When I worked as a stockbroker, I was always interested to see portfolios that had been put together by other advisors. This was most common when working with people who were considering moving their accounts or transferred their accounts to me. In many cases, the prior advisor had given good advice and the holdings were reasonable.

There was one thing that would bother me whenever I saw it, however, and that was matching accounts. My father was my branch manager, and he used to always create matching accounts. Let me explain: If a client’s portfolio was to contain 50% Canadian equity, 20% foreign equity and 30% fixed income, then the RRSP, the open account and the spouse’s RRSP would each be allocated 50/20/30.

With mutual funds, this made some sense. The trades were free to us and to clients, so although placing trades to rebalance each account meant (in the example above) triple the number of trades, it made almost no difference to us. Further, all account statements and all software views showed only one account at a time, never consolidated across all accounts for both spouses. Because we created matching accounts, it was easy to see that the overall portfolio was always balanced by virtue of being the product of matching accounts.

With stocks, it makes less sense, especially when each trade is charged a commission. Returning to the example above, suppose the RRSP holds 50% of the assets, the open account holds 20% and the spouse’s RRSP holds 30%. Each account would hold fewer positions if the RRSP held all the Canadian equities, the open account held all the foreign equities and the spouse’s RRSP held all the fixed income. (This would have to be done with taxation and investment risk tolerance in mind.) Assuming that the Candadian equities and foreign equity portions were each composed of 10 stocks and the fixed income was composed of 5 bonds, each account would have to hold 25 positions in order to match. Consolidating positions per account would mean 10, 10 and 5 positions. When trades are made, such as when adding new funds or rebalancing, this would result in just one third (1/3) of the transactions and one third of the cost.

The drawback is that some accounts may unexpectedly outperform others and that each account may not appear to be diversified. In the end, however, the holding taken together all form the client’s (or couple’s) portfolio, so diversification and performance are really only meaningful at the portfolio level. There doesn’t seem to be any really good reason to hold the same position (stock or bond) in more than one account at a time.

The strange thing is that I haven’t seen anyone do it this way. I haven’t seen a portfolio where each account held unique positions. Am I missing something? Is there a reason this wouldn’t work? Would it not really reduce trading costs?

Consolidating Positions

4 thoughts on “Consolidating Positions

  • January 20, 2012 at 8:58 am
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    Robert – I work with a financial advisor and you’ve touched on a sore spot with me as well.

    Not only do I have the same fund in my RRSP, wy wife’s RRSP and an investment account – but I also see it in a spousal RRSP and my kids RESP.

    It seems crazy to me to have all this duplication. Not to mention to paperwork that’s going to start coming in during tax season.

    Reply
    • January 20, 2012 at 9:43 am
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      Hi Steve, thanks for your comment. I personally don’t mind the added complexity of balancing the portfolio across accounts. But I also understand that from the perspective of the advisor, he or she has additional responsibility (or liability) to ensure that recommendations are defensible.

      Imagine that a client sued an advisor for having all “high risk” rated investments in a single (small) account. Would the judge side with the client, saying that’s inappropriate? Or would the judge side with the advisor, saying that’s only a small part of the entire portfolio? An advisor can’t know the answer to that question, so they will tend to play it safe.

      That’s one reason I bemoan the highly regulated state of the investment industry. I saw that the regulations failed to stop dishonest people (Portis, that guy in Montreal who wasn’t even a registered advisor, that advisor in Vancouver who was bold-faced lying to clients, ponzi schemes in Alberta, etc.). But it keeps honest advisors from doing their best. Still, I’m not arguing against any regulation.

      Reply
  • February 2, 2012 at 3:57 pm
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    This is one of my peeves as well. And you don’t even mention TFSAs and locked in RRSP accounts or if you use more than one broker. And iTrade’s silly restriction that you can only hold bonds and not stocks in their cash optimizer accounts. It’s pretty easy to rack up 15 investment accounts for a family that you would like to look at as one portfolio or split into portfolios differently than the organization of the accounts. Unfortunately brokers and investment advisers have little incentive to provide better tools, the only solution seems to be to do it yourself using Quicken, MS Money, or your on spreadsheets and home grown software.

    Reply
    • February 2, 2012 at 5:43 pm
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      Hi Greg, I have found that the higher my expectations, the more likely I’ll be disappointed. At my past employer, trades of US dollar funds were settled in Canadian dollars inside RRSPs, even if the proceeds would be used to buy another US dollar fund. At HSBC, that’s not the case, but they can’t provide level 2 (market depth) data (except over the phone). And it’s rare to get a consolidated portfolio view. In my case, I set up a spreadsheet, which I update weekly and every time I place a trade.

      Reply

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