29 Aug Should I split assets between two firms?

Q. I have some inherited funds with Morgan Stanley managed with an asset management fee, and I have my own investment accounts with Bank of America. I’m planning to move all the accounts to one institution. Would it be better to split it between two different firms like Fidelity and Schwab? Is there a risk to having all my financial eggs in one basket? I manage my own funds and I don’t like the idea of an asset management fee.
— Investor

A. The answer depends on what kinds of investments or accounts your money is in, so we have to make a distinction between a bank account and a brokerage account.

A bank account can be a checking account or a savings account, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Kiely said when you deposit funds into a bank account, you are actually lending the money to the bank. The bank is a debtor and you are the bank’s creditor.

When a debtor becomes broke, the creditor is out of luck, he said.

“During the great depression of the late 1920s and 1930s, savers lost everything as bank after bank went out of business,” Kiely said. “That is why the federal government started the Federal Deposit Insurance Corporation (FDIC).”

The federal government guarantees deposits up to $250,000 per depositor per insured institution, Kiely said.

But FDIC insurance only covers bank accounts, not brokerage accounts.

Now let’s define a brokerage account. What’s in the account is actually your property, and the brokerage firm is just holding your investments.

If the firm goes out of business, you simply transfer your property to another custodian, Kiely said.

“During the financial crises that started in 2008, some brokerage firms suffered serious problems,” he said. “Merrill Lynch almost went bankrupt. That’s why the federal government convinced Bank of America to take over Merrill Lynch.”

Kiely said he believes keeping things simple is far better than making things complicated.

“That is why I suggest you should have one taxable brokerage account, one IRA account and one Roth IRA account,” he said. “I agree you shouldn’t be paying a one percent management fee if you are self-directed and do all the work.”

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This post was originally published in August 2017.