Diversifying Your Portfolio Through Multiple Brokerage Accounts: Good or Bad
Buying and selling individual stocks and investments requires access to a minimum of one brokerage account. There are many benefits to opening a single account, including the broker's expertise and customization of your portfolio through them. However, many investors wonder if a single account is the most lucrative and practical way to diversify their portfolio and whether they can or should have more.
An investor can open more than one brokerage account; however, while diversification is one of the most critical aspects of investing, there are not always compelling reasons to spread your money across multiple financial service providers. To determine the best investment strategy, then, it is necessary to discuss the benefits of a single account over numerous accounts and vice versa.
Advantages of a Single Brokerage Account
Most brokers argue that simplicity is the primary reason to own a single account. With one account, you consolidate your investments, making it easier to keep track of your holdings. Analyses are also made easier when your portfolio is in one place, allowing straightforward risk assessments and adjustments.
Additionally, many brokers offer incentives and perks to account holders who meet specific account thresholds. Some of the benefits might include:
- Lower commission rates
- Financial planning advice
- Additional research resources
With a single account, investors can reach thresholds quicker. Your money is focused in one place rather than potentially being spread thin across multiple holdings. Therefore, a single account is sometimes preferable to diversity for diversity's sake.
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Advantages of Multiple Brokerage Accounts
The Securities Investor Protection Corporation provides account insurance of up to $500,000 per broker, meaning a significant portfolio can receive greater protection when spread across multiple brokerage accounts. While the SIPC does not protect against financial losses, it does protect against brokerage closures, stepping in to replace eligible stocks and securities up to the offered limits.
Additionally, while multiple accounts can complicate strategy and analysis, many brokers make promotional offers for new account holders, including commission-free trades, cash bonuses, and other perks. Sometimes, the promotional offers are worthwhile.
Several circumstances might demand ownership of several accounts, including diversifying retirement accounts, providing for a child, and planning your estate. When you own an IRA brokerage account, you typically are not allowed full access until a specific age — 59 ½ is a usual threshold. Therefore, owning two accounts is the best practice when you want more control over your assets.
Many parents want to ensure their children are provided for even after their passing. Using laws like the Uniform Transfers to Minors Act or Uniform Gifts to Minors Act, most brokers can set up custodial brokerage accounts. However, understand that these accounts are for the child's benefit, and once you put money into them, the cash is no longer yours, meaning you cannot remove it for personal spending. Also, your rights to the account are typically terminated when the child turns 18 or 21, depending on the state.
Finally, multiple brokerage accounts can simplify the estate planning process, often avoiding probate over financial assets. With joint owner or pay-on-death beneficiary accounts, you can ensure your brokerage assets go directly to the individual you choose. Co-ownership typically allows both parties to contribute to and make decisions about the account. However, you can select a pay-on-death account that keeps you as the sole owner until your passing. You can have several accounts naming different loved ones as beneficiaries to help simplify your estate.
Ultimately, choosing between a single brokerage account or multiple depends on your situation and comfort level. What advice do you have for future investors? Leave a comment.