The Bernie Madoff scandal has everyone taking a second look at their investments. And given how many Wall Street firms have gone out of business or are on unsteady ground right now, investors more than ever are looking not just at what investments they own but also at where they hold their assets.

For years, financial services companies have tried to convince investors that they could get everything they needed in a single place. Discount brokers like Charles Schwab (NASDAQ:SCHW) and TD AMERITRADE (NASDAQ:AMTD) offer more than just stock trading; they give you access to thousands of mutual funds -- including many beyond the broker's own branded funds -- so you can consolidate all your investments within a single account.

Yet in a downturn in which even trusted Wall Street institutions have simply disappeared, ensuring maximum protection under brokerage insurance programs such as the Securities Investor Protection Corp. (SIPC) is just one reason to diversify your holdings across different financial firms. Moreover, it isn't even the best reason. You can also earn better returns on your money.

Don't put your funds in one basket
Nowhere is the fight to grab as many assets as possible clearer than in the mutual fund industry. Huge fund families like Vanguard and Fidelity offer dozens of funds spanning nearly every type of investment you can buy. Large brokerage firms like Morgan Stanley (NYSE:MS) have proprietary mutual funds that their brokers can use to retain clients.

But while sticking with a single fund family may make recordkeeping and exchanging money between funds easier, it won't necessarily get you the best results. That's because despite each fund family's strengths, none of them can boast the best funds in every single category of investments.

A closer look: Vanguard
As an example, look at Vanguard. The king of index funds has funds tracking many different market niches, covering domestic and international stocks, real estate investments, bonds, and plenty of subcategories. In addition, Vanguard has actively managed funds whose mission is to outperform those indexes.

Yet for all the success Vanguard has had overall, some funds have shared in that success more than others. For instance, the Vanguard Dividend Growth Fund (VDIGX) has gotten a five-star rating from Morningstar, having outperformed the S&P 500 and its fund peers in four of the past five years. Overall, its return has outpaced its benchmarks by 4%-5% since 2004, thanks to good investments like Marathon Oil (NYSE:MRO) and Nike (NYSE:NKE).

At the other end of the spectrum, the Vanguard Capital Value Fund (VCVLX) has performed abysmally in recent years. The one-star fund has lagged the S&P 500 by double-digit percentage points in 2007 and 2008, leading to a shortfall of nearly 5% in performance versus its peers. Investments in UBS (NYSE:UBS) and Elan (NYSE:ELN) have gone nowhere recently.

Sticking with strengths
With thousands of funds to choose from, there's every reason to expect that the best funds will be scattered across many different fund companies. PIMCO, for instance, has a strong reputation for bond funds, due in large part to the notoriety of manager Bill Gross. But for stock funds, you might be better served going elsewhere.

Similarly, with its passive focus, Vanguard does well in efficient markets where successfully tracking an index at low cost lets you outperform the majority of category peers. But its actively managed funds have more inconsistent results.

If worries about unethical managers have you taking a second look at where your investments are, now's a good time to see if you might get better investment results by spreading your money across several financial institutions. Not only do you benefit from better coverage in case of bankruptcy or fraud, but you could also improve your returns.

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Fool contributor Dan Caplinger used to be a Vanguard fanatic, but he's started spreading the wealth around a bit. He doesn't own shares of the companies mentioned in this article. Charles Schwab is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days, and we'll help you learn how to look out for your money. The Fool's disclosure policy gets you where you want to go.