Diversification or Dispersion?

We’ve all heard the phrase, ‘Don’t put all of your eggs in one basket’.  For many people, they’ve taken this philosophy a little too far, having IRAs, 401ks, 403bs, and other investment accounts disbursed with various providers. Add in accounts for your spouse and other family members and it’s not uncommon to see accounts at over half a dozen different providers.  In many instances, people switch employment and leave their 401k/403b behind with the old employer.  In other instances, they open accounts at a discount brokerage firm after reading the latest Money Magazine or getting advice from their brother-in-law at a Holiday party.  This strategy of diversification by dispersion causes several challenges when planning for retirement.  Let’s review some of these challenges.

Asset Management

Having an optimum mixture of various investments, including stocks, bonds, international, real estate, commodities, cash, etc..can be a challenging endeavor.  When assets are located with different providers, this process becomes more difficult.  Simply understanding what you own can be a monumental task, and once you do, the next question is whether your various assets are working well together. Owning 10 large-cap index funds is not a well-diversified portfolio, but it’s hard to recognize this issue looking at a plethora of statements.  Identify your targeted asset allocation, based on your risk tolerance and return expectations, and implement it throughout your assets.

Managing assets is difficult.  It requires an extensive amount of research to select the appropriate investments, make the necessary changes, and monitor it moving forward.  Managing those assets throughout multiple providers is an inefficient and difficult.  Centralizing assets in one location allows for the more efficient management of your plan.

Administration of Retirement Accounts

Not to be overlooked, dealing with various administrative issues is made more difficult when you have multiple accounts.  Imagine having to change your address or beneficiary designations to your various investment accounts, including current and previous 401k plans, IRA & Roth IRA accounts, and brokerage assets.  Next, imagine needing to seek out 1099 Forms for all of your accounts, much less coordinating a Roth Conversion strategy between custodians.  Centralizing assets will save you time and ease the headaches that go with administering your assets.

Distribution

As you approach retirement, trying to set-up an efficient distribution strategy between different types of accounts (tax-deferred IRAs,tax-free Roth IRAs, taxable brokerage accounts) is made more difficult when assets are dispersed.  If you’re trying to minimize tax liability, doing so without a coordinated strategy is not productive.  In addition, the simple task of tracking down a lost check, or confirm a deposit is made more difficult when you have multiple providers.  Collectively, if clients haven’t seen the benefits of asset consolidation before they reach distribution phase, they clearly see it once they reach this point.

Lower Fees & Better Service Offering

Not to be overlooked, there are valuable cost savings when you consolidate assets.  These may include reductions in advisory fees, brokerage commissions, or margin rates.  In addition, higher account balances frequently qualify you for more services with your provider.

The concept of diversification by dispersion taught to us by our depression era parents or grandparents creates a road block in facilitating a successful retirement.  It is prudent to centralize assets and coordinate with one service provider.  When in doubt, consolidate.