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Benz on Keeping It in the (Fund) Family

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. A typical U.S. worker could have as many as seven jobs in their lifetime, and a side effect of this can mean scores of investment accounts across lots of different providers. Is consolidating all of those accounts with one fund firm a good idea?

Here with me to talk about the pluses and minuses is Morningstar's Christine Benz. She is Director of Personal Finance. Thanks for joining me Christine.

Christine Benz: Jason, nice to be here.

Stipp: So it certainly sounds like a nice thing if I've got all these different accounts, and I'm trying to keep track of all the paperwork, to have one fund firm, one series of accounts, one format. What are the pluses to this? Is it a good idea?

Benz: Well, it doesn't even have to be one fund firm, Jason. It could be, say, a supermarket that lets you buy mutual funds, stocks, exchange-traded funds, and this has really been the name of the game for companies in the financial services sector over the past couple of years to be one-stop providers. They all want to be that so they are all offering a broad array of choices.

So there are a couple of key benefits. One is recordkeeping. You'll have fewer statements flowing into your house. You'll receive one consolidated statement, which can be very helpful, particularly for people who are getting close to retirement and want to spend less time managing this stuff. So from an oversight standpoint, I think it can be very, very valuable.

And another big benefit that I see is that when you take time to pull all this stuff together and consolidate, you can do some pruning and put more assets behind your higher conviction ideas, get rid of that fund that you thought was a good idea 12 years ago, but really haven't paid much attention to because it's only a small pool of money. If you spend time consolidating, you can do some streamlining and put more of your assets behind your better ideas.

Stipp: So it really gives you a nice opportunity to pull everything back together and have a nice overhead look and view of what your portfolio is made up. Maybe get rid of some overlap and things like that?

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Benz: Exactly, exactly.

Stipp: So if this is something that I think could be a good idea for me, something that I want to pursue, what sort of things should I look for if I'm going to make this change?

Benz: Well, one of the key starting points would be breadth of investment options. So you want to check up not just on what's available to you, but also what it will cost you to buy and sell. So a lot of firms will have a lot of funds and different options on their platforms, but they may charge you a little bit to buy and sell those that aren't the captive in-house funds.

So check not just on the breadth of the lineup, but what the actual costs will be to do those transactions. Also, check on other account maintenance fees that you might pay to have your accounts at that firm. Those would be some of the key things to focus on.

Stipp: Now you mentioned before that this might be something that someone who is approaching retirement might want to think about. If I am going to be moving into retirement, that obviously means some changes for my portfolio. So what should I have on my radar in that respect if I am thinking about this option?

Benz: Well, that's a great question, Jason. So another key thing if you're getting close to retirement or even in your 40s or 50s and fixed income is taking up a larger share of your portfolio, you want a firm that either does fixed income very well itself or offers you great fixed income options at a very low cost.

But that's one reason I have such an easy time recommending Vanguard for a firm, for an individual's fixed income portfolio, because it does a very good job of managing its fixed income funds at a very low cost.

Stipp: So looking at the flip side, then, it sounds like there are some potential benefits. What are some risks, what are some warning flags that I should have on my radar if I am thinking about doing this, taking this option?

Benz: Well, one key thing to keep in mind is whether the investments within a given firm sort of converge around a similar style. And this is not a risk for the large providers like Fidelity, which offer a broad gamut of investment styles, but more a concern for some of the smaller boutique-type firms, very good firms that you might be tempted to say, here is my money. But one risk is that you will be skewing heavily toward a single investment style.

If you are comfortable with that, that's fine. You might be fine saying, Dodge & Cox, I like their style, I like value and that's where I want to be. But know that you will have periods, where your performance will look very weak because the funds will be very beholden to a given investment style. So that's one potential risk.

Stipp: What about from a regulatory standpoint, is there anything I should keep in mind about, you know, the regulatory issues that a firm could face or this sort of regulatory credentials that they would have?

Benz: Right. So it's kind of the eggs in one basket phenomenon that you want to be sure that there are safeguards in case under some worst-case scenario, and I'll admit that this is not especially likely, but you want to be sure that there are some protection.

So the key thing you are looking for is that the firm is a member of the Securities Investor Protection Corp. So you want to look for that on the firm's website. And that means that should someone at some point in the chain put their hands on client assets, you'll have some safeguards.

So that means that up to 500,000 typically in client assets would be protected by SIPC. So, clients would be made whole should some unfortunate incident like that occur.

Stipp: So important to note that that covers perhaps up to 500,000 if there is some sort of fraud, but it's not going to protect you if the market decides to take another downturn?

Benz: Exactly. Unfortunately, it would be nice if we could buy some insurance protection like that. But no, this is just in case of some sort of fraud or something like that.

Stipp: Well, Christine, thanks so much for outlining the ups and the downs of keeping it in the family, so to speak.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.