Combined accounts make sense, save cents

When you start investing, you're likely to hear over and over again that diversification is one key to a strong portfolio.

But sometimes scattering your money among too many investment firms can cause problems of its own.

Such is the situation faced by Sherry. She said in an e-mail that her 401(k) is being managed by one local financial adviser, while a different adviser is managing her individual retirement account. The IRA consists of less than $1,000, and the IRA adviser told her that, due to the low balance, fees were slowly "eating away my money."

"He suggested that I roll over my 401(k) . . . and put that in an IRA account combined with the existing IRA," Sherry wrote.

However, the company for which her IRA adviser works has made news lately for employing some people who made bad recommendations.

"I am leery about them now," Sherry wrote. "Is there any reason I should not do the rollover that was suggested? It sounds like I would save money by doing this."

I posed Sherry's question to Alan B. Tingey, principal at Cannon Tingey Investment Advisors in Midvale.

Alan says it often makes sense for an individual investor to combine similar accounts.

"Since your reader's 401(k) and IRA accounts are both qualified retirement plans with similar tax advantages, and since they should have similar objectives and risk postures, she should probably combine the accounts unless there are any specific restrictions," Alan says.

"By combining the accounts she creates a simpler, potentially lower-cost alternative that allows both accounts to be managed under the same coherent strategy."

He says there seems to be a trend among brokers to charge higher annual fees. But if an account gets big enough, brokers sometimes waive those fees.

"If the reader shops around, she will find a few alternative discount brokers that charge no annual fee, even for small accounts," Alan says.

"Another way to avoid an annual account fee is to open an account directly with a mutual fund company. However, as with any mutual fund, an investor should gain a clear understanding of the management fee (disclosed in the prospectus) that could be as high as 3 percent annually. As a rule of thumb, any management fee above 1 percent could be viewed as excessive."

Regarding Sherry's concern about avoiding bad investment recommendations, Alan says one way of eliminating such "adviser risk" is to invest in assets called Exchange Traded Funds (ETFs), or "index stocks."