A brokerage account is essential for trading in stocks and investing in other securities. However, a trend quite common nowadays is to have more than one brokerage account.
Is it right to have multiple brokerage accounts?
It is the question asked most by investors, especially newbies. They want to know the pros and cons of having multiple brokerage accounts.
One thing everyone should know that it is legal to have more than one brokerage account. But, it can’t be the reason to have multiple accounts. By explaining the pros and cons of having multiple brokerage accounts, this article will help you decide whether to have one or more than one brokerage accounts.
The Concept of Multiple Brokerage Accounts
If you dig deep, you’ll find that brokerage firms are behind the concept of multiple brokerage accounts. Yes, to increase their customer base and profits.
But, this whole concept is equally beneficial for traders and investors. It gives them several benefits, such as access to advanced trading tools, detailed financial reports, stock screeners, and others, at competitive rates.
But, most brokerage firms do not cover every feature an investor or trader needs. It makes a strong base for having more than one brokerage account.
Suppose that you are a trader and have opened an account with a brokerage firm charging low fees. After some time, you learn technical analysis and find that your firm does not offer crucial trading tools, such as advanced charts. In such a situation, you’ll open an account with a firm offering advanced charts.
Well, this was just an example. There are many more reasons to have, or not to have, more than one brokerage accounts.
Assets Managed by Online Brokerage Firms
(in Billion USD)
|
Name of the Brokerage Firm |
2015 | 2016 | 2017 | 2018 | 2019 |
Vanguard |
$3,399 | $3,965 | $4,940 | $4,867 | $6,152 |
Charles Schwab |
$2,514 | $2,780 | $3,362 | $3,252 | $4,039 |
|
Bank of America/ |
$2,458 | $2,509 | $2,752 | $2,621 | $3,048 |
Fidelity |
$2,036 | $2,131 | $2,449 | $2,425 | $3,043 |
TD Ameritrade |
$667 | $774 | $1,119 | $1,298 | $1,430 |
E*TRADE |
$288 | $311 | $477 | $509 | $678 |
Ally Invest |
N/A | $4.8 | $5.4 | $5.8 | $7.9 |
Source: infogram
Pros and Cons of Having Multiple Brokerage Accounts
Is it right to have, or not to have, many brokerage accounts? Let’s find it now by understanding the pros and cons of having more than one brokerage account:
Pros of Having Multiple Brokerage Accounts
Here are the reasons in favor:
• Access to The Best Services
If you evaluate the services offered by large brokerage firms, you’ll find that almost all of them allow trading in all major asset classes, such as Stocks, Futures, Options, Bonds, Mutual Funds, and Exchange Traded Funds (ETFs).
The services they offer may also look similar, but some might be outstanding in some fields whereas average in others. For example, one brokerage firm might charge the lowest fee, whereas another may provide the best retirement planning resources. If you open accounts with both types, you’ll benefit from both.
• Lower Trading Commissions
Having multiple brokerage accounts minimizes costs as compared to having many broker-managed accounts. Brokerage accounts eliminate the broker from a deal, which means fewer expenses and more money in your pocket.
Competition is driving brokerage firms to minimize commissions on trading not only stocks but also ETFs. Many of them even offer commission-free Exchange Traded Funds. In addition to ETFs, thousands of Mutual Funds are also made available without any transaction fee.
This kind of rivalry is beneficial for customers. But, each of these firms does not offer everything you require. That’s why many people open accounts with two brokers – one offering value and another helping in cost minimization.
• Access to Better Research
When it comes to educating customers and providing them the best analysis reports, not many brokerage firms succeed. For example, firms charging lower fees for trading often don’t provide useful and comprehensive fundamental reports.
Some brokerage firms provide in-house reports and tutorials prepared by industry experts, whereas others offer detailed reports from third parties. An investor may find value in both and decide to open an account with both of them.
Such a move may help you get additional high-level info, such as market commentaries, earnings projections, and trend reports. All this not only teaches you about reading reports but also assists you in identifying the right investments.
• Better Utilization of Assets
Every person doesn’t have similar investment goals. Some may want to make money in the short-term, some want to create long-term wealth, and many like to make money in both the short and long term.
When people have diverse financial goals, it is best to manage their investments with multiple brokerage accounts. Some firms hold the expertise and have the best assets for short-term investments, some are known for long-term investments, and some may have other specialties.
Opening accounts with multiple firms allow an investor to manage their money in the best possible way. Moreover, experts in these firms do their best to help investors get better returns on investment.
• Low Margin Costs
Margin is a kind of loan you take against equities/securities lying in your brokerage account. When you trade utilizing the margin amount, the firm charges interest on it. This interest gets deducted when cash comes into your account, whether by selling stock/security or adding money.
If you have an account with a firm offering better research products for your long-term investments, you can open another account with a firm offering cheaper margin loans. It’ll help you make big profits in the short-term.
Cons of Having Multiple Brokerage Accounts
Here are the reasons against having multiple brokerage accounts:
• Money Scatters on Different Platforms
When you have separate brokerage accounts for short-term trading and long-term investments, your money scatters amongst different firms. Many people find it frustrating to contact multiple firms for checking or executing investments/trades.
On the other hand, when you have only one account with a single firm, money management becomes easy as all your money-making activities remain on a single platform. They also send consolidated reports to help you evaluate the health of your exposure and make decisions.
• Not A Premium Investor
Premium investors are those who make huge investments. Brokerage firms also treat them differently and offer perks as well as advantages compared to non-premium investors.
When people open multiple brokerage accounts, they distribute their money to different firms in small proportions. Doing so means none of their accounts exceed some thresholds to qualify as premium.
When you make all the investments through a single brokerage firm, the chances of qualifying as a premium investor are maximum.
• Risk of Identity Theft
One problem faced most by people having more than one brokerage accounts is theft of identity. When you open accounts with different brokerage firms, you also share your private data with them.
This kind of exposure of your sensitive information increases the risk of theft of personal data. Because of identity thefts, many people lose money as well as reputation. An individual deciding to have multiple accounts should ensure the safety of his/her data first.
• Require Better Skills, Self-Control, and Decision-Making Ability
Different brokerage firms operate differently and have one or the other feature that describes them better from each other. Sometimes, you can also observe this difference in their research reports and predictions. This variance eventually confuses investors and leads to financial losses.
People having multiple brokerage accounts should have better skills and better self-control as well as decision-making abilities. These qualities can help them understand or ignore differences and make decisions beneficial for their financial future.
• Not for People with Memory Loss Issues
If you have memory loss issues or often forget things, then avoid having multiple brokerage accounts. You might be thinking that how can someone forget about their money, but it happens.
When people open multiple brokerage accounts and invest a large share of their capital in one account and diversify small parts in other accounts, they often forget one or two smaller ones.
Frequently Asked Questions
After understanding the pros and cons of having multiple brokerage accounts, people get many questions in their minds. Below are answers to some of the most frequently asked questions:
1. What is SIPC, and how it benefits investors?
SIPC stands for Securities Investor Protection Corporation. It provides up to $500,000 of protection to investors. If your brokerage firm defaults, then SIPC will intervene and pay for eligible securities up to those limits.
Note that SIPC is not liable if you make losses on your investments or their value decreases. When a person has more than one brokerage account, SIPC provides up to $500,000 coverage on each of them. This kind of arrangement is especially beneficial for high net worth individuals.
2. When it is a must to have multiple brokerage accounts?
There are a few situations when it is essential to have more than one brokerage accounts. For example:
Suppose that you have retirement savings. You want to keep some money always available and invest the remaining with a broker. In this case, it’ll be difficult for you to do both with a single brokerage account.
Let’s understand it better with another example:
Suppose that you have found the best retirement strategy according to your age and opened an IRA brokerage account. It’ll provide you with all tax advantages but won’t allow accessing its assets until you are 59 ½ years old. If you withdraw before this age, you must pay a penalty of 10% in addition to tax consequences set for early withdrawals.
Because of this, you should open an IRA account and a regular taxable account. This way, you’ll be able to access the assets from your usual brokerage account if any financial need occurs before the age of 59 ½ years.
3. Can I have a brokerage account for my child?
Yes, you can have a brokerage account for your child as well. Several brokers allow opening an account for children, using a custodial account, and falling under the Uniform Transfers to Minors Act or Uniform Gifts to Minors Act.
4. What is the smartest way to invest money?
There is no specific smartest way to invest money. It depends upon your investment style and financial goals. For some people, an aggressive approach (most investments in equities) can be the smartest way. Some may find a conservative approach (most investments in Government Securities or Bonds) as the smartest way.
5. How does an investor make money from an investment?
An investor can make money from an investment in the following five ways:
- Interest: Interest is the compensation investors receive for lending money to debt instrument issuers. Different instruments that allow investors to earn interest income are:
- Bonds, Convertible Debentures, and other fixed-income securities
- Demand deposit account, like money market, savings, and checking
- Fixed annuities
- Mortgages financed by sellers
- Mutual Funds with exposure to the above
- Dividends: It is the cash compensation investors receive for holding equities of a company. A dividend is the part of a company’s earnings that get distributed among shareholders on a monthly, quarterly, or yearly basis.
- Tax Advantages: Certain investments provide tax advantages to people for making investments. For example, income through drilling operations of oil and gas gets up to 15 percent tax benefit.
- Capital Gains: It is the appreciation in an investment’s price from the time of initial purchase. Depending upon the investment duration, capital gains can be short or long-term.
- Multiple Returns: Many investments give investors opportunities to make money in more than one way. For example, a stockholder can make money through capital gains and dividends.
Final Words
Whether you maintain a single brokerage account or multiple accounts, you should not forget your objective – to earn profits by trading in stocks. If multiple brokerage accounts are helping you in this, have them. If they aren’t, have a single brokerage account.
Other crucial things you should care about are advanced tools, high payouts, enhanced customer service, additional safety cushions, etc. Big investors usually get all the benefits through single as well as multiple brokerage accounts. If you are a small investor, evaluate all options before deciding how many brokerage accounts can help you achieve your financial goals.
Disclaimer: All information on this page is general. It might not be suitable for every person looking to, or having, a single or multiple brokerage accounts. You can use this information as guidance to decide whether a single brokerage account will be advantageous for you or multiple brokerage accounts. We suggest consulting a certified financial advisor before making a decision.