Diversifying Advisors

Recently, I’ve talked with a couple clients who retain two financial advisors. In one case, the client was considering changing advisors, but wanted a transition period to make sure he had made the right choice. In another case, a client had received bad advice by entrusting their finances to a single salesperson, and chose to try working with multiple advisors to reduce the risk of bad advice affecting their entire portfolio. A third case was a client who had his reasonably cautious assets with one advisor and his aggressive assets with another. In each case, I believe the clients were making a mistake to work with two financial advisors.

There are two reasons why it is counterproductive to have two advisors, each managing separate types (or classes) of assets. First, it is generally possible to find a financial advisor who can give advice on and access to all types of investments you require. Not all advisors can offer this service, but it should be possible to find an advisor who can. Working with two advisors means double the number of meetings and double the work to manage the assets. Second, your advisors can’t give you advice on your total portfolio. If each advisor only has access to a portion of the assets, they could offer irrelevant or conflicting advice. That leaves the client to on his own to make portfolio-level decisions.

The problems with multiple sources of investment advice are magnified when dealing with financial planning. How should a person know how much to save, whether to prioritise debt-repayment or investment and how long to plan to work, if two advisors give conflicting advice? In this case, two advisors are no more help than having no advisor at all. It is possible to learn the principles of financial planning, even if you don’t work in the profession. This knowledge can serve you if you work with a financial planner or if you do it yourself. But working with two financial planners will only cause a person to question his own conclusions and the advice of each advisor. In short, increasing the number of financial planners only increases confusion.

What if a person wanted to compare two advisors? Couldn’t she just work with both of them, and see which account comes out ahead? If only it were so simple. It could work over a period of five years, if both accounts were given the same attention and resources. Returns over a shorter period are too random to be meaningful. And if the accounts are treated differently, such as deposits that are larger or that are staggered over a longer period of time or more or less aggressive, it obscures the value of advice.

Let’s look at a hypothetical example to see what can go wrong. Consider an investor who hires two financial advisors. She tells one that she wants a conservative approach and tells the other she can stomache high volatility. Suppose she invests a lump sum in each, and after one year, the aggressive account is ahead. She puts the “conservative” advisor on notice, saying he’s got a year to do better. The problem is that he now has nothing to lose. If he’s restricted to bonds, why not buy risky corporate bonds? If they pay off, he gets the whole account. If they blow up, it’s not his money and he was going to lose the account anyway. Further, the outcome was to be expected. But in the second year, the market crashes. The conservative investments will fall less, outperforming the aggressive account. Again, this is to be expected. The problem with firing the “aggressive” advisor at this point would be that it’s not the advisor’s fault. Maybe the investor learned something about her actual risk tolerance, but it was her choice of strategy, not her choice of advisor, that was wrong. Finally, after the third year, the market recovers and the accounts are exactly even. Now is it time to compare advisors? If not now, when? To my mind, investment performance is not a good measure of the value of advice.

I work as a financial advisor. I give investment advice and financial planning advice. Could my opinions above be biased? I just re-read Wealth, by Stuart Lucas. As someone who worked in the financial services industry for over 10 years, and is now a client of the same industry, I appreciate his perspective. He recommends working with a single advisor. He also shares some ideas to hire the right advisor. I suspect that this is where most people experience difficulty. Because the subject of money is a taboo in polite conversation, people have trouble being introduced to a trustworthy advisor. I would start by asking everyone you know if they work with an advisor and, if so, if they would recommend them. Then, meet with at least three, preferably five or more. Decide what services you require and who you can get along with. In this way, you should be able to find the right advisor and get the full benefit of his or her advice. Then, if your expectations aren’t met, you can try working with your advisor to improve the relationship, or you can meet again with the other advisors, if appropriate.

Can someone help me? What benefit is there to having two financial advisors?