Never Keep All Assets in One Institution
Financial Institutions frequently try to convince investors that it is great to hold everything under one roof, despite the fact it is a terrible idea. The most frequent sales pitch seems to be that it creates ease of record keeping. They often have attractive portfolio allocation monitoring tools with all sorts of charts and graphs. At tax time, they say, there is also only one 1099 to contend with. But while there is some truth behind their pitch negatives far outweigh positives.
One big risk is that problems might occur within the company. I bought a certificate of deposit (CD) at Broadway Bank in Chicago back around 2007. When the Financial Crisis hit Broadway Bank failed. The CD was under the FDIC protection limit. But during the process of Broadway’s assets being taken over by MB Financial they had the right to lower interest payments on this obligation, which they did: from 3% to 1.5%. Then when the CD came due a few years later it was a giant hassle. The signature card had been lost during transition from one bank to another, and due to MB’s policies they had to go through special procedures to close it out. The personal banker spent about an hour on the phone while I waited there. All other institutions I do business with continued to operate normally. So the nuisance was limited. But imagine if everything had been at Broadway.
Different institutions also have positive and negative features. At Chase these days you can still walk in and talk to a personal banker, although sometimes you have to wait a few minutes. Last time I needed a personal banker from Bank of America I had to make an appointment, go sit in a coffee shop for an hour and a half, then come back. On the flip side Bank of America offers a more flexible brokerage operation. They have Merrill Lynch financial advisors available. But they also offer Merrill Edge discount brokerage. Chase only offers accounts with an advisor. I don’t personally need an advisor. So it can be a nuisance: phone calls to take care of business on the account almost always mean listening to a sales pitch. Discover Bank, an online bank, offers savings rates much higher than either Bank of America or Chase: currently .95% compared to rates under .10%. Features also change over time. So an institution you love now could be at the top of your hate list in a couple years. If you have assets in multiple locations you can continue business as usual one place while arranging to change the one that is no longer adequate.
Insurance limits also come into play. Many people know that the FDIC insures bank accounts for up to $250,000 in deposits. But there is coverage, provided by the Securities Investor Protection Corporation (SIPC), for brokerage accounts as well. The current coverage limit is $500,000 per account with up to $250,000 of that allowed to be cash. For coverage to be active your brokerage must be a member firm. If they are it will be prominently displayed on their signage and statements. SIPC coverage is more difficult to manage than FDIC due to fluctuating market values. But it is something to keep an eye on. Anything up to $500,000 has a safety net. Anything above that limit does not.
Having multiple financial relationships is of benefit to individual investors. Using this strategy hedges against problems occurring within a given company, something that happens all the time. It also allows an investor to take advantage of strengths at various institutions while stepping around the weaknesses. And it creates an environment where account insurance limits can be used to the fullest. Listening to the tried and true financial industry sales pitch about keeping all your assets in one place is a big mistake.
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