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Top 5 Reasons to Consolidate Investment Accounts

Top 5 Reasons to Consolidate Investment Accounts

In my career as a CERTIFIED FINANCIAL PLANNER™ I have had the opportunity to work with many clients reviewing their investment accounts.  What has always struck me was the large number of accounts that are held across an array of firms such as brokers, discount brokers, banks, credit unions, mutual fund companies and insurance companies.  A typical couple often holds 10-15 different financial accounts with 5-7 different custodians.  In one respect, this is not surprising.  The average person holds 12 different jobs in their lifetime (according to the US Bureau of Labor Statistics), each one of which may have a retirement plan associated with it.  As people move from job to job, these accounts often get left behind.  Add in Contributory IRA’s, Roth IRA’s, Individual accounts, Custodial accounts, Joint accounts and Trust accounts and one can quickly see how this proliferates.  Sometimes the multiplication of accounts is intentional; clients spread their assets over different firms to “diversify” their portfolios- not realizing that multiple accounts, custodians, or managers does not necessarily increase diversification. However, over time, the number of accounts becomes unwieldy, asset allocation becomes ignored, the global performance unknown and the management difficult.

Clearly, not all accounts can be consolidated.  It is important to keep tax-advantaged retirement accounts separate and changing the titling on non-qualified accounts needs to be carefully considered.  One needs to be sure that there are no unintended tax consequences in consolidation such as rolling a Contributory IRA into a Roth IRA. Likewise, you would not want to unintentionally make a taxable gift by adding another person to the titling of the account. Despite these limitations, I almost always see some opportunity for consolidation and there are good reasons to do so.  Here are my top 5 reasons to merge accounts:

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  1. Easier to Manage and Track Performance: Fewer accounts with less firms = easier to manage. Think of the logistic task of rebalancing multiple portfolios twice a year across different platforms or even updating an address, phone number or email for all these accounts.  Importantly, tracking portfolio performance is much easier when accounts are consolidated, and one firm is doing the reporting.  If you have multiple accounts, custodians, or managers and are unable to tell precisely how you are doing, it is a warning sign.

 

  1. Saves Money: Account consolidation may save you money in annual fees, trading costs, management fees and taxes! First, some custodians charge an annual fee per account; fewer accounts can mean a reduction in these annual fees.  Second, there are trading costs associated whenever you buy and sell securities.  Multiple accounts may mean additional trading charges as you must trade in numerous accounts.  Third, typical management fees paid to investment advisors decline as the assets increase above certain levels.  Consolidating accounts may result in an overall decline in management fees.  Finally, consolidation of accounts leads to better tax efficiency – enabling more control of income, realized gains, and tax loss harvesting.
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3. Facilitates Retirement Income Distributions: Clients who are retired usually establish an income stream from their qualified accounts to replace their pre-retirement wages. Imagine trying to set this up with a myriad of legacy 401(k) accounts and IRA’s. Trying to arrange distributions and calculate RMDs through former employers’ plans years after termination of employment can be frustrating and tedious. Consolidation of accounts prior to retirement allows for simplification and a reduction in stress for the retiree- fewer accounts means fewer calculations and moving to one investment advisor means only one call or email when there are questions.  As people age, it becomes more and more important to streamline their financial life.

4. Simplifies Asset Allocation: The percentage of the portfolio held in stocks (large cap, mid cap, small cap, foreign and emerging markets) and bonds (treasuries, municipals, corporates, TIPs, senior loans, foreign) and cash determines 92% of the return of any portfolio. Yet, when a client holds 10-15 different accounts with a variety of firms, even determining the asset allocation is a major hurdle.  Most individuals don’t know their overall asset allocation and are often surprised when I show them. The two most common problems I see are clients whose allocation does not match their age and risk tolerance and clients who are severely overweight one position. For example, Apple may be held individually as a stock position and held inside mutual funds and ETFs that they own in different accounts. Many people are shocked at how much cash they have when viewed as a percentage of their overall allocation.  Consolidation of accounts greatly simplifies this and enables control proper monitoring of the asset allocation.

 

5. Improves Estate Planning: Some people feel that they can manage and control their assets across multiple portfolios using account consolidation software or home-grown spreadsheets. They may receive paper copies of statements, electronic copies or some combination of the two. However, what if something happens to this individual? The error I see most often is a failure to plan for the control person’s own disability, incapacity or eventual passing.  The surviving spouse or executor can be left with a complicated web of accounts to untangle.  Consolidation of accounts can greatly help the surviving spouse or executor and make the process easier, quicker and less costly for the estate.  When the number of accounts is minimized there is also less room for error when changing beneficiaries, adding transfer on death designations, or other ongoing updates to the estate plan.

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These are all good reasons to streamline the number of financial accounts.  So why don’t more people do so?  The process of implementing account consolidation can be daunting.  Deciding which accounts to merge, the custodian to use and completing the paperwork stops many people in their tracks. Every firm works differently and getting the help that you need when leaving a custodian can be difficult.  Working with a CFP® can greatly simplify the process.  Give us a call if you would like more information and learn how we can help you manage your consolidations.