Mattress, Bank, or Broker - Broker/Custodial Diversification – Is it necessary?

So, you have made it, or are clearly on your way…. And your liquid investment accounts have grown from merely a place where you add money as you earned it to a real nest egg. So, you start thinking, is my money safe? At Members’ Wealth, we get this exact question or concern from prospective clients and clients on a regular basis. I am sure we are not alone. It is valid. We aim for security and portfolio management efficiency in helping our clients.

While there are several factors to consider, when thinking of the safety of your assets, a great first place to start is literally where is your money held. Mattress, bank, custodian…etc.

Mattress (Keeping Cash at Home)

Pros:

• Immediate Access: Your money is immediately accessible anytime you need it, with no intermediary or processing time.
• Perceived Control: Some may feel a greater sense of control over their funds when they're physically held.

Cons:

• No Earnings: Money stored at home does not earn any interest or investment returns.
• Safety Risks: Physical cash is vulnerable to theft, loss, or damage from disasters (fire, flood, etc.).
• Inflation Risk: The value of cash decreases over time due to inflation, eroding purchasing power.
• No Insurance: There's no protection or insurance for cash kept at home.

Bank[i]

Pros:

• Safety and Security: Banks are regulated and offer a secure environment for your money. In the U.S., the FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. (So husband, wife, joint, 250k each account, 750k per bank; however, if you have 7.5 million, you would want 10 banks)
• Interest Earnings: Savings accounts, CDs, and other bank products can earn interest, providing a return on your money.
• Convenience: Easy access to funds through ATMs, online banking, and checks. Banks also offer various financial services like loans, mortgages, and safe deposit boxes.

Cons:

• Interest Rates: The interest rates offered on savings accounts are often lower than what can be achieved through investments.
• Fees: Banks may charge account maintenance fees, though these can often be waived by maintaining minimum balances or meeting other criteria.
• Accessibility: While generally accessible, there could be withdrawal limits or delays in accessing large amounts of cash.
• Safety and Security – for your money, after certain asset thresholds you will need to diversify by bank to keep all of your money under FDIC protection.

Financial Custodian (Brokerage Firm; Fidelity, Schwab, etc)

Pros:

• Investment Opportunities: Custodians provide access to a wide range of investment products, including stocks, bonds, mutual funds, and ETFs, which have the potential for higher returns compared to traditional bank savings.
• SIPC Insurance: In the U.S., the Securities Investor Protection Corporation (SIPC) protects customers of brokerage firms up to $500,000 (including $250,000 for claims for cash) in the event of a brokerage's failure (not against market loss). Though firms like Fidelity also have “Excess of SIPC” coverage[ii]
• Professional Management: Investment advice and portfolio management services, helping you to potentially grow your wealth more effectively.

Cons:

• Market Risk: Investments made through a custodian are subject to market risk, and it's possible to lose principal.
• Complexity: Requires more knowledge and active management compared to putting money in a bank or under a mattress.
• Fees: Depending on the custodian and type of account, there could be fees for account management, trading, and advisory services.

Choosing between keeping your money in a mattress, in a bank, or with a financial custodian depends on your financial goals, risk tolerance, and need for accessibility.

• For security and insurance protection (up to a certain limit) with some interest earnings, a bank is a solid choice.
• For potential higher returns through investment and access to financial advice, a custodian is preferable, though it may come with higher market risk.
• Keeping cash in a mattress offers immediate access and control but lacks security, earnings potential, and protection against inflation and theft.

Ideally, a diversified approach, utilizing banks for short-term needs and emergency funds, and custodians for long-term investments, can provide a balance of security, growth potential, and liquidity (maybe a few bucks under the mattress but don’t get carried away).

The safety, services, and investment opportunities offered by custodians or brokers, and the practicalities of managing your investments are a lot to consider.

What about using two Brokers? As in Schwab and Fidelity?

Here's a breakdown of the pros and cons of placing all your assets with one custodian/broker versus diversifying among multiple brokers:

Placing All Assets with One Custodian/Broker

Pros:

• Simplified Management: Having all your assets with one institution can make it easier to manage your portfolio, with a single point of contact for all your investment needs.
• Consolidated View: It's easier to have an overview of your entire portfolio and make holistic investment decisions.
• Potentially Lower Fees: You might qualify for lower fees or access to premium services due to the larger amount of assets held with a single institution.
• Relationship Benefits: Building a strong relationship with one institution could lead to better personalized service and access to exclusive investment opportunities.

Cons:

• Potential Concentration Risk: While SIPC insurance (in the U.S.) covers up to $500,000 per customer for cash and securities (including a $250,000 limit for cash only), amounts above this limit might be at risk in the unlikely event of the custodian's failure. However, many brokers offer additional insurance through third parties. But as noted above, firms like Fidelity carry “Excess of SIPC” coverage.
• Limited Access to Diverse Services: Different brokers may offer unique services, products, or investment opportunities. Placing all assets with one custodian might limit access to these.

Diversifying Among Multiple Brokers/Custodians

Pros:

• Reduced Concentration Risk: Spreading your assets across multiple brokers can mitigate the risk of any single institution's failure affecting your entire portfolio.
• Access to Diverse Services and Investments: Different institutions may offer unique products, services, or better terms on certain investments, allowing for a broader investment strategy.
• Increased Insurance Coverage: By diversifying across several custodians, you can increase the total amount of SIPC protection (or equivalent) covering your assets.

Cons:

• Complexity in Management: Managing multiple accounts can be more time-consuming and complex, requiring you to consolidate information across platforms to get a full picture of your investments.
• Varied Customer Service: The quality of service and the personal relationships you can build may vary between institutions.
• Possibility of Higher Fees: Depending on the custodian and your negotiation skills, having assets spread out may lead to higher fees in aggregate compared to a potentially discounted rate for consolidating assets with one broker.

Conclusion

The decision between consolidating your assets with one custodian or diversifying across multiple brokers depends on your individual priorities, including the importance of diversified protection, desire for simplicity in managing investments, and the specific investment opportunities each custodian offers. It's also essential to consider the financial stability of the custodians you're considering, as well as any additional insurance they may offer beyond the standard protections.

Consulting with a financial advisor or Members’ Wealth who understands your personal financial situation and goals can provide tailored advice that considers all these factors. This approach ensures that your decision aligns with your overall investment strategy and risk tolerance.

[i] Blurred Lines. Increasingly over the years, some banks offer brokerage services, and some brokers offer banking services. As such, investors should be careful to note which service they are receiving and thus what protections they are receiving.

[ii] “Excess of SIPC” coverage

In addition to SIPC protection, Fidelity thought National Financial Services LLC (NFS) provides additional “excess of SIPC” coverage to brokerage accounts. The excess of SIPC coverage would be used only when SIPC coverage is exhausted. Like SIPC protection, excess of SIPC protection does not cover investment losses in customer accounts due to market fluctuation. It also does not cover other claims for losses incurred while broker-dealers remain in business. Total aggregate excess of SIPC coverage available through NFS’s excess of SIPC policy is $1 billion. Within NFS’s excess of SIPC coverage, there is no per-customer dollar limit on coverage of securities, but there is a per-customer limit of $1.9 million on coverage of cash awaiting investment. This is the maximum excess of SIPC protection currently available in the brokerage industry.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

To get in touch with the Members’ Wealth team today, I invite you to email info@memberswealthllc.com or call (267) 367-5453. 

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