While some investors appreciate the simplicity of holding all of their mutual funds under one account, there are many reasons to turn to different brokers.
Some investors have several brokerage accounts to maintain their pension funds and active trading accounts segregated, while others prefer to keep their niche accounts with companies that specialize in them.
Still others see benefits in real estate planning or simply want to take advantage of multiple sign-up benefits.
For many investors, it is “more convenient to keep their taxable and tax-sheltered portfolios, such as a… 401(k) plan or IRA separately,” said Stuart Michelson, a professor of finance at Stetson University in DeLand, Florida. “An investor can open an account with one investment company for taxable investments and another for tax-protected investments.”
If you’re considering whether it’s beneficial to open a second, third, or tenth brokerage account, here are some points to keep in mind:
— Multiple brokers help diversify and manage risk.
— Take advantage of the promotions of various brokers.
— Disadvantages of having multiple accounts.
Multiple brokers help diversify and manage risk
An important benefit of owning multiple brokerage accounts is that it can help you diversify your holdings.
“With more than one brokerage account, an investor has many more diversified investment options, using both mutual funds and exchange-traded funds,” Michelson says.
Brokers also specialize in various assets and products, such as futures, options or commodities.
“For example, an investor may want diversify internationally and discover that another company has a wider offering in foreign markets,” he says. “Or maybe she wants to start using margin and finds that another broker offers lower rates.”
Many investors view having multiple accounts as a risk management tool, says Steve Sosnick, chief strategist for Interactive Brokers, a brokerage based in Greenwich, Connecticut. If one broker has a malfunction, the customer can still trade with another broker.
Sophisticated investors often trade on margin, and “it can be in their best interest to work with a broker that offers the most attractive margins,” said Evan Kulak, co-founder of Polaris Portfolios, a Chicago-based financial planning firm. “If you’re trading on margin, it makes sense to look for the broker that offers the best execution and lending rates. Sophisticated investors can have their non-margin accounts with one broker and their margin accounts with another brokerage firm.”
The security of your money is also a concern. The Securities Investor Protection Corporation account insurance protects up to $500,000 per brokerage account, so dividing assets across different investment firms “helps protect a higher level of total portfolio assets more effectively,” Michelson says.
Multiple accounts can also make sense for estate planning. Investment accounts allow an investor to name a co-owner or a beneficiary upon death.
“Having multiple accounts, each naming a different person as co-owner, allows an investor to manage their brokerage assets completely independently of a will or other estate planning,” Michelson says. “For example, an investor can name his sister as a co-owner in one account and his child as a co-owner in another account, simplifying the distribution of assets after their deaths.”
Take advantage of the promotions of various brokers
Investors may be drawn to the benefits that investment firms offer for opening new accounts, such as cash bonuses, commission-free transactions, and other benefits. Check out the details and see if there are any requirements, such as a minimum balance.
“Make sure you can keep enough money in the account for the time it takes to receive the account opening bonus,” said Greg McBride, chief financial analyst at Bankrate, a New York-based financial data firm. “While trading can be commission-free, not all offerings from robo-advisors or financial advisors are the same, so be sure to compare terms closely to find the best fit at the right price.”
Investors who also have an Alternate Asset Allocation may need to open another account as not every brokerage offers cryptocurrency trading or may only offer trading in certain cryptocurrencies, he says.
Another reason why some investors choose to have a second brokerage account is if they are active traders. Some brokers offer the ability to trade stocks and bonds, but also offer a checking account so you can avoid the delay in transferring money back and forth between a traditional checking account and your brokerage account. The delay will reduce the amount of time money can be used to invest in individual stocks or ETFs.
Some investors have a separate account because one of them is managed by a financial advisor and another for discretionary transactions.
“A lot of people love investing, so they want to take control of a smaller portfolio,” said Thomas Kopelman, financial advisor at Indianapolis-based RLS Wealth.
Disadvantages of having multiple accounts
Holding more than one account means investors may incur additional fees, which easily add up. Shop around and compare expense ratios, especially if you’re buying or selling funds or ETFs often.
“One investment firm may have a lower expense ratio than another for a comparable mutual fund or ETF,” Michelson says.
Another downside to having more than one account: If you have brokerage accounts with several companies, “you may not have the total snapshot of your asset allocation or net worth in one place,” McBride says. “Be extra diligent about which account you deposit or withdraw money into if you have a taxable account and an IRA with the same company. You don’t want to accidentally place a transaction in your taxable account that was meant to be made in your IRA.”
When an investor has multiple brokerage accounts, it can become more difficult to track investment performance, fees, and taxes, Michelson says.
“For some investors, consolidating all of their assets into one account allows the investor to more easily track and analyze their performance, level of risk, and return,” he says.
Some brokerage firms offer perks and incentives to investors who reach the minimum thresholds in terms of account value, such as lower commissions, additional research resources, and financial planning advice, Michelson says.
“A single account allows an investor to more easily reach those minimums or thresholds,” he says.