While some investors appreciate the simplicity of keeping all of their investment funds under one account, there are many reasons to branch out to different brokerages.
Some investors have several brokerage accounts to keep their retirement funds and active trading accounts separate, while others prefer to keep their niche accounts with companies that specialize in them.
Still others see benefits in estate planning or simply want to take advantage of multiple sign-up perks.
For many investors, it is more “convenient to track their taxable and tax-sheltered portfolios such as a 401(k) plan or IRA separately,” says Stuart Michelson, a finance professor at Stetson University in DeLand, Florida. “An investor may open an account with one investment company for taxable investments and another for tax-sheltered investments.”
If you are considering whether it is advantageous to open a second, third or 10th brokerage account, here are some points to keep in mind:
— Multiple brokerages help diversify and manage risk.
— Take advantage of different brokerages’ promotions.
— Disadvantages of having multiple accounts.
Multiple Brokerages Help Diversify and Manage Risk
A prime benefit of owning multiple brokerage accounts is that it can help diversify your holdings.
“With more than one brokerage account, an investor has many more diversified investment possibilities, using both mutual funds and exchange-traded funds,” Michelson says.
Brokerages also specialize in different assets and products such as futures, options or commodities.
“For example, an investor may want to diversify internationally and find that another firm has a wider breadth of offerings in foreign markets,” he says. “Or she may want to begin using margin and finds that another broker offers lower rates.”
Many investors see having multiple accounts as a risk management tool, says Steve Sosnick, chief strategist of Interactive Brokers, a brokerage based in Greenwich, Connecticut. If one broker has an outage, then the customer can still trade at 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 margin rates,” says Evan Kulak, a co-founder of Polaris Portfolios, a Chicago-based financial planning firm. “If you are trading on margin, it makes sense to shop around for the broker that provides the best execution and lending rates. Sophisticated investors may have their non-margin accounts at one broker and their margin accounts at another brokerage firm.”
Safety of your funds is also a concern. The Securities Investor Protection Corporation’s account insurance protects up to $500,000 per brokerage account, so dividing assets across different investment firms will “assist in protecting a higher level of overall portfolio assets more effectively,” Michelson says.
Multiple accounts may also make sense for estate planning. Investment accounts allow an investor to name a joint owner or a pay-on-death beneficiary.
“By having multiple accounts, each naming a different person as a joint owner, an investor can manage their brokerage assets completely independent of a will or any other estate planning,” Michelson says. “For example, an investor may name their sister as a joint owner on one account and their child as a joint owner on a different account, simplifying distribution of assets upon their death.”
Take Advantage of Different Brokerages’ Promotions
Investors may be attracted to the perks offered by investment firms for opening new accounts, such as cash bonuses, commission-free trades and other advantages. Check out the details and see if there are requirements, such as a minimum balance.
“Make sure you will be able to keep sufficient funds in the account for the required time to capture the account opening bonus,” says Greg McBride, chief financial analyst for Bankrate, a New York-based financial data company. “While trading might be commission-free, not all robo advisor or financial advisor offerings are the same, so be sure to compare terms closely to find the best fit at the right cost.”
Investors who also have an allocation for alternative assets may need to open another account since not every brokerage offers cryptocurrency trading or may only offer trading in certain cryptocurrencies, he says.
Another reason some investors choose to have a second brokerage account is if they are active traders. Some brokerages 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 lower the amount of time that money can be used to invest in individual stocks or ETFs.
Some investors will have a separate account because one of them is managed by a financial advisor and another one is for discretionary trades.
“Many people enjoy investing, so they want to take control of a smaller portfolio,” says Thomas Kopelman, a financial advisor at Indianapolis-based RLS Wealth.
Disadvantages of Having Multiple Accounts
Maintaining more than one account means investors could be paying additional fees, which add up easily. Shop around and compare expense ratios, especially if you buy or sell funds or ETFs frequently.
“One investment firm may have a lower expense ratio than another firm for a similar mutual fund or ETF,” Michelson says.
Another catch to having more than one account: If you have brokerage accounts at different firms, “you may not have the total snapshot of your asset allocation or net worth in one place,” McBride says. “Be extra diligent in which account you deposit or withdraw funds if you have a taxable account and an IRA at the same firm. You don’t want to inadvertently place a trade in your taxable account that was intended to be done in your IRA.”
When an investor has multiple brokerage accounts, tracking the investment performance, fees and taxes can become more complicated, Michelson says.
“For some investors, consolidating all of their holdings in one account allows the investor to more easily track and analyze their performance, risk level and returns,” he says.
Some brokerage firms offer perks and incentives to investors who reach 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 account minimums or thresholds,” he says.