Some affluent investors make the decision to use multiple investment advisors. However, this is not in their best interest for a number of reasons:
Having multiple investment advisors is almost always more costly than working with just one. Most advisors charge a fee based on a percentage of the assets they manage. The smaller the account size, the larger the percentage fee.
Below are some examples of the maximum annual fee for management services from several well-known firms. The chart below shows that if a client had a portfolio of $4 million in total and $1 million at each of the four firms, the stated management fee would be over $68,000 a year. If the entire $4 million were at Union Bank, the annual fee would appear to be $48,000. At Merrill Lynch, fees could be $58,500 or $31,750 at Charles Schwab Corp. and $79,000 at Citigroup. (For related reading, see: How to Select a Financial Advisor.)
Actual fees may vary (these numbers were calculated based on the ADV of each firm), but clearly having more assets at one firm is cheaper than the same amount divided between multiple firms.
Working with multiple advisors is more time consuming than working with one. The older you get, the less time you have left and most folks want to be as efficient with their time as possible.
When you have accounts at multiple firms, there are more forms to fill out, disclosures to read, ADV forms to review annually, investment statements to monitor and more time needed to talk to or meet with multiple advisors. When it comes time to prepare your tax returns, these firms mean more 1099 forms, which could result in higher tax return preparation fees. When you or your spouse pass away, more time is needed to deal with multiple firms for your heirs, trustees and administrators.
Lack of a Unified Investment Approach
When constructing a portfolio, these should be your goals:
- Having the correct level of risk based on your goals.
- Choosing investments that will give you the highest returns for your level of risk.
- To be tax efficient.
- To be low cost.
- To have a portfolio design and management process that is easy for you to understand.
The only way to design the portfolio is to know all the parts of the whole portfolio. There is no way to accomplish the goals of good portfolio design and management when using multiple advisors, as typically there is little communication between them.
All portfolios should have an Investment Policy Statement (IPS), which lays out the objectives of the portfolio, the expected rate of return and how the portfolio will be managed. One IPS for the total portfolio is much easier than a separate IPS from each advisor. (For related reading, see: Investment Advisor Versus Broker: How They Compare.)
Most investment advisors want diversification in a portfolio, including some U.S., foreign, emerging market stock, real estate investment trust (REIT), cash and fixed-income investments. If you are using multiple advisors, you may end up with more investments in the same asset class than you would with one advisor and without any greater diversification. Managing all of these investments means there are more investment prospectuses to review, more proxies to sign, but there is no improvement in your portfolio performance or diversification.
Some amount of cash is in all managed accounts, allowing for the management fees to be deducted and serves as a cash reserve for any needed near-term distributions. Multiple firm accounts will lead to more cash sitting than if it were with one firm. Keep in mind that cash sitting in an account (earning very low interest) usually has a management fee charged against it. Therefore, you actually lose money holding cash in a managed account when a management fee based on a percentage is applied to the account. This is why you do not want excess cash just sitting.
Advisors Can Wear Different Hats
Fee-only advisors do not sell you high commissioned products. Investment advisors work for a Registered Investment Advisor (RIA) firm and are required to operate as a fiduciary, which means they must do what is in your best interest. Unfortunately, 95% of RIA advisors are also registered as broker-dealer representatives, or they sell insurance. When selling products, the advisor is not required to keep your best interest in mind and actually has a legal obligation to the firm where they are licensed to sell the product. These products pay a commission to the salesperson so they can present a conflict of interest and annuities can have commissions that can be up to 7%.
The problem for the consumer is that they do not know what hat the advisor is wearing at any given time - they could be acting as a fiduciary or as a salesperson. A fee-only advisor does not sell products and is never paid a commission, therefore decreasing the potential for conflicts of interest. A fee-only advisor will never recommend that you purchase a high cost product.
Investment Management Versus Wealth Management
Several years ago, a man came to my office to inquire about investment management. He used three investment managers at any given time. At the end of the year, he then compared the performance of his investments, fired the one with the worst return and hired a replacement. He had just fired one of his managers and wanted me to manage one third of his assets. I was flattered, but I could not help him. As a fiduciary, I didn't believe that his approach was in his best interest.
By pitting one advisor against others, it could result in more risk than you should have, and create excessive trading (plus excess transaction costs and capital gains taxes).
Investment management is different than wealth management. Wealth management looks at the whole picture of all your investments and works alongside other advisors (including insurance, tax and estate planning professionals) so important details that could impact you financially do not drop between the cracks.
If you have multiple advisors or were considering engaging multiple financial advisors, know that you will save money, save time and increase effectiveness and efficiency if you hire the services of one qualified, fee-only financial advisor instead. (For more from this author, see: 5 Reasons Why You Shouldn't Use Yelp to Find Advisors.)