Should I Diversify My Investment Brokerage Firms?

by Kevin on October 30, 2012

A few weeks ago I pondered the benefit of diversifying my life insurance companies. In other words, is it better to put all of your eggs into one basket and hope that life insurance company doesn’t fail or should you spread out your insurance policies over several insurers to reduce that risk? Is that even a legitimate risk to worry about?

That brought me to today’s thought: my brokerage firm. Should I spread our money out over several firms? That may sound ridiculous, but let’s dig into this case a bit deeper.

How Many Brokers Should I Have?

I currently have two major brokerage firms that hold all of my family’s retirement assets. One is a company I chose to do business with while the other is a firm my employer picked to run our 4o1k plan. A majority of our retirement savings is in the former and not the latter.

For the average person this would be fine. You don’t need 16 different brokers; I won’t argue that point. But having more than the one you picked and the one your employer picked might be wise. Why?

Brokerage Firm Insolvency

Any investment brokerage you do business with either online or as a brick-and-mortar store should be a member of SIPC or Securities Investor Protection Corporation. A brokerage firm being a member of SIPC is similar to a bank being FDIC insured or a credit union NCUA insured. Essentially, if the financial institution is insolvent that firm’s customers can get their money back. In fact their mission webpage says no less than 99% of people who are eligible get their investments back through SIPC after a brokerage firm is insolvent.

But, just like with the FDIC, you may not get immediate access to your investments and funds. The process of taking over the brokerage isn’t immediate and issues have to be worked through. At the end of the day you end up with your investments, but what if you need to make changes immediately?

Retirees Should Be Careful

For the average investor that is trying to save a little bit of money each month for a retirement many years in the future, I don’t think diversifying your brokerage firms is a big necessity. In fact it can be counterproductive because it makes managing your assets that much more complicated.

However, for retirees that are relying on the income from the investments held in those retirement accounts I think it could turn out to be important. Especially if you are truly reliant each month on the income from those investments to be able to pay your bills. Just like living paycheck to paycheck, living from investment check to investment check is not a great place to be. And any disruption in those checks coming to you could spell trouble.

Imagine having your entire nest egg with a broker that goes under. You are expecting a check in two weeks from the dividend payments on some of your investments. Now the SIPC steps in and starts working on getting you your cash and investments to you so you can put them with a new broker.

It’s a messy, stressful situation. It would be really comforting at a time like that to have a 2nd brokerage firm holding 50% of your assets that also sends you a check on a regular basis. That way if one of your brokerage firms goes insolvent (unlikely, but it does happen) you might see a delay on 50% of your dividend checks or just the ability to make changes to your portfolio. The likelihood that both firms go under in a short period of time would be incredibly small, so you hedge your bets a little bit.

This might be overboard, but if I were a retiree that was reliant on a steady check from my investments this is something I would definitely consider doing. What about you?

{ 1 comment }

[email protected] November 1, 2012 at 2:05 pm

Diversifying risk is always a good idea. Having 2 brokers ought to be enough. Is there some way to investigate how secure a brokerage’s finances are? Thanks!

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