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In the past year, I invested $1k per week in a diversified portfolio through a financial firm. The money belongs to my incorporation. My goal is to invest as much as possible and never use it, eventually living on the dividends. That way, it grows faster because I'm paying only 20% taxes on the income hence I can invest more.

Now I'm making a bit more money and I could add approximately $250 to those weekly investments. I'm wondering if there's something wrong with that. Some people told me that I should not invest all my money through the same firm. I get the point that all my money should not be in the same bucket. I feel like my case is different given that my portfolio is widely diversified.

It was not enough to convince those people. Let's see the options:

  1. just keep investing as much as I can in the same portfolio;
  2. real estate;
  3. registered retirement savings plans (RRSP).

I've had a house for 5 years. I hate it. I'm not going to buy more real estate.

RRSP just doesn't appear profitable to me compared to my current strategy.

I considered having an affair with another financial advisor so that all my money doesn't go through the same one. To be honest, I don't think it's worth the 4 meetings per year. I just don't see what's wrong with my current strategy.

I'm 26 and I work and study full time so I want to keep things as simple as possible.

What's wrong with my strategy? Am I missing the obvious?

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Similar to SIPC insurance here in the US, Canada has the Canadian Investor Protection Fund whose purpose is to protect investors from the bankruptcy of an investment firm. Last I knew it was $1 million in coverage. Be aware that the CIPF protects against losses that result from insolvency of an investment firm not from losses in a fund due to investment fraud.

While I can't guarantee you that it would be the same with investment firms, in 2008-2009 when US banks were falling like flies, in most cases, the ensured that the takeover transition to new ownership was seamless and the banks remained open for business. In some instances, doors were shuttered for a day or two. That's the purpose of these agencies (FDIC, SIPC, CIPF, etc.).

Given that there's a possibility that one's investments could be tied up for a short period of time if an investment firm failed, I think that it's a good idea to have an account at a second broker. One could then defend one's positions and avoid market risk until one regained access to the failed brokerage account. The cost would be additional B/A slippage and commissions which I think is a small price to pay in order to protect a large sum of invested money.

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The main concern is what your exposure is to a single point of failure - specifically, the firm you have your money with. Is it government insured (it probably isn't, most investments aren't insured)? Is the insurance at risk, if there is any? At the same time, how much of your total life savings is "at risk" (i.e. playing around in some non-secured market)?

In the world we live in, financial systems are tightly bound together, and risk is not always well diversified but is often magnified - see the 2008 worldwide financial crisis as an example of such a "black swan" event. Similarly, whole investment firms and brokerages have gone bust all at once. Again in 2008, if it had not been for massive government bailouts it is not clear what investment firm would not have gone bust - but still, many smaller firms did still collapse, and many investors lost a lot of money.

The issue then is not some question like "will your firm still be here next year", but rather "can you estimate the risk that your firm will still be functioning well 25+ years from now, when you actually want to make use of that money?" The correct answer is that you cannot, and no one can, because no one can validly estimate the risk of some rare event knocking your investment firm over as though it were made of straw. Or more likely, that corruption will take hold and the managers of the firm will use their position to ensure themselves millions in profits while putting investors like you at risk of losing everything while technically maybe sorta following the law. And no one can say if that will happen in your lifetime.

Thus the true goal of diversification of risk is that if some bad thing happens, and given the length of time we are talking it almost certainly will to some serious degree, you do not want to give up everything you've gained - or worse, everything you saved. While diversifying the individual investments well is important, it doesn't protect you from problems with the firm itself. At large amounts of money I don't know of any example of anyone keeping all their money with one firm - it is the norm to have pools of money spread across multiple minimally-related firms. When you are just starting out it is fine to stick with one - but as the money grows and comes to represent months and years of your hard-earned savings, why would you trust one single group financiers to have your best interests at heart?

As a bonus, working with multiple firms can help you see how much firms vary, and will make it easy for you to switch money around if you experience any funny business from one of them. It can also expose you to a variety of different methods of steering you to some investments over others. If they encourage different strategies, it is easy for you to see how opinions differ. If they all push the same strategy - maybe worry about why :)

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  • Investing and banking are different. With typical investments, you own something that is independent of the broker and there are rules in place to protect it if the broker fails.
    – Eric
    Commented Jul 26, 2019 at 9:43
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    It's a false premise that managerial corruption at a brokerage form puts investors at risk of losing everything. The U.S. has SIPC insurance and Canada has the CIPF.
    – Bob Baerker
    Commented Jul 26, 2019 at 13:51
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WRT using a single financial advisor to handle your investments, I can answer in two words: Bernie Madoff (https://en.wikipedia.org/wiki/Bernie_Madoff )

IMHO, unless you are in the multi-millionaire category (and probably tens of millions), there is absolutely no point* to having a "financial advisor". Just put your money in mutual funds instead.

And from my experience, there are good reasons NOT to have a financial advisor. They're out to make money for themselves. If they're like the one I briefly had when I first started investing, they will do this by "churning" your account (https://www.investopedia.com/terms/c/churning.asp ), persuading you to invest in risky startups, &c, when all you want to do is park the money somewhere reasonably safe and forget about it so you can concentrate on work.

*Honestly, that guy would call me at work about once a week (this was before email was widely used) with some new "opportunity".

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  • The Bernie Madoff story isn't that cut and dry. For starters, many of his victims far exceeded SIPC coverage limits. The majority of them did not invest directly with Madoff's SEC registered firm but rather via third party feeder funds. Such hedge funds and limited partnerships do not qualify for SIPC protection.
    – Bob Baerker
    Commented Jul 26, 2019 at 22:32
  • @Bob Baerker: Sure, but that doesn't invalidate my point. A even a semi-honest honest financial adviser (as mine sort of was: all the companies he tried to get me to invest in were real, as were their losses :-() can rob you, not only of money, but of your time. Even if SIPC or the Canadian equivalent eventually cover your losses, you're still stuck with a major hassle.
    – jamesqf
    Commented Jul 27, 2019 at 0:32
  • You're conflating issues. Bernie Madoff has nothing to do with the OP's question and mentioning of him validates nothing. I'm not defending financial advisers. My first one was the husband of a close friend of mine and he churned my account. That put me on the road to managing my own affairs. I thought it was fitting when his firm went belly up (Bear Stearns).
    – Bob Baerker
    Commented Jul 27, 2019 at 1:03
  • @Bob Baerker: Certainly it has something to do with the OP's question. Put all your eggs in one basket by keeping them with a single firm or advisor, and you take the risk that they're going to be crooked - or, as with Bear Stearns, just reckless with your money.
    – jamesqf
    Commented Jul 27, 2019 at 17:08
  • Again, you're conflating issues. Bear Stearns went under because of its involvement in hedge fund ownership of over leveraged risky mortgage backed securities. It had to bail out its HGSCS fund (CDOs) and after that, the High-Grade hedge fund lost all of its value due to crash of the subprime mortgage market. Their trading desk was reckless with their own money as well as investor cash. Everyday retail like you (ownership of securities) wasn't buying CDOs and therefore your cash and securities were SIPC protected ($250k each). A good read about it is 'House Of Cards' by William Cohan.
    – Bob Baerker
    Commented Jul 27, 2019 at 18:15

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