Often times when I meet with a prospect, the conversation turns to which investments they hold and where they are held.
TOO often, it sounds something like this:
“I have 32 grand at my old company 401(k) and $1,320 in an IRA at Merrill Lynch. At Schwab, I have 2 IRAs…one for me and one for my wife and they each have $21,500 in the account. Over at Edward Jones, I have a non-qualified annuity which is different from the trading account I have at E-trade. Other than that, I have checking accounts at Bank of America, Wells Fargo, Jim Bob’s Credit Union, and ING Direct. Oh, I almost forgot…I have my current 401(k) and some CDs at 3-4 other banks.”
Wife: “Honey, what about the Roth IRAs?”
“Yep, I left those out. I have 3 Roth IRAs. One at Vanguard, one at the American Funds, and one with my brother in law at XYZ Securities.”
Wife: “Your brother in law left the financial business.”
“Ok, then I don’t know who handles that one, but it is still there.”
Let’s count them, shall we?
- Old 401(k)
- IRA for him – Merrill Lynch
- IRA for him – Schwab
- IRA for her – Schwab
- Annuity – Edward Jones
- Brokerage Account – E-trade
- Checking Account – Bank of America
- Checking Account – Wells Fargo
- Checking Account – Jim Bob’s Credit Union
- Checking Account – ING Direct
- Current 401(k)
- CD – Unknown bank #1
- CD – Unknown bank #2
- CD – unknown bank #3
- CD – unknown bank #4
- Roth IRA – Vanguard
- Roth IRA – American Funds
- Roth IRA – XYZ Securities
18 Accounts. 18. One. Eight. Seriously? Why on God’s green earth would anyone need 18 accounts? Is there any advantage to having so many accounts? What disadvantages are there?
“Sir, you are suffering from a bad case of what I like to call…..RANDOM POOLS OF MONEY.”
The one advantage that people THINK they have when they maintain so many accounts is that they are diversified. Some believe that because they have money spread around in so many spots, that they are somewhat insulated from losing copious amounts of money.
This is NOT TRUE at all.
Depending on the types of investments held in each account, there is a chance that you, Mr. Random Pools, are not diversified at all. Maybe you ARE diversified with your 18 accounts, but your situation could be simplified significantly.
Before we get into simplifying, let’s delve into what you DID accomplish my fertilizing the financial industry with your account spread.
FEES: Most investment accounts have some sort of maintenance fee ($40-$50 per year for every IRA, Roth, etc..) and since you have a nice collection of them. You could be wasting hundreds of dollars on fees. Congrats on that…
Also, some companies have small account fees and if your money is spread around at 10 different companies, you are more likely to not have enough money at that one firm to avoid the small account fee.
AVERAGE CLIENT: If someone has $20,000 with an advisor, they will receive a certain level of service. If someone else has $100,000 with the advisor, should they receive the same level of service?
What about $2 million?
Whether or not they SHOULD receive the same service…I will tell you that they WON’T receive the same service. The larger the account, the more of our time it buys. That is not to say that an advisor shouldn’t accept small accounts (many of us do not have an account minimum), but if you have $750, please do not expect to get a $750,000 level of service. Not happening. It can’t happen.
With that in mind, the more an investor consolidates his/her accounts, the larger the amount of money they have with one advisor.
You go from meaning a “little bit” to a lot of people to meaning “a lot” to a few people.
DEATH PLANNING: Assuming that you care about your beneficiaries, you might want to limit how many different firms house your assets. Depending on each firm’s requirements, a beneficiary will have to present a testamentary will, an affidavit of domicile, a death certificate, and a P.R. form (personal representative). Usually, they all have to be original copies which cost money to purchase. This is a pain in the rear end. Things would be so much simpler for them if they only had to go to 1-2 firms.
CONCENTRATION: The Merrill Lynch advisor has no idea what the Credit Union advisor is doing with your account. We (all of the advisors) could all be recommending the same types of investments, which could lead to concentration (ie…more risk). If the money is all in 1-2 places, it is much easier to keep track of and to recommend suitable investments that will complement the overall strategy.
RMDs: Required minimum distributions are mandatory once the investor reaches 70 ½ years old. If you have 5 IRAs, you will get 5 notices to take out specific amounts of money from each IRA. You are allowed to take it all from 1 IRA if you choose, but good luck keeping up with all of the totals and calculating the amount accurately. By the way, there is a 50% penalty if the correct amount is not taken.
SECOND GUESSING: Brokers are notorious for comparing returns after their recommendations have a good year. I will confess that I too have done this.
“Mr. Roberts, the account I managed was up 12.34% and the account you have with my competitor was only up 3.2%. Why don’t we move that account here?”
Many times you will be selling an asset at a low price and buying more of an asset at a high price. Brokers use the good year to gather more of your money. However, when our account is on the short end of the stick, the excuses will flow.
I strongly encourage investors to choose one. Choose one. CHOOSE ONE PLEASE…even if it is not me. I would rather you pick my competitor and move all of your money there than for you to have 18 accounts all across town.
Have some conviction. Have some heart. Make a decision!
Choose the person you think is the most talented/will do the best job/is the prettiest/is the friendliest, etc, etc, etc……find your criteria and make your move.
Choose one. It is okay. If you choose incorrectly, you can always make a change.