More and more Americans are taking responsibility for their own finances. In 2011, The Wall Street Journal’s MarketWatch noted that Americans had moved $100 billion into online brokerage since 2009, most of it away from full-service brokers. Many have also split their assets between two or more brokerage services.
Using multiple brokers is often considered common sense, and when you can open an account with some firms in as little as 10 minutes, it’s not difficult advice to follow. But is it necessary? For some investors, no, but for others, multiple accounts can offer increased security, even savings.
Why multiple brokerages?
Investors who have accounts with more than one broker frequently do this to limit risk. The Securities Investor Protection Corporation (SIPC) insures the accounts of investors with member firms up to $500,000 per account type, of which up to $250,000 per account can be a cash claim. In other words, if you have a Roth IRA and a brokerage account with the same firm, both are insured up to $500,000, or $1,000,000 total. But if you have two brokerage accounts at the same firm, you’re insured only for $500,000 total. This more than covers most investors, but if you happen to have more than $500,000 per account type invested at a brokerage when it goes bust, you could be out of luck – whether the excess is $1,000 or $1,000,000. Having accounts with more than one broker affords you more protection, if you need it.
Or you might prefer to stick with a single broker, no matter how much you have to invest. Obviously, it’s easier to deal with one company’s regulations and paperwork, and many offer preferred member programs to those with high account balances. Brokerages also often have supplemental insurance that protects investors above and beyond SIPC. The unlikelihood of your brokerage failing, and the safeguards in place should it fail, make having multiple brokerages a less compelling way to manage risk.
That said, there are other reasons both long-term investors and active traders might want to hold accounts at more than one brokerage. For example:
Long-term investors
Any investor who’s shopped for an online brokerage knows that there are many factors to consider. One might offer great commissions, but substandard research, or great research with high commissions. Many deep-discount brokers don’t offer as wide a range of stocks or mutual funds as more expensive firms; some charge for IRAs. Maybe you’re willing to sacrifice premium trading tools for low prices (or vice versa), or maybe there just isn’t one perfect brokerage for you.
If you’ve found two or three brokers with complementary offerings, it might make sense to maintain accounts with all of them. Just keep a close eye on each firm’s regulations. Many charge for inactivity, or falling below a certain account minimum, so be sure you’re trading enough – and funding the account with enough money – to avoid unnecessary fees.
Active traders
All active traders should be aware of what constitutes a day-trader. According the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), buying and then selling – or selling and then buying – the same security within one day makes you a day trader. 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. This can be an expensive proposition, and not just in commissions. Once your brokerage has designated you a day trader, you must trade only in margin accounts, each of which must be funded with at least $25,000.
Check out your broker’s policy on day-trading. If it has especially strict regulations, and you don’t have $25,000 to fund a compliant account, you could spread your trading among different brokerages. This means more work for you, but it could be worthwhile if you want to day-trade.
Should everyone have more than one brokerage?
No. For occasional investors with less than $500,000 who don’t care much about amenities – or are willing to eat a few $9.99 commissions every year in exchange for great resources – dealing with multiple brokerages will be more hassle than it’s worth. And if you’re a high-net-worth investor – but not an active trader – that might also be true. But if you enjoy trading enough to do it semi-seriously, you might want to consider signing up with more than one firm.
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