Few investors would argue against the benefits of diversifying a portfolio, but there is a time when putting your eggs into just one basket may actually work for the better—when you consolidate your accounts with one service provider.
Besides the obvious perks—simplicity and convenience—there are other benefits attached to combining your assets under one roof. These include the opportunity for more effective management of asset allocation and diversification, potentially lower fees, higher service levels, and better planning, among others.
"For many investors, the simplicity and service that come with consolidating assets with a trusted service provider offer significant benefits," notes John Sweeney, executive vice president of planning and advisory services. "Especially in the case of old 401(k)s, many investors would benefit from the wider range of options and simplicity of managing a portfolio in an IRA—though you always want to consider the options in your particular workplace plan carefully before deciding to roll your assets over."
One provider can help you take charge
Taking control of your portfolio and making your investments work effectively for your goals are among the most compelling reasons to consolidate multiple accounts. If you have investments in several locations, it's difficult to stay in control of your overall portfolio. It's also complicated to make your investments work together. In fact, you could be duplicating exposure to certain asset classes. When you consolidate, it's much easier to take charge of your strategy and keep your intended asset allocation on track. Moreover, rebalancing is a much simpler task in one account. "Fidelity will provide you with a clear view of your performance and asset breakdown, making it easy," says Sweeney.
Improve tax efficiency
Bringing retirement accounts and brokerage accounts together with a service provider may make it easier to implement a tax-efficient investing strategy. For instance, taking advantage of tax loss harvesting may be easier when your gains and losses are all in the same account. Or you may find it easier to implement an asset location strategy—where the least tax-efficient assets are housed in accounts that offer tax deferral or exemption.
Pay less, get more
If you're investing through multiple providers, you might be paying more fees than necessary. This is because financial providers typically set asset and trading thresholds before offering price breaks. As a rule, the more assets you move to one financial services provider, the more opportunities you may have to avoid some account fees, pay lower fund expenses, and qualify for lower commissions on brokerage trades.
Consolidating may also improve the quality of certain planning activities, such as retirement income planning. Typically, you need to determine a sustainable withdrawal rate, meet minimum required distributions, and monitor your assets to make sure you're not depleting your resources too quickly.
"Managing a complex financial life is hard enough; adding the complexity of planning across multiple providers can be an unnecessary headache, making it harder to have a realistic view of your cash flow, needs, and progress," says Sweeney.
Look before you leap
If you decide to consolidate, do it wisely. For nonqualified assets, you need to find out whether consolidating will force you to liquidate certain positions and possibly incur tax consequences. For example, investors with company stock in their plan might lose the option to elect net unrealized appreciation (NUA) if they roll those assets into an IRA. After you consider the tax implications, determine whether that scenario works with your financial plans.
For fund investors, consider the investment options, particularly if your workplace plan offers institutional shares that may be more advantageous to you. For annuity investors, it's essential to review the surrender charge policy, and possibly adjust the timing of your consolidation to avoid excess expense in the process. Overall, you need to be sure that the tangible benefits outweigh any potential costs.
Clearly, consolidating is a decision that warrants some time and consideration. But the potential benefits may make it worth your while. You could improve and find it easier to maintain your asset allocation, as well as diversify your portfolio more effectively. You might find opportunities to save money, both through improved tax efficiency and the lower fees often associated with having higher asset levels at one provider. Most of all, you'll have a chance to plan more effectively and to take control of your finances. And that's a move that, in the end, could improve your overall financial picture.