Is It Time To Clean Up Your “Financial House”?

We all clean-up around the house from time to time. We understand the need to do it and we do it often or perhaps, for some of us, not often enough. With a little effort, a clean house leads to more efficiency (i.e., you can find the car keys) and less stress. The same can be said for cleaning your “Financial House” – i.e., your many banking and brokerage accounts. You probably have an extra bank, brokerage or credit card account that you rarely use or have lost track of. In fact, a new client recently admitted that she was “pretty sure she had an old 401(k) account somewhere but wasn’t exactly sure where it was.” She is not alone. I’ve heard a similar story from many clients and, I’m sure, many of you can relate. So, why are we so reluctant to clean our Financial House? It’s time to take action, do a little (financial) house cleaning and enjoy a little less stress in your life.

Let’s take a minute to review why your Financial House may be messy. When I entered the financial industry in the 1990’s, the landscape was quite different. It was very fragmented in the sense that there were many service providers competing for your business. Many of you may remember, for example, the near relentless credit card offers coming from banks all over the country. One of my former colleagues, who worked at Capital One, said that when he joined Capital One in 1994 the industry was highly fragmented with over 50 credit card issuers claiming at least 1 million customers. Moreover, many issuers were specialists that catered only to specific groups (e.g., travelers, business owners, etc.). Similar fragmentation and specialization existed in banking and in stock-brokerage – leading to quite a mess of accounts for many of us.

Fast forward to today. After 20 years of industry consolidation, the top 10 credit card issuers now control over 90% of the market. The same situation occurred in other banking services as fallout from the Great Recession led to a wave of consolidation. Similar trends existed in the brokerage industry where a small number of providers (e.g., Charles Schwab, Fidelity, Morgan Stanley and others) each now service a huge customer base. For example, my custodian, Charles Schwab, has grown to over 10 million customers and over $3 trillion in assets.

So, how does this affect us? The good news for all of us is that the lines have now been blurred among these behemoth financial institutions such that they all are attempting to be a “one-stop-shop” for your financial needs. Charles Schwab has added “Charles Schwab Bank” and can offer just about any banking product (e.g., credits cards, loans and lines-of-credit) and Capital One has grown from a credit card issuer into a full-service bank/brokerage. What this means for the consumer is that the opportunity to consolidate accounts is available like never before. For commodity products, like checking accounts, credits cards and debit cards, there is generally no need to maintain extra relationships. Moreover, as pricing continues to drop, even lines-of-credit, loans and trade-execution have become more commoditized. In other words, they’re all so similar in price that the value of shopping around is often not worth the hassle of maintaining extra relationships.

At this point, you might take a minute to think about what clutter may exist in your Financial House. Do you have an old 401(k) from a former employer that could be “rolled over” (i.e., transferred) to an IRA at your current brokerage? Do you have accounts or IRAs at multiple brokerages and, if so, why not consolidate them? Do you have a banking relationship simply to have a checking, debit card or credit card account? In general, I’ve found tremendous value in consolidating accounts for clients. On the investing side, there are cost savings to having accounts in one place and doing so could yield better overall investment results. Greater results are possible because larger providers generally have a better selection of investments and account consolidation leads to better oversite (e.g., integration with financial planning software). Also, in regard to basic banking services, clients at Charles Schwab, for example, can invest while still accessing the money via check, debit card or ACH transfer – all from one account. In my experience, the brokerages that now offer banking services tend to be a very attractive option for your cash balances. For example, Charles Schwab offers a high-yield savings option without locking up your capital so you can earn approximately 2% in the current rate environment rather than near-zero returns as is offered presently by many bank savings accounts.

Ten to twenty years ago we could only dream of a world where it was possible to exist with one financial relationship. Now it’s possible and yet many of us have failed to take advantage of it. It takes a little work, but it’s worth the effort. You’ll likely have less stress and, hopefully, a faster growing “nest egg.” Good luck!