The Case for Multiple Advisors or the Case against Multiple Advisors?
Since the financial crisis of 2008 and even before with the dot.com crash of before and even Black Monday in October of 1987, investors are increasingly skiddish about their investment portfolios and their financial advisors. Financial advice similar to other advice provided by lawyers, accountants and physicians involves uncertainty and risk. In the case of a physician, most individuals have a primary care physician who looks at the big picture and coordinates all of the information and recommendations from the specialists and sub-specialists. Do you need or even want to have more than one primary care physician to serve as the coordinator and to view the big picture? In the case of an attorney, you may seek advice on an estate planning matter and then solicit a second opinion to provide some reassurance that you have not left any stone unturned. Even in the case of financial advisors, a recent phenomenon is to get a second opinion on a financial plan or a specific financial decision.
According to a report entitled “Taking On The Role of The Lead Advisor: A Model for Driving Assets, Growth and Retention” published by State Street Global Advisors based upon a survey distributed to 2,196 financial advisors and 776 ultra-high net worth investors, nearly one-fifth (17%) use two or more advisors, half (49%) manage their own investments, and a third (34%) work with a single advisor. Furthermore, the majority (55%) of those using more than one advisor have not let the other advisors know about each other. Interestingly, among those with multiple advisors, nearly two-thirds (65%) regard one of the advisors as their primary advisor. Is this similar to the role of a primary care physician? The survey did not address this analogy but it is worth pondering. Of note, the number one reported reason for using multiple financial advisors was to diversity risk.
What type of risk might you diversity if you have more than one financial advisor? Let’s review the major types of risk for investors of all types. Risk is inseparable from return.
- Inflation Risk
- Interest Rate Risk
- Sector Risk
- Diversifiable Risk
- Tax Risk
- Event Risk
- Liquidity Risk
As prices rise, then spending power decreases. Multiple advisors will not reduce this risk. Asset allocation will reduce this risk assuming that you have investments which are hedges against rising inflation like TIPS.
Interest Rate Risk
As interest rates increase or the cost of borrowing money, then the value of bonds decreases. They are inversely related. Multiple advisors will not reduce this risk. Bond laddering will reduce this risk.
Allocating all of your assets in a single sector like banking can yield very high returns under specific conditions and dismal returns under other conditions. These conditions are beyond the control of you as an investor and any financial advisor and even multiple advisors. Multiple advisors will not reduce this risk. Asset allocation and diversification of the assets in your portfolio with investments in different sectors will reduce this risk.
This is also called systemic risk. This is risk that can be managed based upon asset allocation. Multiple advisors will not reduce this risk unless they engage in asset allocation as an investment strategy. Again, asset allocation based upon an Investment Policy Statement will reduce this risk.
Some investments are more tax efficient than others. This means that you have a bigger tax bite with some investments. Multiple advisors will not reduce this risk. Investing while considering the tax implications now and in the future will reduce this risk.
9-11 and the earthquake in Japan are catastrophic man-made and natural events. Events of this magnitude and scope have an impact on investments. Multiple advisors will not reduce this risk. To be honest, a single advisor will not reduce this risk. Asset allocation by focusing upon global diversification based upon weather patterns, political risks, and geographic risks will reduce this risk.
Cash is king. If all of your net worth is tied up in your house or a 5-year CD or in a trust that you cannot get access to for another 20 years, then your investments are illiquid. In short, you have the money but you can’t get your money. Multiple advisors will not reduce this risk. Purposeful financial planning supported by an Investment Policy Statement and coordinating with estate planning professionals and tax professionals will reduce this risk.
If having multiple advisors will not reduce these risks, then what risks are being diversified as discovered in the State Street Global Advisors Survey. It is more than likely diversifying dependence upon one advisor to create a greater sense of ease given increasingly turbulent markets or it is a contest between the multiple advisors to determine who generates the greatest raw return during any given time period.
If you decide to have more than one financial advisor and these multiple advisors are essentially providing the same service unlike the relationship between a financial advisor and an estate planning attorney, a CPA, a real estate professional or financial therapist, then you have to be clear on what the other advisor(s) are providing you in exchange for their fee.
In our work with clients, most of whom have other professionals as part of their Brain Trust and a few who have other financial advisors, we see our role and responsibility as follows:
- To serve as the coordinator, integrator, synthesizer, and conductor of all the services provided by the Brain Trust while being the trusted guide to support our client achieve their life-enhancing financial goals based upon their financial plan which includes an Investment Policy Statement.
- To serve as a fiduciary always holding the best interest of our client as the first and foremost priority.
- To identify the individuals and organizations in the Brain Trust of the client.
- To establish high-quality, coordinated relationships with members of the client’s Brain Trust.
- To develop in collaboration with the client an Investment Policy Statement incorporating all assets in the client’s entire portfolio including those managed by other advisors.
- To collect, monitor and report on a quarterly basis the performance and related risks of the entire portfolio including those managed by other advisors.
- To identify and recommend any conflicts arising from managing multiple portfolios with multiple advisors.
- To calculate and share with the client the cost of services provided by the Brain Trust.
- To evaluate with the client about adding, changing or deleting members of the Brain Trust as the client’s life and financial situation changes.
- To partner with the client to enhance the communication with the members of the Brain Trust and how to get the most value from the Brain Trust.