Published in: Buying Stocks | Dec. 19, 2018

Is It a Bad Idea to Have Multiple Brokerage Accounts?

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Find out whether it makes sense to divide your assets.

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If you want to buy and sell individual stocks and other investments, then you pretty much have to have at least one brokerage account. By opening an account, you can use your broker's expertise and access to invest in exactly what you want to own in your portfolio.

One question many investors ask, though, is whether they should have more than one brokerage account. Diversification is an important aspect of investing, but when it comes to financial services providers, there's not always as compelling a reason to avoid putting all your eggs in one basket. However, there are definitely some situations in which having multiple brokerage accounts is an absolute necessity, because you can't take full advantage of the investing opportunities available to you if you have only a single brokerage account.

The argument in favor of having just one brokerage account

The primary advantage of having your investment assets in a single brokerage account is simplicity. Rather than having to keep track of different accounts separately, you can consolidate all of your holdings in a single place. That also makes it easier to analyze your overall portfolio, assessing its risk level and potential return and making necessary adjustments to stay in line with what you're comfortable doing with your stocks and other investments.

In addition, some brokers offer perks and incentives to account holders who reach certain thresholds in terms of account size. For instance, Vanguard Group has lower commission rates on stock trades for those who reach specified minimum balances in their accounts. Others offer features like financial planning advice or additional research resources if you keep a minimum amount in your brokerage account. Having a single account makes it easier for you to reach those thresholds.

Why multiple brokerage accounts can be beneficial

On the other hand, there are also compelling arguments favoring having more than one brokerage account. For one thing, because account insurance under the Securities Investor Protection Corporation amounts to $500,000 per broker, dividing assets across different brokerage companies can help you protect a larger overall portfolio more effectively. Again, SIPC protection won't prevent you from taking losses on your investments if they drop in value, but if your broker goes out of business, the SIPC will step in to replace stocks and other eligible securities up to those limits.

Also, many brokers make promotional offers to prospective new clients if they open a new brokerage account. These offers can include a combination of cash bonuses, commission-free trades, or other perks. Those rewards can be worth the added complexity of dealing with multiple accounts in managing your financial affairs.

When multiple brokerage accounts are an absolute must

There is a common situation where you really have no choice but to have multiple brokerage accounts. If you want to keep some of your money freely available but also want to invest your retirement savings with a broker, you really can't do a good job of that with a single regular brokerage account.

For instance, many people who are saving for retirement have IRA brokerage accounts. These accounts give you the tax advantages of an IRA, including being able to deduct contributions to a traditional IRA as well as getting tax-deferred growth of the assets in the account for as long as you keep your money within the IRA. Only when you withdraw money from the IRA brokerage account do you potentially have to worry about tax consequences, and if you happen to use a Roth IRA, even at that point you might be able to escape taxation.

The problem with IRAs, though, is that you can't get complete access to the assets inside the account before you reach a certain age. Age 59 1/2 is the usual threshold, and if you're younger than that, you'll often have to pay a 10% penalty on top of any other tax consequences if you take early withdrawals.

Because of that, most investors like to keep both a regular taxable account and an IRA brokerage account. That way, if they have financial needs that arise before they retire, they can have ready access to the assets in their regular brokerage account. Having both accounts gives you some leeway to avoid having to raid your retirement account early just to handle a minor financial emergency.

A brokerage account for your child

Another case that often arises is when you have children and want to set up an investment account for them. Most brokers will let you open a brokerage account for a child, using custodial accounts under laws like the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act.

The key thing to understand with these arrangements is that once you put money into a custodial brokerage account, the investments you make are solely for the benefit of the child whose name is on the account. You can no longer take money out of the account to spend for your own personal needs. Instead, any spending from the account has to be toward allowable expenses that the child incurs.

Also, when the child reaches the age of majority -- usually either 18 or 21, depending on the state -- then your rights to control the account end. The child is then entitled to full management and control of the investments within the account. Not all parents are comfortable with that aspect of custodial accounts, but for purposes of keeping financial resources for a child separate from your own assets, a separate custodial brokerage account can be useful.

Using multiple brokerage accounts for estate planning

Finally, one area in which having multiple brokerage accounts is invaluable is when you're trying to simplify what will happen to your investments after your death. If you have a regular brokerage account in your individual name, then it will usually go to whomever you name in your will.

However, you can set up an account that names either a joint owner or what's known as a pay-on-death beneficiary. An account that lists you and another co-owner as joint tenants with rights of survivorship will automatically go to the other co-owner upon your death. Spouses commonly use this form of ownership, because it grants both spouses the right to do transactions on the account during their joint lifetimes as well.

Pay-on-death brokerage accounts, on the other hand, let you keep complete control of your account during your lifetime but direct it to go to specified heirs upon your death. Named beneficiaries can be a spouse or any other family member or loved one that you wish to receive your assets.

By having multiple accounts, each naming a different person as a co-owner or pay-on-death beneficiary, you can handle what will happen to your brokerage assets completely independently of a will or any other estate planning that you've done. That can be especially handy if most of your assets are held within the brokerage account.

Do what's right for you

There's absolutely nothing wrong with having multiple brokerage accounts, and in some situations, being open to having more than one account can create opportunities that a single account wouldn't allow you to seize. The downside of multiple accounts is that they can be more difficult to keep track of and manage than a single account would be. It's therefore important to look closely at your own particular goals for your investing strategy and then decide how many brokerage accounts would be the ideal number to help you achieve those goals.

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