Does it make sense to hold your investment portfolios with different financial institutions in case one runs into trouble? In the world of investing, the ways in which you can diversify are endless – across currencies, countries, industries, asset classes and more. When done in a structured, meaningful way it can protect and improve the performance of your investment portfolio. But what about diversifying across financial service providers? Does it help or hurt?
Why do people choose more than one broker?
The reason for diversifying in the investment world is to reduce losses imposed by any one eventuality. In this case, the eventuality that investors are trying to guard against is the risk of an institution going bankrupt and what that will mean for their investments. It is important to invest through financially sound licensed brokers. However, once you have found a few financially sound brokers you may wish to concentrate your investments there, that is, go for fewer brokers but focus on ones with stronger fundamentals. This can be assessed using a capital adequacy ratio that brokers must publish in accordance with the Financial Services Commission (FSC) guidelines. The higher the better, and the regulatory minimum is 10 per cent.
Another reason is that different brokers may have different areas of expertise. Some are known for equities while some may be known for bonds. Intelligent investors prudently choose based on the strengths and skill sets of the broker.
Benefits of consolidating your investments under one custodian’s roof.
*Easier monitoring and management: Consolidating your various portfolios at one custodian, simplifies your administrative work and makes it easier to keep track of your holdings. This is especially important for older investors who may grow wary of the extra hassle more easily. It can make matters simpler for their heirs. I frequently see individuals who have so many accounts that they do not know or remember what they are invested in, how the investments are performing and whose names are on their various accounts as the numerous portfolios have become too cumbersome to monitor and track.
*Financial advice based on the full picture: If you rely on your firm for advice or asset management, it would be prudent to have a second opinion by having more than one investment advisor. However, investors using more than one advisor or manager run the risk that the firms could unknowingly duplicate one another, leaving the investor too heavily committed to certain investments. Your advisor can offer better guidance when they have a full picture of your investments and not just a small slice of the total pie.
*Opportunity to access better rates and wider investment options: Sometimes you limit your investment opportunities and rates by having small sums of money invested with several different brokers. I recall a client once complaining about the rate she was getting on her repo with me. It turned out that she had several small repos earning low rates at other institutions. I pointed out that the rates on repos are tiered (i.e. higher rates for higher amounts) so if she consolidated the repos into one larger amount with one institution, she could get a better rate. I was also able to offer her other products with even higher rates that she did not have access to before, because of the higher minimum requirement.
It may not be a bad idea to invest through two different brokers, to benefit from opinions from more than one advisor or to benefit from different areas of investment expertise, for example using one broker to buy your stocks and one for bonds. But diversifying over several brokers is probably overkill and may cause more harm than good in the long run. In other words, when it comes to the number of financial institutions you should have managing your investments, less may be more.
Toni-Ann Neita-Elliott, CFP is the vice-president, sales & marketing at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm . Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: firstname.lastname@example.org