Craig Roland has issued a warning. It makes sense to me.
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First of all, keeping all your money at one company or one fund provider is a very bad idea. I’m sorry because I know that it’s more convienent, but it’s just how I feel. I strongly believe in Institutional Diversification. That is the idea that you split your money up between financial services company and the funds they provide.
Institutional diversification is more than about fund managers commiting fraud or other shenanigans with customer funds (although that has happened in the past as MF Global customers just found out). There are a lot of other unknown risks that can show up as well. Some examples:
1) Your account is compromised and access to your funds is frozen while it is sorted out. It can be identity theft from some rogue player overseas, or (more likely) someone you know. You will likely get access to the funds soon enough, but with more than one company it is unlikely the perpetrator will gain access to all your funds in one fell swoop. And if they do, you have two companies to work out the problem with and one of them likely will handle it faster than the other so you can regain some control.
2) Physical attacks against infrastructure are very real as shown on 9/11. Directed cyberattacks against infrastructure affecting large numbers of accounts at a financial services company are also all possibilities. Again, having more than one company diversifies this risk of being locked out of all your money at once.
3) A natural disaster could happen to affect the company where you have all your money. Earthquakes, hurricanes, etc. are all possible and would be very bad for certain parts of the country where many financial sector companies are based.
4) Lastly, but most importantly (and likely) there is not so much fraud as there is just sheer manager incompetence. SIPC coverage and other legal protections do not do anything if the fund managers do something dumb like Schwab’s YieldPlus fiasco, the Reserve Fund breaking the buck in 2008, or even Vanguard’s own Total Bond Market Fund in 2002 that undershot their benchmark due to manager error. Keeping all your money in one fund type at one provider opens you up to this kind of manager risk that has absolutely no protection of any kind. . . .