Diversification a key component

The words diversification and investments go hand-in-hand.  The term diversification generally refers to owning a number of different investments.  Investors should generally diversify by asset class, sector, geography and capitalization.   Some investors may feel they are diversifying their holdings by having investment accounts at several financial institutions.

In our opinion, diversifying between financial institutions is not necessary.  The following are a few benefits of consolidating your investments with one advisor:

Asset Mix

The most important component of investment performance is asset mix.  Consolidation can help you manage your asset mix and ensure that you have not duplicated your holdings and are therefore, not overexposed in one sector.   Unless your financial advisors have been given a copy of all of your investment portfolios, it will be difficult for them to get a clear picture of your total holdings.  Even if you were able to periodically provide a summary of each account to each advisor, as transactions occur you would still need to update every advisor with those changes.

Technology

Most firms provide access to view your investments online.  If you have accounts at different institutions, then you will need to get online access from each. It is unlikely that you will be able to transfer funds between these institutions online.

Tax Receipts

If you hold non-registered investment accounts at several institutions, you will receive multiple tax receipts.  By consolidating your accounts, you will receive a limited number of reporting slips for income tax each year.  Reducing the number of tax receipts may also reduce the amount of time your accountant will spend completing your tax return.

Managing Cash Flow

Projected income reports from different institutions will be presented in various formats and at different points in time.  For you to obtain a complete picture of your financial situation, you will have to manually calculate the total income from your investments.  In situations where you have instructed your financial institution to pay income directly from an investment account to your banking account, it becomes more complicated to manage when there are multiple investment accounts.

Estate Planning

A couple of weeks ago we highlighted the benefits of registering your physical share certificates in a nominee account.  Another helpful estate planning measure is to reduce the number of investment accounts and bank accounts.  Having your investments in one location will certainly simplify estate planning and the administration of your estate.

Monitoring Performance

Some investors may be comparing the performance of one firm/advisor to another.  Investors should be careful when doing this to ensure they are really comparing apples to apples.  One investment account may have GICs while another may have 100% equities, in which case we would expect the returns to be different.  It is easier to understand how all of your investments are performing when you receive a consolidated report.

Conversion of Accounts

If you have multiple RRSP accounts and are turning 69 next year you may want to consider consolidating now and discussing your income needs with an advisor that you trust.

Account Types

Fee-based accounts are usually suitable for a household that has total investment assets of $100,000 or more at one institution.  Consolidating allows these types of accounts to be an additional option.  As your account value grows, the fees as a percentage may decline in a fee based or managed account.

Other Benefits

When individuals have all of their registered and non-registered investments in one location an advisor may be able to fund RRSP contributions through in-kind contributions.  Your advisor may also be able to swap investments between accounts to improve the overall structure from a cash flow and tax efficiency standpoint.

Building Relationships

Building trust between advisors and their clients goes both ways.  Clients want their advisor to have the expertise and ethics to do what is in their best interest.  Advisors want to be able to trust their clients and ensure that the effort they are dedicating is appreciated.

As you’re looking through all your individual account statements you may want to give some thought to the level of service you’re currently receiving.  If you are happy with one of your advisors, the best compliment you can give is to consolidate your investment accounts with them and this will provide you with all the benefits described above.