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It’s known as account sprawl and longtime investors know how easily it happens. You switch jobs and leave behind the 401(k). The local bank was offering that great introductory CD rate. Your spouse inherited a brokerage account with all those utility stocks. There are also the savings bonds Aunt Lucille gave you on your birthdays. Don't forget about your old company stock in that dividend reinvestment plan. Accounts accumulate over the years and you end up with assets spread out over an assortment of financial institutions. They clutter up over time to the point where you are unsure of what you have or exactly where everything is. Staying on top of it all becomes an increasingly difficult task. While consolidating all your assets is likely not possible, effectively limiting the number of accounts, service providers and investment relationships can provide more than just simplicity and convenience.
1. More effective portfolio management
A streamlined portfolio can give you a complete view of your overall wealth and how assets are allocated. It makes it easier to measure performance and determine if your investments are working together. It will enable you to more effectively manage risk by easily recognizing when re-balancing between equities, bonds, and cash is needed. You are also less likely to duplicate exposure to certain sectors and recognize when investments may no longer be appropriate. Overall it will be easier to ensure your portfolio is in line with your goals and risk tolerance.
2. Comprehensive financial planning
Consolidation can improve financial planning efforts such as retirement income. When accounts are spread over multiple providers, you may not have a realistic view of cash flow, making it difficult to determine if you have a sustainable withdrawal rate. A holistic view makes determining an optimal order of withdrawal from various accounts easier. Too many retirement accounts can also increase the chances of not meeting your required minimum distributions (RMDs) when the time comes. The more they are dispersed, the more complicated this annual ritual will be. Estate planning is more effective when you can easily keep track of your estate inventory and review your beneficiary information and account registrations to make sure they are current.
3. Efficient tax management
Bringing your retirement and taxable accounts to one service provider makes it easier to implement tax-efficient strategies such as asset location. Your more tax-efficient assets can be held in a taxable account while less tax-efficient assets are better served in a tax-advantaged account like an IRA. Tax-loss harvesting takes less effort when you can easily see your gains and losses and helps avoid triggering the wash sale rule. It also allows you to quickly calculate and act on important tax information like realized gains and income distributions.
4. Ease of administration
Centralizing your finances minimizes the risk of forgotten accounts. It's not uncommon to move and forget to inform financial institutions about a change of address. This is one reason unclaimed property held by federal and state governments is estimated to be over $32 billion. One provider also gives you a consistent service experience, thereby reducing the need to keep track of multiple policies and possible changes to services and fees. When an unfortunate event happens, or an urgent need arises, there is comfort in having a single point of contact. Lastly, it will reduce the number of statements, financial literature and tax documents. Your mailman and CPA will both thank you.
5. Reduced risk of fraud and identity theft
Closing unused and idle credit accounts helps protect your credit file from intruders. You may also save money by avoiding unnecessary annual fees. The fewer financial accounts you have, the less effort it takes to monitor activity. Consolidation also minimizes online access points and the worry of keeping up with multiple user ids and passwords.
6. Smooth estate and wealth transition planning
Having a clear picture of your financial life makes it easier for the administration of your estate. Maybe you can keep up with the multiple contacts and accounts, but what about the person who steps in when you’re out of the picture? Tracking down assets and contacting multiple providers not only takes lots of time and effort, it’s not uncommon for assets to go undiscovered. Unification can save a surviving spouse and other heirs time, money and frustration at a time of grief and uncertainty.
Keep in mind that consolidating investment accounts needs to be done wisely and thoughtfully. Consideration of possible tax consequences, early withdrawal penalties, rollover rules and comparison of expenses is essential. Evaluating what can be brought together can be complicated and takes time. However, the benefits can make it more than worth your while.
