You’ve seen the ads for online brokerage firms, bragging about their low fees, user-friendly trading tools, stock screeners and so on. How do you choose?
The good news is there’s no law against “polygamy” when it comes to brokerage accounts. There is nothing illegal about having more than one. And there are at least 10 firms worth considering. (Check them out here.)
However, there are also sound reasons for keeping all of your investments at the same brokerage firm. Let’s look at the arguments on both sides.
Good Reasons to Have More Than One
- All the biggest brokerage firms provide access to most major asset classes. These classes include stocks, bonds, exchange-traded funds (ETFs) and mutual funds, futures and options). And they all offer similar services. But each one is outstanding at some things and “just good” or average at others. So you may want to split your accounts across more than one firm, based on their relative strengths. For example, you might have your IRA with a broker that offers great retirement planning resources. And you have your taxable account, where you do most of your trading, with a firm that offers rock-bottom trading fees or slick simulation tools to test your trade ideas.
- Not all brokerages allow you to trade certain risky assets like penny stocks, forex and cryptocurrencies. If you want to trade them, you’ll need an account with a firm that offers them, even though you may prefer to do most of your investing with another brokerage. Robinhood, for example, lets you trade a selection of cryptocurrencies with no fees. However, the platform does not currently support retirement accounts, so you’ll want to invest your IRA with another brokerage.
- Some people who have a lot of money to invest prefer to spread their accounts across different firms. They do this so that each account stays below the $500,000 limit covered by SIPC (Securities Industry Protection Corporation) insurance. However, this may not be as important as it sounds. First, the definition of “account” for this purpose means that a taxable account and an IRA held at the same brokerage firm are each covered for up to $500,000. Also, even when a brokerage firm has gone belly-up (a very rare event), the amount the SIPC ended up having to cover (“unrecovered assets” such as stocks, bonds, funds and options purchased with your money) has been less than 5% of the total assets investors held at the failed firms. So you’d need an account worth well over $5 million to make this a serious concern. More importantly, SIPC coverage is limited to securities held in “street name” in a brokerage account. This means they are kept in the brokerage firm’s name with the Depository Trust Company (DTC) but are separate from the assets of the brokerage firm itself. It’s like having a separate vault for all of the securities owned by the brokerage firm’s customers. Even if there were some shenanigans going on at a firm, the bad guys could not get their hands on your securities. (Actually, it’s all electronic recordkeeping these days — physical stock and bond certificates are no longer used.)
Active Trader, Day Trader or Pattern Day Trader?
There has been a “price war” among firms to offer the lowest trading costs. If you’re an active trader, you may have opened more than one online brokerage account to get the latest, lowest fees.
If you are an extremely active trader, you may fit the definition of “day trader” or even a “pattern day trader.” If you wish to avoid this designation, you could use more than one brokerage account to spread your activity. (And you’ll want to check out our roundup of stock brokers for day traders.)
According to the Securities and Exchange Commission (SEC) and FINRA (the Financial Industry Regulatory Authority), you are a day trader if you buy and then sell — or sell short and then buy — the same security on the same day. If you make four or more day trades within five business days and these trades account for more than 6% of your account activity, you’re a pattern day trader. (Some brokerages have even tighter definitions and restrictions regarding this classification.)
If you are designated as a pattern day trader by a brokerage firm, you will be restricted to trading in accounts that maintain a value of at least $25,000 (along with other requirements). So, if you don’t have that kind of money, you may want to spread your trading across different firms so that you don’t qualify as a pattern day trader in any one of them.
Good Reasons to Have Just One
- Firms like Schwab, Fidelity and others consolidate your holdings across all of the accounts held at that firm. These include your taxable account(s), traditional IRA, Roth IRA, inherited IRA, that 401(k) money you transferred to a separate IRA after you left that job, etc. Their consolidated reporting features allow you to see your aggregate exposures across all of your accounts, sliced and diced in various ways. For example, you can see your combined exposure to different types of assets, e.g., large-cap, mid-cap and small-cap U.S. stocks. If you have multiple brokerage accounts, you have to do this consolidation by yourself in a spreadsheet (or the really old-fashioned way, with paper, pencil and a calculator).
- The more money you have invested through a brokerage firm, the more important you are to them. You can get certain perks if your total account size exceeds some threshold — maybe free consultations with an advisor, free notary services, etc. If your investments are held across multiple brokerages, you might not reach a “premium” level at any one of them. But combine them at one firm and you might qualify.
- Someday, you may forget about a brokerage account. That seems absurd. It sounds impossible. How could you forget about your own money? But it happens. Imagine you opened an account using a small amount of money just after you graduated college. Maybe you bought some shares of a mutual fund that tracks a broad market index. You added a little bit of money to the account here and there, but not much. Time passed. You got busy and stopped looking at the statements mailed to you each month. Then you started a new job, and the firm that administers the company’s 401(k) plan, Well-Known Brokerage, Inc., made a great presentation at your workplace about saving and investing. You decided to open a personal account with them and started investing regularly. Maybe you even used automatic deductions from your pay (smart move!). Years pass. You switch jobs again, rolling your 401(k) money into an IRA at Well-Known Brokerage.
Now you’re in your 40s. You have kids, a mortgage, a career. Guess what — you forgot about that first brokerage account you had, right out of college.
- A final reason to think twice before opening multiple brokerage accounts is the increased risk of identity theft. The more firms that have access to sensitive information about you, the more likely your personal data could get hacked. While not a huge risk, it is something to keep in mind. If you do use more than one brokerage firm, make sure you have different passwords for each of them.
There are good reasons in favor and good reasons against having more than one brokerage account. Whatever you decide and whatever is held in your brokerage accounts, trade and invest thoughtfully.
Do you use multiple brokers or keep all your investments centralized? Let us know in the Comments Section below.