I recently worked with a client who sold his business and received a check with two commas in it. After depositing it, he had a moment of realization: between his new brokerage account and his existing IRA, over 80% of his entire net worth was now sitting inside a single financial institution.

He asked me a question that many DIY investors wrestle with: "Should I split this up? If this firm blows up, am I in trouble?"

It’s a valid concern. Let’s look at the risks of "custodian concentration" and whether the effort of diversifying your brokerages is worth the reward.

The Two Big Fears: Cybersecurity and Counterparty Risk

When you have nearly all your assets in one place, you are exposed to two main types of "catastrophic" risk:

1. Cybersecurity: If your specific account—or the firm’s entire platform—gets hacked, your access to liquidity could be frozen. For a retiree living off their portfolio, even a two-week freeze can be devastating.

2. Counterparty Risk: This is the "Silicon Valley Bank" fear. We saw it in 2022 with the regional bank runs and in 2008 with the Great Financial Crisis. It’s the fear that the institution you do business with won't be able to fulfill its obligations.

SIPC: The "Safety Net" (With Significant Holes)

To calm these fears, many people point to SIPC (Securities Investor Protection Corporation). While SIPC is great, you need to understand what it actually does.

SIPC protects up to $500,000 of customer securities if a brokerage fails or if there is fraud. However:

• It does NOT protect against market downturns. If your stocks go down, SIPC doesn't care.

• It’s not instant. The Madoff Ponzi scheme case is still an active case on the SIPC website nearly 20 years later because there were never any real trades placed.

• Lehman Brothers was different. In the Lehman collapse, customer assets were actually there; they were just frozen. Most were transferred to Barclays within weeks.

The Advisor’s Incentive vs. Your Peace of Mind

If you work with a traditional advisor on an Assets Under Management (AUM) model, they will almost always push you to consolidate. They have good reasons:

• Admin Ease: It’s much harder to trade and move money across different platforms with different forms and service teams.

• The Bottom Line: Most advisors get paid a percentage of what they manage. If you move half your money to another firm, they take a 50% pay cut.

Because I work as an hourly planner, I don't manage your assets. I have no horse in the race. This allows me to see the client's perspective: sometimes, spreading things out just helps you sleep better at night.

The Nebraska Connection: Why We’re Skeptical

For my clients here in Nebraska, this skepticism is often "baked in." Many folks retiring today remember the Agriculture Crisis of the 1980s. Land values plummeted, and because local banks had loans tied to that land, banks were closing left and right. Add in the Savings and Loan crisis of that same era, and it’s no wonder Midwesterners are wary of putting all their trust in one institution.

The "Goldilocks" Solution: How Many Accounts is Too Many?

So, should you keep every account under $500,000 to stay within SIPC limits? Probably not.

If you do that, you’ll spend your entire retirement resetting passwords, tracking down lost 1099s, and eventually leaving a logistical nightmare for your heirs. I once heard of a client who had 10 separate IRAs at the same firm—even an advisor with 30 years of experience couldn't figure out why.

The Strategy:

• The 2-3 Relationship Rule: Having two or three brokerage relationships (e.g., Fidelity and Vanguard, or Schwab and a local bank) is a reasonable middle ground.

• The Spreadsheet Anchor: This strategy requires you to maintain a simple spreadsheet to track your Asset Allocation (what you own) and Asset Location (which account holds which tax-type).

• The Spousal Talk: Be prepared to explain to your spouse why the Roth at Firm A is up 12% while the IRA at Firm B is only up $4\%$ (hint: it’s likely your asset location strategy, not the firm itself!).

Final Thought

Diversifying your brokerage is about operational resilience. It ensures that if one "pipe" gets clogged, you have another one ready to fund your life.

At Barrett FP, we offer expert financial planning on an hourly basis. We can help you build the spreadsheet and the strategy to manage multiple custodians without the headache.

Ready to diversify your dashboard? See if we’re a good fit.