Diversify Financial Companies?

Question: We have just finished our annual retirement portfolio re-balancing. All of our accounts are with Vanguard. Should we consider having some accounts at a different company to spread the broker risk around? Howard, Bozeman, MT.

Answer: This question is coming up a lot recently, and with good reason: The collapse of the investment bank Bear Stearns, the handful of bank failures, the frozen auction rate preferred market, and the ongoing turmoil from the credit crunch.

What do I think? For many of us, it's easier to manage our retirement portfolio if the money is at one institution that offers good service, low fees and investment choice. But does convenience increase your risk? It does a bit, but not by much in most cases. I've gone back and forth on this issue several times over the past couple of years. In essence, my answer is "no", but...

First of all, the biggest protection you have is that your money is invested in securities. So, even if Vanguard, Fidelity, or some other major financial institution got into trouble you still own the securities. (Of course, ownership doesn't prevent the value of your portfolio from going down.) There is also Securities Industry Protection Corp. backing that provides an additional layer of security in case of fraud and malfeasance. (You can learn more about it at www.sipc.org.)

What's more, most of us end up with a kind of natural financial institution diversification. You have your retirement portfolios with Vanguard. I bet you have savings at a bank or credit union, a life insurance policy with a life insurance company, and so on. If you look at your household as a single entity you're probably reasonably diversified overall--even if your retirement portfolios are managed by one firm.

Now for the proverbial "but." In an era of financial supermarkets and one-stop-shopping it's possible to concentrate amost all your financial assets with one firm. At that point say "stop," and diversify. The lack of diversification is one reason why I have never been enamored with the financial supermarket idea. The other is that experience shows a firm good at managing mutual funds isn't necessarily the best at creating other competitive financial products. It always pays to shop around.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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