In just the past year, our team has conducted over 800 meetings with clients, new families and individuals to do preliminary planning work to determine if we can help them and if we bring them on as private clients. Throughout these meetings and interactions with so many people looking to take control and organize their very complex financial lives, we have learned a few things.
One takeaway that was profound to us was that many investors we spoke with had multiple financial advisors, wealth managers and investment advisors. Most of them would have similar reasons such as they inherited the advisor, or “this guy does my bonds,” “this guy has performed great,” “I really like this one,” and my favorite: “I don’t even know who manages these funds and I never look at the statements”.
In today’s complex financial landscape, people often look to experts for advice on investment, retirement planning, and their overall wealth management. Financial advisors offer specialized knowledge to help clients meet their monetary goals. However, a growing trend among wealthy individuals is to hire multiple financial advisors in the belief that diversifying advice will lead to better returns and reduced risk. While this approach may seem logical at first glance, it can introduce a host of inefficiencies and challenges.
Below are some reasons why having multiple financial advisors may not always be beneficial:
A severe lack of a coherent strategy: Different advisors might have varying philosophies, risk appetites, and investment approaches. If each advisor is working in isolation, you might end up with a mishmash of strategies, with one advisor’s decisions potentially undermining or conflicting with another’s.
Increased costs: Every financial advisor charges fees, whether through direct charges, commissions, or hidden costs embedded in investment products. By employing multiple advisors, you might be doubling or tripling your expenses, eroding your potential returns.
At our firm, and like most financial institutions, wealth management advice is generally monetized through financial planning fees and a percentage of the assets under management. The AUM fees are tiered based on your assets under management. For instance, if you have $10 Million of assets managed out one firm, your effect percentage will be significantly lower than if you have five advisors giving each $2million.
Overlap in investment products: Without a coordinated approach, there’s a risk that different advisors might invest in similar products or sectors. This can defeat the purpose of diversification, potentially concentrating your risk instead of spreading it. You might think you are safe because all your eggs are not in one basket, but if all your advisors are using the same basket this can be problematic.
Challenges in monitoring and reporting: Juggling multiple portfolios with different advisors means you have to consolidate reports, understand varied performance metrics and manage several communication lines. This can be cumbersome and time-consuming.
Lack of accountability: With several advisors at the helm, it’s easy for each one to blame another when things go wrong. Having a single advisor means there’s clear accountability for decisions and outcomes.
Skewed performance monitoring: You may have one advisor whose strategy is doing well because it hit a certain time in the cycle of the market which they have concentration in. My article on long-term strategy explains how this can lead to poor decision making.
Privacy concerns: Sharing your financial situation and goals with multiple parties can increase the risk of your personal information being mishandled or misused.
Inefficient tax planning: Different advisors may not be aware of each other’s decisions, leading to potential tax inefficiencies. For example, one might sell a security at a gain while another incurs a loss, missing an opportunity to offset gains and losses for tax purposes. The more you pay in taxes, the less wealth you have. Effective tax management is crucial in your financial planning and ongoing investment management.
Relationship management: Building trust and understanding with an advisor takes time. With multiple advisors, you spread thin the time and effort you can invest in each relationship, potentially reducing the depth and value of each advisory relationship.
Missed synergies: A holistic approach to financial planning considers investments, retirement, tax planning, estate planning and more. A single advisor or firm with a comprehensive view can find synergies between these areas, whereas multiple advisors working in isolation might miss them.
Increased complexity in decision making: Receiving varied advice from different experts can lead to confusion. Which strategy do you follow when they conflict? How do you prioritize recommendations?
While diversifying investments is a wise strategy, diversifying advisors may not yield the same benefits. The complexities and potential pitfalls introduced by managing multiple advisory relationships can overshadow the perceived benefits. It’s crucial to weigh the pros and cons and perhaps consider a consolidated approach with a trusted advisor or team that offers a comprehensive suite of services. This can help ensure coherence in strategy, efficiency in costs, and clarity in communication.