading investments across different asset classes, industries, and geographic regions to reduce the overall risk of an investment portfolio. By holding a variety of investments, the poor performance of one investment can potentially be offset by the better performance of another, leading to a more consistent overall return.

There are several ways to diversify a portfolio:

• Diversifying across asset classes: This includes investing in stocks, bonds, real estate, or cryptocurrency.
• Diversifying across industries: Investing in multiple industries dilutes the risk caused by trends or events in any particular industry.
• Diversifying across companies: Risk can be specific to a company and can arise from legislation, acts of nature, or consumer preference.
• Diversifying across borders: Investing in companies from different countries can provide protection against legislative changes and economic downturns in a single country.
• Diversifying across time frames: Long-term investments generally carry more risk but offer higher potential returns, while short-term investments are more liquid and yield less.

The benefits of diversification include:

• Reduced risk: Diversification helps to lower the overall risk of an investment portfolio.
• Higher long-term returns: A portfolio constructed of different kinds of assets will, on average, yield higher long-term returns.
• Protection against losses: Diversification attempts to protect against losses, which is especially important for older investors and retirees.
• Risk-adjusted returns: Diversification increases the risk-adjusted returns of a portfolio, meaning investors earn greater returns when factoring in the risk they are taking.
• Better opportunities: Diversification can lead to better investment opportunities as it involves researching new industries and comparing companies.
• Enjoyment: Some investors find diversification more enjoyable as it involves exploring new investments and industries.

However, there are also potential drawbacks to diversification:

• Higher costs: Diversification can be more expensive due to transaction fees and brokerage charges associated with buying and selling multiple holdings.
• Complexity: Managing a diverse portfolio can be time-consuming and cumbersome, especially with multiple holdings.
• Lower returns: Diversification may lead to lower portfolio-wide returns as it focuses on reducing risk rather than maximizing returns.
• Overwhelming for beginners: Diversification may be intimidating for inexperienced investors due to the complexity and number of investment options.

When deciding whether to use more than one investment platform, it is important to consider the benefits of diversification and the potential drawbacks of managing multiple accounts. Consolidating investments into one brokerage account can simplify the investment process and make it easier to manage. However, using multiple platforms can provide access to a wider range of investment options and may be beneficial for investors seeking exposure to specific types of investments or asset classes. Ultimately, the decision depends on individual preferences, investment goals, and risk tolerance.

Access to specialised services

Diversification and Risk Management

Multiple investment platforms can help investors diversify their holdings and manage risk. By using different platforms, investors can gain access to a wider range of investment options, such as stocks, bonds, mutual funds, and exchange-traded funds. Different brokerage firms may offer unique investment opportunities, such as initial public offerings, private placements, or alternative investments. This allows investors to spread their assets across different investment options and protect themselves from potential fraud or unauthorised access.

Specialised Brokerage Services

Some brokerage firms specialise in certain investment products or aspects of wealth management, such as trading platforms, tools, commission and fees, investment options, reputation, and regulations. By working with multiple firms, investors can gain exposure to a variety of benefits and services that may not be available at a single institution. This is especially useful for investors with complex financial goals, as they can partner with multiple professionals who specialise in different areas of the financial industry.

Tax Diversification

Using multiple investment platforms can also provide tax diversification. For example, investors can direct some of their money into a taxable brokerage account and some into a tax-advantaged account, such as an IRA or a health savings account. This can help ease the tax burden associated with taxable accounts.

Special Features and Benefits

Different investment platforms may offer highly specific benefits or features, such as roundup features that allow investors to invest spare change into the stock market. Other platforms may offer additional services, such as person-to-person financial advice or robo-advisors with automated rebalancing and tax optimisation.

Drawbacks

While using multiple investment platforms can provide access to specialised services, it is important to consider the drawbacks. Managing multiple accounts can be complex and may lead to communication issues and higher fees and expenses. It can also be challenging to track asset allocation and overall performance across multiple platforms. Therefore, investors should carefully consider their financial goals and seek advice from qualified professionals before deciding to use multiple investment platforms.

Access to a wider range of features

Using multiple investment platforms can give you access to a wider range of features. Different platforms offer different features, trading platforms, and tools. For example, while big brokers like Fidelity, Charles Schwab, and E-Trade offer the most robust trading platforms, their mobile trading apps are outperformed by mobile-first brokers like Robinhood and Public.

By using multiple platforms, you can access a broader range of quality features and choose the platforms and tools that align best with your preferences and trading style. For instance, you might want to use a second platform as a backup option in case there are IT issues with your primary platform.

Additionally, some platforms may offer specialised services or cater to specific types of investments or services. For instance, one platform may excel in options trading, while another is known for its robo-advisory services.

Furthermore, some platforms may have better research tools, while others have a more diverse lineup of tradable assets. Using multiple platforms can allow you to take advantage of the strengths of each platform and maximise your investment strategy.

Cost efficiency

Firstly, consolidating your investments on a single platform can often lead to cost savings. For example, some platforms may offer reduced fees or waive certain charges if you hold multiple types of accounts (such as an ISA and a pension) with them or if your total invested assets exceed a certain threshold. Spreading your investments across multiple platforms may result in paying multiple sets of fees, which can add up and impact your overall returns.

However, using multiple investment platforms can also provide cost benefits in certain situations. Different platforms may offer lower fees or better terms for specific types of investments or transactions. For instance, a platform might offer lower fees for trading certain types of assets, such as Vanguard funds or ETFs. By using multiple platforms, you can take advantage of the cost structure that best suits your investment strategy.

Additionally, some platforms may provide promotions or bonuses for opening an account or reaching certain deposit milestones. By using multiple platforms, you may be able to take advantage of these incentives and potentially increase your overall returns.

It's also worth noting that cost should not be the only factor when deciding whether to use multiple investment platforms. Other considerations, such as risk management, investment goals, and the range of investment options available, should also play a role in your decision-making process.

Finally, it's important to carefully evaluate the fees and costs associated with any investment platform before committing your funds. Be sure to read the fine print and understand all the charges involved, including advisory fees, expense ratios, inactivity penalties, and transaction fees. By understanding the cost structure, you can make informed decisions about which platforms to use and ensure you're getting the most value for your money.

Backup in case of IT issues

Using multiple investment platforms can be a good backup in case of IT issues. If one platform is experiencing downtime, you can still access your investments through another platform. However, it is important to note that having multiple platforms means more work for you and can make it harder to track your overall performance and asset allocation.

To keep things organised, you can use apps such as Empower (formerly Personal Capital) to track your investments across different platforms. Additionally, large brokerages and financial advisors often have software that consolidates and tracks performance, providing a holistic view of your finances.

It is also worth noting that three-quarters of all platforms use software from just three suppliers, so choosing platforms that use different backend software can reduce the risk of all your platforms being affected by the same software issues.

Frequently asked questions