Can You Have Too Many Investment Accounts?
Maybe. Combining investments is not only about how many investment accounts you should have—other things also matter. Financial consultants Ryan Adams, Jimmy Merdian, Sarah Pedersen and Addison Tantillo give their top reasons why you may want to consider reducing the number of accounts you have.
1. Helps You Know What You're Invested In
Consolidating your investments may help you get a clearer picture of what's in your portfolio. Having multiple investment accounts with different firms can make identifying overlaps or gaps in asset classes difficult.
"Understanding the mix of assets in your portfolio helps you determine if you have enough variety," explains Addison. "It also helps you know if you're investing the right way for your goals and taking appropriate risks."
Some believe that having multiple investment accounts at different firms provides diversification, but this is not always true. Jimmy says, "Clients may be surprised that their investments can be similar and lack true diversification benefits."
Addison tells of one client for whom this hit home. "He had growth investments with four companies and only realized how similar they were when we compared each mutual fund's top holdings. We simplified his investments and added bonds to diversify them because he was retiring soon."
Having too much of one type of investment can be risky. On the other hand, having a mix of different investments can help you manage risk in your portfolio. It's one of those surprising truths about diversification we think all investors should know about.
2. Streamlines Retirement Planning
Combining retirement accounts can help you more clearly see your retirement nest egg in total. That can include IRAs and workplace retirement accounts from former employers.
"Consolidating accounts can make it easier to wrap your arms around the retirement planning process," says Ryan. Knowing your assets (and where they are) can also help you be on the same page for your future if you are part of a couple.
Streamlining accounts may also make it more convenient when drawing down retirement income. "A lot of my clients want to simplify life, especially as they get closer to retirement," says Sarah. "I agree with them! Managing investments should get easier as you get closer to your goal so you can spend more time enjoying the fruits of your labor."
Another consideration for consolidating retirement accounts is when it's time to take required minimum distributions (RMDs). "When you reach RMD age, having fewer accounts makes it easier to calculate your required withdrawal amount," explains Ryan. Withdrawing too little can lead to tax consequences, so it's essential to calculate your RMD correctly.
3. Simplifies Estate Planning for You and Your Heirs
Not many people like to think about the "what ifs" in life, but estate planning can mean a lot to your loved ones after you've passed. And consolidating accounts can make it that much less stressful.
Consider a surviving spouse managing accounts at seven different places versus just two. Combining accounts now can make a huge difference during an otherwise trying time.
"This very scenario happened to one of my clients," says Ryan. "Fortunately, the client did consolidate many of his accounts before he passed. His spouse only had to deal with a couple of companies to access the money. Had he not combined accounts, she would have had to deal with several more."
4. Gives You the Big Picture for Your Next Steps
We discussed how combining accounts can help simplify your financial and retirement planning and benefit your beneficiaries. It may also help you get a more precise direction for your next steps.
Sarah says, "No one wants one-sided advice. Consolidating helps you see the whole picture more efficiently and lets your advisor make recommendations using all your assets." Combining investments can also make it easier to balance your portfolio.
"Even if we don't manage all your investments here, knowing what you're invested in elsewhere can help us give you a better financial plan and better advice about what to do next," says Ryan. That's true for retirement accounts and your taxable accounts, too.
Our consultants say asking a client if they want to consolidate investments shouldn't be about bringing more money under the control of a single financial advisor; it should be about helping make things easier (and more beneficial) for you.
Sarah says, “Many people want to consolidate accounts because managing multiple ones can be overwhelming. This feeling becomes more apparent when you receive all your statements.”
When Does Consolidating Investments Not Make Sense?
Our consultants rarely advise against simplifying accounts in most scenarios. However, there are a few times when it may not make sense. One may be if you plan to retire early. Another may be if there are high fees, such as from an annuity that has surrender charges.
"If you plan to retire earlier than 59 ½, you may want to keep your money in an existing 401(k) or 403(b)," says Ryan. With both accounts, you can withdraw money at age 55 without a penalty if you leave the job or retire.
Consolidation Fees?
Certain annuities have a surrender period during which you will incur withdrawal charges. The surrender period generally lasts between 6 to 8 years after you purchase the annuity. To discourage investors from withdrawing those funds, the annuity insurance company will charge a fee (the surrender charge).
"Consolidating may not be a good idea if you have to pay a big fee," says Addison. Generally speaking, you want to avoid moving any money until the surrender period ends.
In addition, some investment firms charge a termination fee if you are redeeming all shares. American Century does not, but you may run across some companies that do. Our consultants say those charges are typically under $100.
Consolidating Obstacles—Real or Misunderstood?
In most cases, our consultants believe fewer accounts can make an investor's life easier. So why do some hesitate to combine accounts? Here are some perceived barriers and our consultants' take on them.
"It's too complicated." It can be, but our consultants can help you through it, mainly because they understand the process.
"More companies mean better diversification." As we mentioned before, that's not necessarily true. It depends on what you're invested in.
"It's hard to let go." It's okay to be loyal to a company, but consider if an investment makes sense to own. It's worth a second look to ensure all your assets keep your portfolio on the right track.
"It will cost too much in taxes." Many retirement accounts can roll over into an IRA without creating a taxable event. Investors can generally transfer taxable accounts in kind without incurring taxes.
Transfer-in-kind is moving one brokerage account to another "as-is." There is no selling of assets or buying new shares to cause a taxable event.
Get a Professional Opinion About Consolidating
Like most decisions about investing, consolidating accounts needs to be the right move for you. The best way to find out how many investment accounts you should have is to talk to a professional. Our consultants are here to help.
