It’s been said infinite times that the foundation of successful long-term investing is diversification that includes bonds and stocks from around the world.
But there’s a higher – and generally unnecessary – higher level of diversification that investors sometimes strive for in nerve-wracking times like these. This diversification is based not on the risk of losing money, but rather on the possibility of an investment dealer or financial company going bankrupt.
A pattern I’ve seen a few times over the years is a shock to the markets, followed by questions from investors about where they should:
- Divide their money between investment advice companies in case one goes under
- Use at least a couple of robo-advisers rather than relying on one.
- Spread their exchange-traded fund assets among the same type of fund offered by different companies.
One of the less-talked about investing traps people fall into is fragmenting their portfolios in different accounts with different companies. It’s beyond easy to miss events or details in one or more of these accounts that end up costing you money. For that reason, I’m a fan of consolidating your accounts and investments with strong, reputable brokers or advice firms.
Some thoughts on identifying those companies:
* Are they participants in the Canadian Investor Protection Fund?
CIPF offers coverage of up to $1-million if cash or securities in your account go missing as a result of the failure of your investment company. Whatever the balance at a CIPF-member firm, you’re covered for losses of up to $1-million in missing cash or securities that result from insolvency.
* Are they part of the Canadian Investment Regulatory Organization?
CIRO is the regulator that oversees investment dealers and mutual fund dealers.
* Do they participate in the Ombudsman For Banking Services and Investments?
OBSI resolves disputes between more than 1,500 financial companies and their customers.
With ETFs and other fund products, it’s fine to use best-of products from various companies. But it’s hard to see any benefit from owning multiple funds of the exact same type. Fund assets should be held by a third-party custodian and thus be separate from the parent fund company’s business. If a fund company becomes insolvent, its fund operations could be sold to another company or liquidated so that assets can be distributed to fundholders.
In summary, it’s unnecessary to diversify between investment companies and roboadvisers if you’re within CPIF coverage limits. As for ETFs and investment products, the financial industry is crammed with proven companies that have history and assets demonstrating their stability. Start there if you’re thinking a lot about insolvency risk.
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