Is it OK to put all my investments in one firm or should I divide them?

Question

Hi, I'm considering rolling over my 401k to another firm where I have my Roth IRA. Should I be worried about concentrating all my investments in one firm, for example if something happens and that firm goes out of business, etc.? Thank you.

Answer 1

First - the easy answer to your question - is that unless you have more than $250,000 involved, you have nothing to be concerned about. Assuming you're with a legitimate firm, you are protected up to $250,000 (against fraud - not investment loss).

Second - you are actually BETTER in investing with one firm -- IF YOU ARE COMFORTABLE with that firm. If you end up splitting your money up, you could well be in a situation where you THINK you are well-diversified because you have different named funds but, in reality, you have everything invested in the same companies. A good quality financial advisor will ensure that this is not happening.

Having your funds in one firm also helps when it comes to retirement in that you're not dealing with multiple minimum distribution requirements, etc.

Finally, you're better with one firm because FEES are generally based on the amount you have invested.

(Side note: In almost every case, you are better finding a "fee based" advisor rather than a "commission based" advisor. Yes - you'll pay a fee on the front end that may be larger than your front end commission would be. However, in the longer term, your fee based advisor is more likely to have your best interests in mind and will be less likely to suggest trades that the commission based advisor.

Remember --- the way that the commission based investor makes money is by getting you to buy (and buy again). The fee-based advisor is making money by providing advice. If that turns out to be great advice, you return the next year and the advisor continues to make money.)

Good luck and I hope this helps!!

Answer 2

If by "firm" you mean the brokerage house where your funds are held, there is no need to split your money up between different brokerages. Think about it, your actual cash is invested in the various funds/stocks/bonds/whatever that are inside the IRA, not in the brokerage company itself. If the brokerage went "belly-up", your actual assets would simply be transferred to whoever assumed the assets & obligations of the failing brokerage.

Happy New Year!

Answer 3

I forget which commandment it is, but surely one says "Thou shalt not fail to diversify the number of trustees for your invested funds."

The idea of having more than one company to hold your retirement money becomes interesting periodically when someone tries to get inventive in funny ways. In my community, a company was offering some exceptional rates of return and wasn't subscribing to the common insurance programs for their type of firm. They eventually folded, taking tens of millions of their investor's retirement savings with them. Even if you go with the "biggies" there are periodically problems. The venerable Barings Bank folded when one renegade trader wasn't properly supervised and dug them into a colossal hole (while trying to fix what he failed, and the fixes made things exponentially worse). If you had your money into something that was based on a Bear Stearns Collateralized Debt Object (CDO) then your retirement funds are on life support right now.

These illustrate how it might be wise to have your eggs in more than one basket. Still, there are piles of places that aren't pushing the limits or playing fast and loose with normal practices. If my money were in, say, Dodge and Cox or, more adventurously, CGM, I wouldn't sweat at all. Still, I once sold for one of the very oldest life insurance companies in the country, Mutual Benefit. I can't tell you how distressing it was when I almost sold a couple of friends on using Mutual Benefit's insurance instruments as a buy-out tool for the family business--just two weeks before the company folded. So, watch your investments, but watch those who hold them even more.

Answer 4

ERISA regulations require that all pension plans, including 401(k) plans, be insured by an "ERISA bond" which has a payout equal to 10% of plan assets, or $500,000, whichever is less.

So if your assets exceed $500K, you should diversify to another firm just to maximize your insurance coverage.

Answer 5

Always diversify. Don't believe me? Ask people who worked for Enron, Global Crossing, Lucent and many others where they had ALL their income, pensions, 401(K) & employee savings flushed down the toilet.

Answer 6

diversify for safe investing, focus for higher yield. Up to your investment risk.

Answer 7

DIVERSIFY with the best funds, or stocks if you prefer them.