When an individual approaches retirement and estate planning becomes a priority, many investors find that they are looking at a long list of accounts that ranging from investment portfolios, savings accounts, and registered plans. All these accounts may be spread amongst several financial institutions. What use to feel like a diversification strategy can begin feeling more like clutter.
That’s why we are seeing more clients inquire about asset consolidation to simplify their financial lives, reduce the burden of administration, and prepare for the future with more clarity.
The Myth of “Diversification by Institution”
One of the main reasons investors hold multiple accounts at different financial institutions is the belief that this will help diversify their investments. With different advisors, they will bring different perspectives and strategies that will help diversify their portfolios. On the surface, this makes a lot of sense, but it can be misleading.
Real diversification is about the types of investments you own – not about how many institutions you work with. If you have accounts at different firms with similar types of assets (i.e. Canadian Balanced Funds), then the portfolio is not actually diversified. Without the entire view of your portfolio, there may be duplication and concentration risk or worse, strategies may be unintentionally contradicting each other. Consolidation provides the advisor the ability to maximize the investment more efficiently and effectively giving a clear picture of your goals, risk tolerance, and asset mix.
The Benefits of Consolidation
Other than the benefit of more effective portfolio management, asset consolidation brings other practical advantages:
Lower Fees: Many investment strategies offer a sliding fee schedule; the more assets being managed, the greater the opportunity to lower your fees. Spreading your assets out into multiple firms can prevent you from reaching the threshold of lower fees.
Simplified Paperwork: From an administration standpoint, there will be less statements, logins and tax slips. This does not only make your life easier but reduces the potential of missing something.
Easier Estate Administration: From an estate purpose, your executor will only need to deal with a single point of contact making things easier during a very stressful time.
Better Retirement Income Planning: A consolidated view of the portfolio helps the advisor build a more accurate and tax-efficient plan to determine where to draw income during retirement. This can help make the most of every dollar.
Cybersecurity: A Common Concern
One of the more recent concerns relating to asset consolidation is the fear of cybersecurity hacks. With high- profile data breaches in the news, it is reasonable to worry about the safety of sensitive and confidential information. However, large financial institutions often have far more robust systems than smaller firms or independent platforms. Protecting client’s information is one of the top priorities and they invest heavily in cybersecurity systems, encryption and real time monitoring. The irony of having multiple financial institutions is that it may increase the chance of cybersecurity event due to more logins, communications, opportunities for fraud and human error.
In short, asset consolidation does not mean giving up control or losing diversification. On the contrary, it can provide more clarity in your strategic investment and planning decisions to meet your financial goals.