Author Topic: Entire nest egg in one financial institution - all eggs, one basket?  (Read 2959 times)

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Between an inheritance and the sale of my home, both very recent, I’m now FI, more or less, and coasting out of my current business over the next 6 months (which I’d be hard-pressed to re-enter). The whole nest egg is liquid, mostly in non-retirement accounts, and needs to be re-shuffled from it’s current locations.

My primary brokerage and retirement accounts are at Schwab. While it would be simplest (and thus it is tempting) to put all the money in one big pile there, with appropriate allocations / a few big funds / a little cash, etc, I’m worried about keeping my entire financial pot in one institution, mostly in one brokerage account. What if I get hacked, or some black swan hits them? Is this an irrational fear? Should I park half the money, or some portion, in another financial institution, say Vanguard, for the sole purpose of NOT keeping everything in one place?

maizefolk

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #1 on: October 25, 2020, 02:02:20 PM »
While it is talking about Vanguard rather than Schwab, here is a thoughtful article on why that particular author isn't worried about having all of their assets invested through a single institution.

On the other hand if you really are worried, it's not THAT much extra work to have separate accounts at places like Vanguard, Fidelity, and Schwab. You can use aggregators like Mint or Personal Capital so that you still only have to sign in one place each time you watch to check if things are okay with all of your account balances.

The one downside I see to having everything with a single institution isn't about long term loss of funds, but just that is something happens that causes your account to be temporarily locked at an awkward moment, it's nice to have at least a few tens of thousands of dollars somewhere else you could tap into if you suddenly needed a big chunk of money in a very time sensitive fashion. I have my non-retirement investments with a single institution, but bank with two other unlinked institutions, so have three places I could potentially pull money from in an emergency. But that's the result of a personal preference on my part and is driven more by my emotional response to uncertainty than any sort of logistical calculation of the risks involved.

ctuser1

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #2 on: October 25, 2020, 02:34:21 PM »
I like my money spread out between different brokers because of a behavioral issue, and not a practical consideration like you guys are talking about.

4-5 years ago, 90+% of all my money (retirement and taxable) was in Fidelity. One tap on the smartphone and I had a very good guess of my net-worth in front of me. I found this caused me to obsess over daily market movements and how much money my portfolio "gained" or "lost" every day, and even hour.

Once I realized the problem, I worked to spread things around. Now, I and DW have money spread around in 4 separate brokerages and it takes me a little bit of effort (<30 minutes) to compile everything from everywhere. This additional distance, I found, helped me obsess less over the market ticks. I now come back and compile the total once every month or so, mainly to check if I need to make any changes to asset allocation etc.

Father Dougal

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #3 on: October 26, 2020, 02:33:16 AM »
Diversifying across brokers is rational. The risk of losing your assets is very small, but not zero. Also, peace of mind is very important.

I know all the theory about how funds are not owned by the broker, so even if the broker goes bust the investor will still be the beneficial owner, and it all makes perfect sense. But I can still think of several things that could go wrong. The extra hassle of having more than one brokerage account is not a large cost to mitigate the risk (even if the risk is small).

cool7hand

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #4 on: October 26, 2020, 04:06:35 AM »
In what scenarios should one worry if all of their money is a Schwab, Vanguard, Fidelity, or the like?

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #5 on: October 26, 2020, 04:59:51 AM »
I like my money spread out between different brokers because of a behavioral issue, and not a practical consideration like you guys are talking about.

4-5 years ago, 90+% of all my money (retirement and taxable) was in Fidelity. One tap on the smartphone and I had a very good guess of my net-worth in front of me. I found this caused me to obsess over daily market movements and how much money my portfolio "gained" or "lost" every day, and even hour.

@ctuser1
HAHA . That's crazy talk.



(shuffles off to contemplate his obsession with daily market movements.)
sigh...

AdrianC

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #6 on: October 26, 2020, 05:34:20 AM »
In what scenarios should one worry if all of their money is a Schwab, Vanguard, Fidelity, or the like?

  • Broker goes bust - you get your money back...eventually. Not good if you need it to live on.
  • Account gets hacked.

We use three brokers and two banks.

cool7hand

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #7 on: October 26, 2020, 06:29:42 AM »
Thanks. This is helpful.

For my edification, after all the facts are in, in what scenario does hacking result in a loss to you instead of the financial institution? I thought hacking resulting in only a risk of personal inconvenience, not loss. Am I wrong?

stoaX

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #8 on: October 26, 2020, 07:22:11 AM »

The one downside I see to having everything with a single institution isn't about long term loss of funds, but just that is something happens that causes your account to be temporarily locked at an awkward moment, it's nice to have at least a few tens of thousands of dollars somewhere else you could tap into if you suddenly needed a big chunk of money in a very time sensitive fashion. I have my non-retirement investments with a single institution, but bank with two other unlinked institutions, so have three places I could potentially pull money from in an emergency. But that's the result of a personal preference on my part and is driven more by my emotional response to uncertainty than any sort of logistical calculation of the risks involved.

My goal is to have my stash spread out between 2 or 3 institutions for the reason cited above.  I use 5 different institutions now so I have some simplifying to do.

terran

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #9 on: October 26, 2020, 09:48:08 AM »
If you're "normal" I wouldn't worry, if not I might. What I mean by "normal" is that you don't do anything that might throw up red flags. For example, I plan to travel internationally without a home base for a time once I retire. Given the money laundering restrictions placed on US brokerages (FATCA?) I'm concerned that this could get my accounts locked down if they "discover" this fact. I think I'd eventually be able to get this sorted out so my concern isn't about total loss of assets, but I don't want to temporarily lose access to all my assets, so I plan to have some money at a few different institutions at that time to alleviate this concern.

terran

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #10 on: October 26, 2020, 09:54:25 AM »
Thanks. This is helpful.

For my edification, after all the facts are in, in what scenario does hacking result in a loss to you instead of the financial institution? I thought hacking resulting in only a risk of personal inconvenience, not loss. Am I wrong?

If the institution is hacked then I would be confident that you'll be made whole. I'm less certain what would happen if you were hacked by way of identity theft, I'd be interested to hear to anyone else knows about this. If your account is "hacked" by virtue of carelessness on your part I would be much less confident -- one vector that concerns me that lots of people seem not to worry about is giving your login details to aggregators like Personal Capital. Financial Institution policies make it very clear that they're not responsible if you give out login details to a 3rd party.

hodedofome

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #11 on: October 26, 2020, 10:28:44 AM »
Thanks. This is helpful.

For my edification, after all the facts are in, in what scenario does hacking result in a loss to you instead of the financial institution? I thought hacking resulting in only a risk of personal inconvenience, not loss. Am I wrong?

If the institution is hacked then I would be confident that you'll be made whole. I'm less certain what would happen if you were hacked by way of identity theft, I'd be interested to hear to anyone else knows about this. If your account is "hacked" by virtue of carelessness on your part I would be much less confident -- one vector that concerns me that lots of people seem not to worry about is giving your login details to aggregators like Personal Capital. Financial Institution policies make it very clear that they're not responsible if you give out login details to a 3rd party.

If you have 2 factor authentication setup at your brokerages, this shouldn't be an issue. Even if someone was to get your login credentials, they can't access your access without the authentication code. And even if they were to hack Mint, Mint can't make transactions in your brokerage account. Their API access is read-only.

hodedofome

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #12 on: October 26, 2020, 10:30:47 AM »
Diversifying across brokers is rational. The risk of losing your assets is very small, but not zero. Also, peace of mind is very important.

I know all the theory about how funds are not owned by the broker, so even if the broker goes bust the investor will still be the beneficial owner, and it all makes perfect sense. But I can still think of several things that could go wrong. The extra hassle of having more than one brokerage account is not a large cost to mitigate the risk (even if the risk is small).

Please tell us how a brokerage can go bust and you lose your bonds/stocks/mutual funds/ETFs during the meltdown. It is in your name, that's why they call it a security.

Now cash sitting at the broker is a different story. But, the positions are yours and yours only.

cool7hand

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #13 on: October 26, 2020, 11:18:58 AM »
Again, this has been very helpful. Given that two-factor authentication seems critical to protect you from your own mistakes, I would think you would never want to authenticate any device by way of a browser cookie so that you always have to use two factor authentication. Or am I missing something? Thanks!

TomTX

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #14 on: October 26, 2020, 11:41:48 AM »
Diversifying across brokers is rational. The risk of losing your assets is very small, but not zero. Also, peace of mind is very important.

I know all the theory about how funds are not owned by the broker, so even if the broker goes bust the investor will still be the beneficial owner, and it all makes perfect sense. But I can still think of several things that could go wrong. The extra hassle of having more than one brokerage account is not a large cost to mitigate the risk (even if the risk is small).

Please tell us how a brokerage can go bust and you lose your bonds/stocks/mutual funds/ETFs during the meltdown. It is in your name, that's why they call it a security.

Now cash sitting at the broker is a different story. But, the positions are yours and yours only.

How long do you think it will take to free up access after the broker melts down?

Father Dougal

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #15 on: October 29, 2020, 01:36:44 AM »
Diversifying across brokers is rational. The risk of losing your assets is very small, but not zero. Also, peace of mind is very important.

I know all the theory about how funds are not owned by the broker, so even if the broker goes bust the investor will still be the beneficial owner, and it all makes perfect sense. But I can still think of several things that could go wrong. The extra hassle of having more than one brokerage account is not a large cost to mitigate the risk (even if the risk is small).

Please tell us how a brokerage can go bust and you lose your bonds/stocks/mutual funds/ETFs during the meltdown. It is in your name, that's why they call it a security.

Now cash sitting at the broker is a different story. But, the positions are yours and yours only.

Okey-dokey. There are a number of scenarios I can think of off the top of my head which are very unlikely but not impossible. They fall broadly into two categories: fraud or incompetence (and most likely both). Regulation and auditing helps mitigate the risk, but we know from Lehman Brothers, Madoff, Enron, Worldcom, Wirecard, Barings Bank, Mirror Group Newspapers, etc, that things go wrong.

Just for fun, let’s say you have an ETF (VTI is popular in these parts, so let’s go with that). Most brokers pool all of the same securities in one nominee account. They then report to their clients the securities that are owned by each of them (what could go wrong, right?).

Scenario 1: Fraud. The broker takes your money and does not buy VTI, but tells you he has. You have a reassuring statement from the broker, and only find out there are no securities when the broker runs out of cash and gets caught out when it can’t pay. That’s basically a Bernie Madoff situation (the former Chairman of NASDAQ and survivor, lest we forget, of multiple SEC investigations).

Scenario 2: Incompetence. A rapidly-growing broker does not invest enough in its IT systems and controls. The pool of VTI nominee accounts starts to deviate from the total holdings of clients. No one knows why. Broker is on the hook for the difference. Key IT staff leave. Broker goes bust. Administrators (very expensive Big 4 firm, who of course get paid before anyone else) some in to sort out the mess. In a few years you get back part of your assets from what they could salvage. Something close to this scenario happened in the 1960s.

Scenario 3. “My broker doesn’t pool my assets. I pay a little more so my VTI are separately ring-fenced.” Smart move, right? Maybe. But what if the broker doesn’t actually do what they say? “Well, due to administrative reasons, we temporarily pooled all assets” say the brokers. You may not think you have counterparty risk because you are the beneficial owner. But perhaps you have a counterparty risk after all, just not the one you thought you had.

Scenario 4: Stock lending goes wrong. There are all sorts of shenanigans around this. Brokers lend your VTI to short sellers for a fee. The broker lends only against other securities (like bonds). Let’s say the borrower does not return the VTI. Meanwhile the bond has lost value (maybe due to default). Or perhaps the broker never took any security. Can the broker make up the loss?

So, there are just a few. I haven’t even started on rogue employees, and there are other “Black Swans” out there too, of course. The reality is that where humans are involved there are going to be mistakes and perhaps dishonesty. You only have to go back to recent history of the Global Financial Crisis to see that. A whole industry convinced itself it was fine to package subprime mortgages into securities which S&P and Moody’s then rated as AAA. UBS alone (then the world’s biggest wealth manager) lost $40 billion on its own account, plus what its clients lost. Screw-ups happen.

Don’t have nightmares, kids. As I said, very unlikely to happen. But the risk is not zero. The decision on diversifying across brokers is really down to the individual.

reeshau

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #16 on: October 29, 2020, 04:04:01 PM »
Diversifying across brokers is rational. The risk of losing your assets is very small, but not zero. Also, peace of mind is very important.

I know all the theory about how funds are not owned by the broker, so even if the broker goes bust the investor will still be the beneficial owner, and it all makes perfect sense. But I can still think of several things that could go wrong. The extra hassle of having more than one brokerage account is not a large cost to mitigate the risk (even if the risk is small).

Please tell us how a brokerage can go bust and you lose your bonds/stocks/mutual funds/ETFs during the meltdown. It is in your name, that's why they call it a security.

Now cash sitting at the broker is a different story. But, the positions are yours and yours only.

Unless you have a physical certificate, most of what you own is held "in street name" to speed up the buying and selling process.  Therefore, nobody knows you own anything, except through your broker.

Yes, It's yours and you are legally entitled to it.  Yes, your broker has SIPC insurance, and likely additional private insurance, on your account against their failure or fraud.  But it could take some time to get unfettered access to your securities through another broker, if a disaster happened.

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #17 on: October 29, 2020, 07:25:26 PM »
Again, this has been very helpful. Given that two-factor authentication seems critical to protect you from your own mistakes, I would think you would never want to authenticate any device by way of a browser cookie so that you always have to use two factor authentication. Or am I missing something? Thanks!

Generally speaking the "two factors" need to be independent, right? Or it's not really two factors, its one with extra inconvenience. And generally one is "something you know" (a password) and one is "something you have" (a fob that generates random numbers, or your cell phone, or maybe even "access to your email account").

So when you log in to 2-factor auth the first time it'll require both factors, sure. But then if there's a "remember this computer" option, like there commonly is, then that's still two factors. 1) your password, 2) "something you have" = a computer with your auth cookie on it. Some random "hacker" on the internet isn't going to have your auth cookie even if they did manage to get your password somehow. That's maybe not quite as secure, because theoretically they could actually somehow have gained access to your computer itself and gotten the cookie too, but mostly that's not how they would have gotten your password so those are still two distinct factors.

The riskiest thing is when both factors are available on the same device, say your cell phone. You lose your cell phone and your two factors were a password and a text to your number? Well theoretically someone can just use the "I forgot my password" link to reset it, which sends an email which is available on your cell phone, and then they'll text you the code for the 2nd factor, and that's also available on your cell, and now they're in and can steal all your money. In practice though that's not actually that risky. The people who are trying to break into your bank account are on the internet somewhere and aren't going to have a way to get your phone, and the people who would steal or find a phone are just going to reset and resell it. They're two completely different sets of people in practice.

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #18 on: October 29, 2020, 08:45:24 PM »
Thank you everyone for your thoughts. I think I'll sleep better knowing that the money is in more than one pile, and that seems to be the key, for me. I do (weirdly, since I'm not "in those circles") personally know 2 different people who lost their money with Madoff, and another who lost all his nest egg due to some convoluted business fraud. So it doesn't feel quite as unlikely as I'd like.

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #19 on: October 30, 2020, 12:01:00 AM »
I feel like the really obvious response to this thread is that SIPC provides $500K of fraud protection per account, so if you are worried about fraud you will open enough accounts so that all of your money is protected against fraud.

reeshau

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #20 on: October 30, 2020, 12:33:11 AM »
I feel like the really obvious response to this thread is that SIPC provides $500K of fraud protection per account, so if you are worried about fraud you will open enough accounts so that all of your money is protected against fraud.

Brokerages usually carry private insurance that supplements the SIPC protection, to much higher levels.  Here is the TD Ameritrade FAQ answer on protection:

Quote
TD Ameritrade is a member of the Securities Investor Protection Corporation ("SIPC"), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure is available on request at www.sipc.com.

Additionally, TD Ameritrade provides each client $149.5 million worth of protection for securities and $2 million of protection for cash through supplemental coverage provided by London insurers. In the event of a brokerage insolvency, a client may receive amounts due from the trustee in bankruptcy and then SIPC. Supplemental coverage is paid out after the trustee and SIPC payouts and under such coverage each client is limited to a combined return of $152 million from a trustee, SIPC and London insurers. The TD Ameritrade supplemental coverage has an aggregate limit of $500 million over all customers. This policy provides coverage following brokerage insolvency and does not protect against loss in market value of securities.

PDXTabs

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #21 on: October 30, 2020, 11:17:04 AM »
But if you were worried about your brokerage defrauding you, would you trust what they wrote in their FAQ?

maizefolk

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #22 on: October 30, 2020, 11:22:28 AM »
I feel like we need two different words to describe:

1) Risk that you lose assets invested at a particular brokerage.
2) Risk that you lose access to assets invested at a particular brokerage for a length of time.

It sounds like the consensus is the risk of #1 is essentially zero but the risk of #2 is significantly non-zero.

Just posting this wrap up in case a newbies reading through this thread and just coming to the conclusion that "having all your assets in one brokerage" is risky, without realizing the distinction between those two types of risk about different undesirable outcomes.

PDXTabs

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #23 on: October 30, 2020, 11:44:24 AM »
2) Risk that you lose access to assets invested at a particular brokerage for a length of time.

Yes, and if you want to be paranoid you can go really far down this rabbit hole. Last night I was listening to a podcast by a retiree that makes sure to have some of his assets in banks with no connection to the USA so that a US court order could not freeze all of his assets.

EDTIed to add - he's a nutter and I'm not going to tell you which podcast it was, because you shouldn't waste your time. I won't listen to him again for some other nutty things that he said.

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #24 on: October 30, 2020, 12:04:19 PM »
But if you were worried about your brokerage defrauding you, would you trust what they wrote in their FAQ?

No, I read about it and researched it when I signed up--but the FAQ was handy.

I also think it would be difficult for organizations of this size to be 100% frauds--either someone gets a conscience and blows the whistle, or the math no longer works to put up a brave front any more.  But, that doesn't prevent something like the fake accounts scandal at Wells Fargo from happening.  (Although, of course, that's a bank, not a brokerage)  That's where I think of the things as "we've even taken steps, in case we do something stupid."

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #25 on: October 30, 2020, 12:20:05 PM »
I feel like we need two different words to describe:

1) Risk that you lose assets invested at a particular brokerage.
2) Risk that you lose access to assets invested at a particular brokerage for a length of time.

It sounds like the consensus is the risk of #1 is essentially zero but the risk of #2 is significantly non-zero.

Just posting this wrap up in case a newbies reading through this thread and just coming to the conclusion that "having all your assets in one brokerage" is risky, without realizing the distinction between those two types of risk about different undesirable outcomes.

I'm not part of that consensus. I don't think the risk of #1 is essentially zero. There are several examples of brokers being very naughty with client accounts, and they usually get found out when times are hard. Examples include MF Global ($1.6 billion of customer losses) and the infamous Bernie Madoff. The MF Global customers got the majority of their money back eventually, but not all. And it could have been worse.

So I think the risk is low, but not zero, essentially or otherwise. It appears that for investors with less than $500k, at least in the US, you are covered. But when numbers get large, I think it's reasonable to at least consider diversifying.

PDXTabs

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #26 on: October 30, 2020, 12:27:35 PM »
But if you were worried about your brokerage defrauding you, would you trust what they wrote in their FAQ?

No, I read about it and researched it when I signed up--but the FAQ was handy.

And if you were invested with a fraudulent brokerage, do you think that they would tell you if they let their insurance lapse? Did you investigate who reinsures that insurance policy to make sure that the insurance provider can pay out?

I also think it would be difficult for organizations of this size to be 100% frauds--either someone gets a conscience and blows the whistle, or the math no longer works to put up a brave front any more.  But, that doesn't prevent something like the fake accounts scandal at Wells Fargo from happening.  (Although, of course, that's a bank, not a brokerage)  That's where I think of the things as "we've even taken steps, in case we do something stupid."

I tend to agree that the risk of keeping your money with a large well know brokerage is very, very low.

EDITed to add - I'm not that paranoid, but I also don't happen to have over $500K with any one brokerage.
« Last Edit: October 30, 2020, 12:29:11 PM by PDXTabs »

maizefolk

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #27 on: October 30, 2020, 02:56:01 PM »
I'm not part of that consensus. I don't think the risk of #1 is essentially zero. There are several examples of brokers being very naughty with client accounts, and they usually get found out when times are hard. Examples include MF Global ($1.6 billion of customer losses) and the infamous Bernie Madoff. The MF Global customers got the majority of their money back eventually, but not all. And it could have been worse.

So I think the risk is low, but not zero, essentially or otherwise. It appears that for investors with less than $500k, at least in the US, you are covered. But when numbers get large, I think it's reasonable to at least consider diversifying.

You're certainly free to disagree with the consensus (with or without evidence), but I do question the applicability of the two examples you point to to support your view.

1) To my knowledge, as of April 3rd 2014 all customers of MF Global have been made whole. It took 2.5 years, but it did happen, and they got most of their money back much earlier.

2) People who invested their money with Madoff's firm weren't buying equities or bonds so I don't think that example is comparable to what we're discussing here. If you invest in a company, that company could go bankrupt. If you buy a bond, the company or government that issued it may default. Yet these examples don't tell us anything about the risk of having ones stocks held through a single major bank like Fidelity or Schwab.

FWIW I would strongly advise anyone against investing their money with wealth managers like Madoff, either all with one or distributed across several.

reeshau

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #28 on: October 30, 2020, 04:38:27 PM »
I'm not part of that consensus. I don't think the risk of #1 is essentially zero. There are several examples of brokers being very naughty with client accounts, and they usually get found out when times are hard. Examples include MF Global ($1.6 billion of customer losses) and the infamous Bernie Madoff. The MF Global customers got the majority of their money back eventually, but not all. And it could have been worse.

So I think the risk is low, but not zero, essentially or otherwise. It appears that for investors with less than $500k, at least in the US, you are covered. But when numbers get large, I think it's reasonable to at least consider diversifying.

You're certainly free to disagree with the consensus (with or without evidence), but I do question the applicability of the two examples you point to to support your view.

1) To my knowledge, as of April 3rd 2014 all customers of MF Global have been made whole. It took 2.5 years, but it did happen, and they got most of their money back much earlier.

2) People who invested their money with Madoff's firm weren't buying equities or bonds so I don't think that example is comparable to what we're discussing here. If you invest in a company, that company could go bankrupt. If you buy a bond, the company or government that issued it may default. Yet these examples don't tell us anything about the risk of having ones stocks held through a single major bank like Fidelity or Schwab.

FWIW I would strongly advise anyone against investing their money with wealth managers like Madoff, either all with one or distributed across several.

From a risk standpoint, the key thing is that the account should be with a custodian, not held by the wealth manager themselves.  That keeps the recordkeeping accurate--and was not in place with Madoff's firm.  Generally, that custodian would be a large firm, and your statements should come from them.

That is entirely besides the question of whether a wealth manager is worth the cost, or not.

Father Dougal

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #29 on: October 31, 2020, 01:27:42 AM »
I'm not part of that consensus. I don't think the risk of #1 is essentially zero. There are several examples of brokers being very naughty with client accounts, and they usually get found out when times are hard. Examples include MF Global ($1.6 billion of customer losses) and the infamous Bernie Madoff. The MF Global customers got the majority of their money back eventually, but not all. And it could have been worse.

So I think the risk is low, but not zero, essentially or otherwise. It appears that for investors with less than $500k, at least in the US, you are covered. But when numbers get large, I think it's reasonable to at least consider diversifying.

You're certainly free to disagree with the consensus (with or without evidence), but I do question the applicability of the two examples you point to to support your view.

1) To my knowledge, as of April 3rd 2014 all customers of MF Global have been made whole. It took 2.5 years, but it did happen, and they got most of their money back much earlier.

2) People who invested their money with Madoff's firm weren't buying equities or bonds so I don't think that example is comparable to what we're discussing here. If you invest in a company, that company could go bankrupt. If you buy a bond, the company or government that issued it may default. Yet these examples don't tell us anything about the risk of having ones stocks held through a single major bank like Fidelity or Schwab.

FWIW I would strongly advise anyone against investing their money with wealth managers like Madoff, either all with one or distributed across several.

If a person disagrees, it's not a consensus. I realise I'm being picky, but you can't just state your view and then say everyone agrees when they don't.

Are you really saying you consider risk of loss to be zero?

MustacheAndaHalf

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #30 on: October 31, 2020, 01:33:14 AM »
Madoff's case doesn't apply to Schwab and Vanguard.  Vanguard, for example, uses a custodian to hold customer assets - they are not held by Vanguard itself.  Involving two independent companies is a great way to thwart fraud.  Madoff held all assets in house - no third party involved.

Stock options have a price and expiration date, which means sometimes there are very few purchases at certain combinations of price and expiration.  Sometimes there are so few transactions, that I will make a purchase and watch that purchase become the latest one on Yahoo Finance's stock options pages.


Father Dougal - Who said there was a "zero" "risk of loss", besides you?  That looks like a straw man argument to me.

Father Dougal

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #31 on: October 31, 2020, 02:43:47 AM »
Madoff's case doesn't apply to Schwab and Vanguard.  Vanguard, for example, uses a custodian to hold customer assets - they are not held by Vanguard itself.  Involving two independent companies is a great way to thwart fraud.  Madoff held all assets in house - no third party involved.

Stock options have a price and expiration date, which means sometimes there are very few purchases at certain combinations of price and expiration.  Sometimes there are so few transactions, that I will make a purchase and watch that purchase become the latest one on Yahoo Finance's stock options pages.


Father Dougal - Who said there was a "zero" "risk of loss", besides you?  That looks like a straw man argument to me.

In  answer to your question, maizefolk said that the consensus was that "Risk that you lose assets invested at a particular brokerage ... is essentially zero ...". So I don't think that's a straw man, as that's the comment that I was responding to.

I said that the risk was very low. Maybe we are agreeing, if "essentially zero" does not mean zero.

If "essentially zero" means "very low", then I think we have consensus!
« Last Edit: October 31, 2020, 04:39:38 AM by Father Dougal »

Linea_Norway

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #32 on: October 31, 2020, 02:57:19 AM »
I once asked that question to a financial institution. They sold me that if they would go broke, some other financial institution would buy their funds and take over the customers. As a customer your index shares and therefore your money, would still exist.

Father Dougal

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #33 on: October 31, 2020, 04:55:04 AM »
I once asked that question to a financial institution. They sold me that if they would go broke, some other financial institution would buy their funds and take over the customers. As a customer your index shares and therefore your money, would still exist.

Yes, that sounds right. As long as the nominee account is in good order, another (solvent) broker would be itching to get its hands on all those client accounts. It's an easy way to get new clients, so they would buy it out of the adminstration process.

maizefolk

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #34 on: October 31, 2020, 08:40:21 AM »
If a person disagrees, it's not a consensus. I realise I'm being picky, but you can't just state your view and then say everyone agrees when they don't.

I don't know what it is about my posting style that seems to attract more debates about the definitions of words than most other posters. But if many people have posted consistent views and a smaller number disagree with that view, I think the definition of the word consensus fits.

Example definitions of the word consensus:
1) "the judgment arrived at by most of those concerned"
2) "majority of opinion"
3) "a generally accepted opinion or decision among a group of people"*
4) "a general agreement"*

Now you're certainly free to use consensus to mean something other than those definitions. English is a living language after all. But I would point out that you seem to have originally been using "consensus" the say way that I was, saying that you disagreed with the consensus (rather than you disagreed, therefore consensus didn't exist) for the following reasons. When I responded with my views on why I didn't think your examples applied in this case, you opened what, to me anyway, appears to be a separate disagreement about the meaning of the word consensus.

*For #3 and #4 I suppose the definitions don't help much unless we agree on a definition for "general" so I'll say I'm reading that word to mean "in most cases; usually."

Are you really saying you consider risk of loss to be zero?

No, I'm saying I consider the risk of permanent loss of assets for someone holding their stocks with a single broker (like Schwab or Fidelity) to be essentially zero.

The risk is a low enough risk it's not worth worrying about. I put it in the same basket of worries as revolutions which end capitalism in the USA (bad for anyone trying to FIRE; actually this is also an example of how one really could lose assets in a brokerage account); someone walking into my office at work and shooting me (would be bad for my personal FIRE plans); or a new disease wiping out the corn crop in 2021 creating a worldwide famine (probably the most likely of the three; I don't work in an industry that provides a lot of motivation for people to want to kill me).

All three could happen. All three would be very bad either for me personally or for everyone. But the risk of each is low enough that we might as well treat it as zero.*

*Unless one is the sort of person with two years food stored in the basement; who wears plate carrier body armor around the office; and who has a second passport and enough gold to bribe their way out of the country stored under their bed. In the grand scheme of things none of those three mitigation strategies is a MAJOR imposition on your life, and the risk of the events they help protect against is not absolutely zero. The problem is that there was so many different risks which are essentially zero but not absolute zero that if you're going to worry about and try to protect against all of them, all of the small and individually manageable mitigation strategy start to add up. And up and up.

Jeez that was a long post to write about the definition of consensus and the fact that "essentially zero" is not the same as "zero". I dislike arguing about the meaning of words.

zoro

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #35 on: November 15, 2020, 04:31:38 AM »
I agree. You should be trying to eliminate uncompensated risk wherever you find it. I have my money spread over 5 brokers and some held as stocks certificates with no broker involved.

One interesting strategy I have found is that brokers pay to move money to them. Ameritrade payed me $5k to move my account from fidelity and Fidelity paid my wife $6k to move her account form Ameritrade. It was a paper work pain but hey $11k (which was taxed).  Same broker risk profile at the end of the day.  I jokingly called the technique “wife swap” - de wasn’t amused

maizefolk

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #36 on: November 15, 2020, 07:57:06 AM »
One interesting strategy I have found is that brokers pay to move money to them. Ameritrade payed me $5k to move my account from fidelity and Fidelity paid my wife $6k to move her account form Ameritrade. It was a paper work pain but hey $11k (which was taxed).  Same broker risk profile at the end of the day.  I jokingly called the technique “wife swap” - de wasn’t amused

If you don't mind my asking, how large were the balances you were moving to get bonuses that large?

I'm familiar with the technique, but generally thought of it as something people did for a few hundred bucks. For five or six thousand I might be willing to do the paperwork as well.

zoro

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Re: Entire nest egg in one financial institution - all eggs, one basket?
« Reply #37 on: November 15, 2020, 08:55:04 AM »
About $3M each.  I think the offer they had in print at the time was minimum of $600 max $2500. So what I did was call them and say I have an account at Scottrade and Ameritrade - they were merging so I have to find Another broker, then I played 2 or three of them off against each other until I got the best offer.  Don’t forget other items of value that they can throw for you - in free trades, reduced hard to borrow fees, lower margin rates, no fees for special situations etc. if any of that is worth it to you.
Brokers seem to go through phases of being willing to deal, and other times they don’t care.
Also one of the criteria is that you keep the account with them for a certain period afterwards.