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The Short Answer

Are There Risks in Investing With a Single Firm?

Investment and operational risks merit further scrutiny.

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Question: I'm in the process of getting ready to retire, and for simplicity's sake, I'd like to consolidate my investment assets with a single firm. But are there any risks to doing so?

Answer: The virtues of running a lean and mean portfolio apply no matter where you are in your investing life. First, you'll have fewer moving parts to oversee, freeing up time for activities other than monitoring your portfolio. You'll also be able to get more bang for your buck by stashing a higher percentage of your money in higher-conviction holdings.

But it's also prudent to explore whether there's a downside to having more (or even all) of your eggs in one basket. There are two key sets of risks to consider: first, whether investing with a single firm will expose your portfolio to undue risks from an investment standpoint because of a lack of diversification, and second, what would happen if the firm you invested with seized assets from client accounts. Would you have any recourse?

The short answer is that if your assets total more than $500,000, ask a current or prospective investment provider whether you have safeguards above that level. Many providers purchase additional insurance to provide larger clients with peace of mind. Legally distinct accounts, such as IRAs and taxable accounts, are also considered separate entities, entitling you to protection of $500,000 per account, not just per individual.  

Sizing Up the Investment Risks
So let's start with the former risk--that investing with a single firm can leave you underdiversified from an investment standpoint. The extent to which you concern yourself with this risk should depend on the provider you choose and the breadth of its lineup. If you opt for one of the big mutual fund companies or brokerage firms, you'll have a huge array of investments from which to choose: mutual funds run by that firm and possibly other, outside investment managers; exchange-traded funds; individual stocks; and maybe even bonds. Given the number of investment choices available at large firms, there's little risk that you won't be able to achieve adequate investment-style diversification.

That risk becomes greater, however, if you have invested the lion's share of your portfolio in actively managed investments from a firm that specializes in a single investment style, even if a firm executes that strategy very well. For example, Dodge & Cox's stock funds all use a value-oriented approach, leaving them beholden to a similar set of forces. In 2008, for example, both  Dodge & Cox International (DODFX) and  Dodge & Cox Stock (DODGX) landed in the bottom 20% of their portfolios, even though they have different managers and investment mandates. Their stock picks were different, of course, but both made forays into fallen holdings, especially in the financials sector, that went on to fall further still as the bear market progressed. An investor who held a lot of assets in Dodge & Cox funds would've seen his or her portfolio hold up better by also stashing assets in another firm with a complementary investment style or even in a good old-fashioned S&P 500 index fund. So if boutique investment managers are a big share of your investment portfolio, make sure to combine them with other types of investments.

And as you consolidate assets prior to retirement, it's also crucial to make sure that prospective providers offer solid fixed-income options, as such assets will be a large and growing share of your portfolio as you age. If the firm where you're investing doesn't offer an array of topflight bond funds--and I'd put Fidelity, Vanguard, and PIMCO atop a very short list for individual investors--it should at least offer you access to outside managers at a very low cost. If it doesn't, that firm isn't an ideal receptacle for your retirement assets.

Assessing the Operational Risks
If you're investing in anything other than cash, you know there's a risk that your holdings could drop in value, and it's one you'll have to live with if you're hoping to earn anything more than a very meager return on your investments.

Yet a separate but related worry reared its head during the bear market: What if investors were defrauded or the investment firm itself went belly-up? Could investors' assets go down with the ship? Could creditors seize client assets? These are obviously huge concerns if you're putting more and more of your life savings with a single firm.

If you're holding stocks, bonds, or mutual funds and your brokerage firm or mutual fund company is a member of the Securities Investor Protection Corporation (and you can check here to see if it is), you have some protections. Member firms pay into an SIPC fund, which in turn would replace client assets if cash or securities were missing from the clients' accounts. SIPC covers up to $500,000 in client assets and up to $100,000 for amounts held in cash.

So is the $500,000 threshold a disincentive to hold more than that amount at any one firm? Not necessarily. Accounts with separate legal distinctions--for example, IRA assets and taxable accounts--would each be eligible for $500,000 in coverage under SIPC. Additionally, some firms purchase extra insurance to cover assets above those levels. So if your total asset level is more than $500,000, be sure to call your current and prospective investment provider and ask for specifics; don't just settle for vague assurances of greater protections on the company's Web site.

See More Articles by Christine Benz


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Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.