By Dr. Jim Dahle, WCI FounderI often get questions from white coat investors such as:
- Do I need to have more than one brokerage account?
- Is it OK to have all of my assets at Vanguard?
- How much is too much to have in a brokerage account?
- Do I need diversification between investing companies?
They're all really asking the same thing: do you need to spread your money around between various investing companies in case something happens to one of them? Like most questions in investing, the answer is: “It depends.”
FDIC Insurance and Banks
If you've got a lot of money sitting in bank accounts, the answer to this question is probably yes. FDIC insurance is generally $250,000 per account, so if you have more than that in cash, you actually may need to have your money at more than one institution. Note that there are ways to structure accounts so that you can have more insured funds than $250,000 at a single bank. Remember, however, that banks have a very significant difference from a brokerage account. Banks engage in fractional banking. If 100 people put $100 a piece into a brokerage account, there is now $10,000 worth of cash and securities in that brokerage account. The securities can fall in value, but they don't really disappear.
That's not the case at a bank. The bank takes that $10,000 and then loans out $40,000. There might only be $5,000 at the bank even though $10,000 was put in there. If all 100 people wanted their money back at the same time, the bank would fail. This is why FDIC insurance is so important. It protects you from when the bank doesn't have the money.
SIPC Insurance
Brokerages do have a kind of insurance too, but it functions somewhat differently from FDIC insurance. SIPC insurance protects you in the event of a brokerage failure but not from the value of your investments going down. It's really just a line of credit from the Treasury that allows you to get some of your money right away until everything can get sorted out at the failed brokerage. SIPC insurance is one of the reasons why it may be just fine to have all your money at Vanguard (or Fidelity or Schwab). You'll have access right away to some of it via the SIPC.
More information here:
Vanguard, Fidelity, and Schwab Are Too Big to Fail
Another benefit of investing with Vanguard, Fidelity, and Schwab is that they're frankly “too big to fail.” Vanguard has $7.7 trillion in AUM. That's like two years of US government tax revenue. It's too big to fail. Now, if you're investing with some tiny little startup brokerage firm, maybe you do need to worry. But Fidelity or Schwab? Nah.
Diversify Investments, Not Custodians
Investors learn quickly the importance of diversifying their investments. It would be a major error to put all your money into a single stock, so you use mutual funds—or, more likely, multiple mutual funds. Perhaps you assume that if diversifying your investments is smart, it must be smart to diversify where your investments are held. It's really two very different things, though. The first matters a lot. The second matters much less and perhaps not at all. Even if Fidelity goes out of business, your money is not invested in Fidelity. It just sits there on the Fidelity computers, and it can easily be moved elsewhere, even if the company goes bankrupt.
More information here:
Vanguard vs. Fidelity — Which Is Best for Your Investments?
Vanguard vs. Schwab — Which Is Best for Your Investments?
When You Should Diversify Custodians
All the discussion above, of course, applies to publicly traded securities and big brokerage firms. Once you cross into private investments, you end up in situations where the custodian is also the investment. This is why Bernie Madoff could pull off his fraud, because he was the custodian and the investment. It's similar if you're invested in a real estate syndication. There is a certain amount of manager risk there. The manager might be a fraudster or just incompetent.
In that sort of situation, diversification matters a lot. If you're going to invest in private investments, it better either be with an enterprise where you've had dinner with every important member of that company (and preferably are involved in day-to-day management) or you had better invest with multiple companies.
More information here:
Will I Be Protected If My Investment Broker Goes Bankrupt?
Financial Gurus Who Have Gone Broke
Investment Company Diversification Happens Naturally
This isn't an issue for most people, just because they naturally have their money spread around with multiple custodians. Consider our situation:
- Vanguard: Trust taxable account, personal taxable account, UGMAs, Roth IRAs
- Fidelity: 401(k)s and HSA
- Schwab: 401(k) and Cash Balance Plan
- TSP: old 401(k)
- My529: 529s
- TreasuryDirect: Trust and personal taxable accounts
And that doesn't include the 15% of the portfolio invested in private investments, which is spread among a dozen more companies. While this may be a bit of an extreme example, I would bet that most mid-career white coat investors already have their money invested with more than one brokerage company.
I wouldn't lose sleep if all of my money were invested in mutual funds or ETFs held with one brokerage company, but it's not that much hassle to spread it between two if it makes you feel better.
What do you think? Is it OK to have all of your money at just one company? Why or why not? How many companies do you invest with?
In 1987, Janus’ phone system collapsed under the weight of panicked investors calling in. Today, the issues are different, but risk remains. All of the companies have disaster recovery plans, but how long they would take to recover is unknown to investors. Thus, access could be limited for days at a minimum.
This and other similar comments aren’t really good arguments for using multiple brokerages, but they are arguments to spread your emergency fund around a bit: some cash at home, some in your checking account, some at a local bank etc.
There is at least one scenario in which diversification among brokerages makes sense.
If you rely on only one institution for your day to day spending, checking, electronic transactions, etc., then what do you do when your institution has a computer system problem and your credit or debit card or ATM or electronic wallet on your phone stops working for a few days? Or when the website malfunctions and won’t let you transfer cash to your checking account to make your mortgage payment on time?
Such scenarios are rare but they do happen.
I’m happy to have all our investments with Vanguard (simplifies things in case a non money manager has to handle it when widowed or orphaned- ditched multiple DRP funds, Etrade, and Janus years ago) and TSP for now, even closed one TSP account at spouse’s request for stream lining. And as military we’ve had USAA banking for decades. However I hated mailing checks for deposit so I always got a local bank or credit union, even in Germany and England. Our family cash is now spread over 4 credit unions in 3 towns and USAA. Lets us cherry pick the good CD rates. I think my closing USAA CDs and always answering “why?” with “interest rates better elsewhere” got them to offer a few competitive rates (though the edge of quicker transfer to our main checking account there made me accept a few tenths % lower rate). We just always make sure the local credit union has enough deposits to tide us over with an in person withdrawal if cards fail, etc.
Just FYI, USAA has had mobile deposit of checks on its app for years.
I was going to say something similar – one reason to consolidate your accounts is to make things easier for others in case something happens. My wife has no interest in investments but has learned to maneuver around the Vanguard site.
Currently I’m about half and half Vanguard and TDAmeritrade (soon to be acquired by Schwab) but I’m thinking maybe it’s time to put everything at Vanguard.
Could you confirm the specific coverage limits of SIPC insurance? My understanding is that it provides up to $500,000 in protection, which includes a maximum of $250,000 for cash within a brokerage account.
My SIPC article is here: https://www.whitecoatinvestor.com/is-your-cash-safe/
The current protected amount is $500,000, including up to $250,000 in cash. Notable successes of SIPC include the eventual recovery of 100% of customer money in the Lehman Brothers meltdown, 100% of customer money in the MF Global Inc. liquidation, and 100% of customer money in the Bernie Madoff scandal (for those who had less than $1.7 million invested; those with more have only received 70% of their money back.)
I diversify my investment institutions just in case there is a hack on the institution (or me) where my userid or password are compromised. The eggs in only one (of a few) basket will then be at risk for theft.
This is a great article – I was looking into the same questions when the bank failures of 2023 were happening.
Beyond what is mentioned above, I’ve considered some brokerage diversification may help against identity and password theft. I’m curious to see if you think that’s worth consideration.
Yes, you could protect against that with multiple accounts IF you use different passwords, but if you lost your Lastpass password or something you’d still have that risk. I think the risk is fairly low these days with three factor authentication everywhere.
I know someone else on a different site who had a Fidelity account shut down and inaccessible for over two weeks because the account information was found on the dark web by Fido security people. (The account had to be closed by Fidelity and the assets transferred to a new account with a new login, and that took time.) Fortunately he was able to access his wife’s account during that interval, but it would have been a big problem if he had not been able to do so.
I think having a bit of redundancy can be a good thing.
Not being able to access my investing accounts for two weeks wouldn’t be an issue for me. Not being able to access my checking account for two weeks would be though.
Related question – how does this apply to actively managed accounts? I’m a new decamillionaire who has always successfully managed my own money but am considering professional help given a recent windfall. Would it make sense to split assets between, for example, UBS and Merrill Lynch?
While I probably wouldn’t use either of those firms, there is something to be said for minimizing manager risk. However, a financial advisor or asset manager isn’t generally the person managing the money itself, they’re usually selecting funds or ETFs or whatever whose managers do that. Having more than one of those seems to bring on unnecessary complexity in my book, plus that now puts you in the position of being the overall asset manager since they don’t know what the other is doing. And I assume you know how I feel about active management already.
https://www.whitecoatinvestor.com/people-still-believe-in-active-management/
It is advisable to get pretax IRA and 401k into the same account upon retirement. It facilitate the tax prep and calculation of minimal withdrawal.
For ROTH, it is good to be in the same account and open another account 5 years before withdrawal to avoid unnecessary 5year penalty. Let us say 54.5 yrs old.
For taxable investment account, I would use 2 separate accounts ( Fidelity and Vanguard). The bank account for daily cash flow is best separate from investment brokerage account, esp during market downturn.
KEEPIT SIMPLE-all in Vanguard-if they go under, so does the country
I diversify between brokerages for the same reason I buy Tylenol in single dose packages: I don’t want it to be easy to make a spur-of-the-moment stupid decision. If I’m ever tempted to move a bunch of money suddenly, I want to have to go through 100 steps so I don’t make a dumb decision in 10 minutes that I’ll regret for 40 years.
I hope everything is okay with you.
That’s an interesting argument for additional complexity though.
One reason to spread your net worth across a few custodians is to limit the worst case in the event of a fraud or hack. Phishing scams are common and surprisingly successful.
I just received a notification from my brokerage that the individual 401k I have now has the capability to be a roth 401k via subaccount. Would this obviate the backdoor roth that I’ve done previously? Can you switch assets into the Roth that are higher cost basis so that you don’t have to pay as much taxes on the roth conversion? Thanks.
Schwab? I got an email too.
So Dr. D is saying we can do both, then?
What is the maximum yearly after tax addition one could give to the subaccount roth 401k? I may not do it anyway, just curious. Gotta fill out more paperwork, lol
It’s a little bit in flux. As a general rule, someone under 50 can put in $23,000 this as an “employee deferral.” That can be either Roth or tax-deferred. Starting this year, catch-up contributions ($7,500 for those over 50) not only can be Roth like before, but have to be Roth as per the Secure Act 2.0. So for someone over 50, that’s $30,500 in Roth. If the employer wants to, they can also make the employer match be Roth, although I’m not sure that option is really out there as a very common option. That would allow it all to be Roth, both employee contributions and the employer contributions up to the 415(c) limit ($69,000 for those under 50 and $76,500 for those over 50). There has always been an option to do Mega Backdoor Roth IRA contributions if the plan allows (after-tax employee contributions followed by an in plan conversion) that allowed one to contribute the entire 415(c) contribution ($69K in 2024 for those under 50) as an after-tax contribution. This is what I have been doing each year with the WCI 401(k). If you were over 50, that last $7,500 would have to be a catch-up contribution, i.e. an employee deferral, not an after-tax contribution. So for 2024 the answer to your question is $69,000 but the maximum amount that could go into the Roth account in one year directly and indirectly is $76,500.
No. IRA and 401(k) contributions are totally different. You can do a Backdoor Roth IRA each year AND make Roth 401(k) contributions. In fact, a good 401(k) will also allow you to do the Mega Backdoor Roth IRA process, which is making after-tax contributions to a 401(k) and then converting them to the Roth subaccount.
Cost basis doesn’t really apply inside retirement accounts. When doing a Roth conversion of tax-deferred dollars, you’ll pay ordinary taxes on all of the money in the account no matter what it is invested in.
https://www.whitecoatinvestor.com/the-mega-backdoor-roth-ira/
This is more of an asset protection question, but I’ve wondered if my wife and I (both physicians) would be wise to invest in two separate brokerage accounts. Currently we do it all in one under my name (for simplicity, easier tax loss harvesting) — but in the (unlikely) event of a lawsuit against me, would it be smarter to spilt joint non-retirement investements into two brokerages (one per spouse)? Or would somehow re-classifying it as a joint account accomplish the same thing–? We’re in IL, if state law makes a difference. I also seem to recall there may be an inability to designate a beneficiary with Vanguard joint accounts, which isn’t ideal since we have children.
In a few states, you can title that brokerage account as tenants by the entirety which is probably the ideal option for asset protection. But your method would work somewhat. If only one of you is sued, you’d at least only lose half of your assets.
My asset protection book lists IL specific laws, which in my recollection weren’t awesome. Let me pull it out and see what the TBE law there is….
In IL you can list your real property as TBE, but not your brokerage account. Sorry.
Thanks for responding. I guess my follow up question would be if whether having a joint brokerage account could actually be riskier since it would be open to lawsuits against either person. It sounds like I’ll need to pick up that book of yours!
I suppose so. Although the risk is so low you’ve got to wonder how much hassle you’re willing to deal with to lower the risk further. Her risk of you trying to run off with all the money in a divorce is likely dramatically higher, even if you guys have the best relationship in the world.