Many investors have at least one account somewhere else; an old 401(k), a brokerage account opened years ago, or an inheritance. This common occurrence is typically not intentional, and sometimes it is not even realized until I begin working with a client. Once we dive deep into the client’s assets, oftentimes these stray accounts are discovered; this is a recent situation I encountered with my clients, a married couple in their early sixties.
Paul and Diane had done everything right, they saved consistently, kept liabilities low, and stayed invested through multiple difficult markets. When they came to Rebalance, they told us about four goals they hoped to achieve:
- Retire in three years without changing how they live
- Keep their lifetime tax bill as low as legally possible
- Never be forced to sell into a bad stock market
- Leave an estate their daughter will not spend a year untangling
However, after meeting several times, we uncovered that the assets they had accumulated along the way were spread across half a dozen accounts at four different institutions. Four organizations that never collaborated with each other, or worked together towards their goals.
Paul asked me the question: Why not split our assets between two firms? Or multiple advisors?
This is a fair question, and it comes from a principle our wealth management industry has spent decades reinforcing. Avoid concentration and diversify your risk.
While this instinct is correct, it is best applied to your investments rather than your financial partnership.
The Right Principle, the Wrong Object
Diversification works inside your portfolio because your holdings do not need to coordinate. A thousand companies across forty countries do not have to agree on anything. Their independence is the entire point.
Your financial plan works on the opposite principle. Its value comes from 100% coordination.
Retiring on schedule, paying less tax over a lifetime, never selling at the wrong moment, and leaving a clean estate all depend on every account behaving as part of one system. These are not achieved by owning the right funds, but by sequencing decisions across everything they own.
Leave pieces of what they own outside the plan, and they have not diversified those goals. They have made each harder to reach. Their lifetime tax bill rises, because the moves that lower it require a coordinated strategy across every account. Their odds of selling at a bad moment rise, because no one controls your full allocation. Their estate gets messier, because there are more places for something to be missed.
What You Give Up When Your Assets Are Divided Between Multiple Financial Advisors
Your allocation stops meaning what you think it means. If one firm manages half your assets targeting a 60/40 mix, while the other half drifts, you are not 60/40. You are whatever the two halves add up to on a given day, and no one person can tell you that number. Worse, the sides can undo each other and net out strategic shifts or rebalancing.
You may lose tax deductions you never knew you had. The wash sale rule applies to you as a taxpayer, across every account you and your spouse own, not to each account separately. A purchase inside one account can disallow a loss harvested in another. If your held-away account reinvests dividends automatically, losses harvested on your behalf may be quietly disallowed.
Your bracket planning becomes guesswork. How much to convert to a Roth, whether you can use the zero percent capital gains bracket, and where the IRMAA thresholds will set your Medicare premiums two years out all require complete visibility. Answered with partial information, they are estimates rather than strategy, and the difference shows up in what you owe.
Nobody audits what nobody is watching. One of the accounts Paul and Diane had held for decades still carried a beneficiary designation naming a relative who had since passed away. That is a probate problem, and it had been working against the fourth tenet they cared most about.
The Problem with Keeping Score
If you divide your assets to compare two managers based on performance, you have started keeping score. One year tells you nothing, and neither does two. What the scoreboard measures is not skill. It is allocation and market environment.
Over any short window, the side that pulled ahead almost certainly held more of whatever happened to lead. That is not a manager outperforming, and you cannot tell the difference by looking at a return. What makes it more challenging is that the asset classes that just led are, if anything, more likely to lag next. Valuations rise with performance, and higher starting valuations have historically meant lower expected returns.
Following the scoreboard means buying whatever is most expensive. Taken to its logical end, the manager who trailed your two-year comparison may be the one better positioned for the decade that follows.
The Solution
We recommended consolidating most of what Paul and Diane held, with three deliberate exceptions. An active 401(k) with an employer match and institutional pricing, a health savings account tied to an employer contribution, and one low-basis position we set aside for a later conversation about charitable giving.
What moved was oversight. Every account, including the ones that stayed, came into the plan and the tax coordination. When we ran a look-through allocation analysis across everything they owned, the portfolio they believed was 60/40 was closer to 80/20 once we dug into the funds held elsewhere. They were carrying more risk than they intended. Nobody had told them before meeting us, because nobody could see the full picture.
With everything visible in one place, we could design a tax-effective allocation specifically for each account, aligned with their near and long-term objectives.
The Takeaway
Most fragmentation is not chosen: it accumulates. A job change here, an inheritance there, an account opened in your twenties for a reason you no longer remember.
Continue to diversify your portfolio. That principle has held up for more than half a century and will keep holding up. Applied to your investments, this lowers your risk. Applied to the oversight of your financial plan, this can work against the outcomes you were trying to protect.
If any of your accounts currently sit outside the financial plan, consider bringing the details to your next review. A complete view allows Rebalance to assess how each account fits into your investment strategy, tax planning, and long-term goals, including whether it should be consolidated or remain where it is.
