Multiple Advisors vs. One Advisor
by Christopher Galeski
Working in finance, it’s become clear to me that decisions surrounding money are commonly influenced by feelings. Those feelings can range from happiness and comfort to fear and greed—the list goes on and on. A natural result of these varied emotions is that people are often hesitant to use one advisor because they are concerned about “putting all of their eggs in one basket.” The choice to have one advisor or multiple advisors is very personal, but it shouldn’t be emotional. Below, we’ll discuss the pros and cons of having multiple advisory relationships rather than just one and how to make this very personal choice without letting emotions decide for you.
Shouldn’t I have multiple advisors to be “diversified”?
Since the financial crisis of 2008, many clients have chosen to work with multiple advisors in order to be “diversified.” Indeed, it’s extremely important to make sure that your money is diversified to reduce volatility, generate more consistent investment returns and to protect the wealth that you’ve built through hard work and savings. However, just because you have multiple advisors does not guarantee that your investments will be diversified. Depending on the market environment, the tools that your advisor has access to and the nature of what has been performing well, two different advisors may very well have exposure to the same investments. Clients with multiple advisors may actually be duplicating their exposure without even knowing it.
What are the risks of having multiple advisors?
The choice of having multiple advisors instantly puts you in the position to act as the “quarterback” of the relationship. It’s now your job to manage and oversee what each advisory relationship is doing. Some clients may have the skill set and time to do that, but most don’t. Further complicating things, coordination between multiple advisory relationships may result in higher expenses and can exacerbate tax- and estate-related matters as well. For example, let’s say advisor A has $50,000 in taxable gains for the year, but advisor B has $50,000 of unrealized losses. If they are not communicating and coordinating with one another, advisor B may not proactively realize these tax losses and the result is that you could be facing a higher tax bill.
There are also cases in which having multiple advisors will cause you to take on more risk than you should because the advisors feel like they are in competition with each other. It’s only natural for each advisor to try to “outperform” the other. This puts more of a focus on short-term performance and completely disregards a client’s long-term financial plan.
I’m fine with having multiple advisors. What do I need to know?
If you choose to have multiple advisors, communication is key. Some questions to ask yourself:
- Who is the quarterback or main person in charge?
- Do my advisors communicate with each other?
- Are all my advisors making sure my best interests are being met?
If you’re going to have multiple advisors, it’s crucial that you designate one to be the main advisor. It’ll be his or her role to coordinate with you and the other advisors throughout the year to make sure that your overall strategy and best interests are being met by all parties. Everyone on your team needs to make sure they understand the whole picture and are aware of your long-term financial goals. It’s imperative that your advisors be in constant communication in order to minimize taxes, avoid duplicating your investment exposure and to make sure they are not giving you conflicting advice.
Additionally, if you’re in a situation where you manage part of your money on your own and delegate a portion to an advisor, it’s important for the advisor to also know what he or she is NOT managing in order to best meet your needs.
What are the benefits of having one advisor?
In order to have a coherent strategy, many advisors advocate for consolidation in order to make sure that investments are properly diversified and rebalanced. Additionally, by consolidating with one firm or advisor, you are more likely to reach fee discounts based on assets under management. And then there is the time factor. It’s hard enough to take the time to meet with one advisor. Do you have enough time to meet with two, three, sometimes four different advisors or professionals to discuss strategy, performance and financial planning on a consistent basis? Do you then have the time to go back and implement the necessary changes in order to get the most life out of your wealth? One advisor streamlines the process and avoids the possible pitfalls that multiple advisors can pose.
Similarly, clients can benefit from a single source of advice when choosing investments to sell in order to generate income. Oftentimes, when clients are raising cash to buy a home or to pay for a vacation, their instinct is to keep aggressive investments that have performed well recently and sell conservative investments that have lagged the riskier assets. This is the exact opposite of what clients should do and often results in making their investment strategy more susceptible to losses in a downturn. It’s in these types of situations that having a single advisor who understands your overall financial picture and long-term goals can prevent major missteps.
I’m still hesitant to have one advisor. How should I proceed?
If the “I-don’t-want-all-my-eggs-in-one-basket” thought crosses your mind, you may want to consider an advisor or advisory firm that has various areas of expertise and utilizes a team approach. The landscape for investing is extremely complex and requires advisors to be experts in many different areas, such as stocks, bonds, real estate, hedge funds, limited partnerships, master limited partnerships (MLPs), real estate investment trusts (REITs), financial planning, tax, insurance, deferred compensation, retirement plans, health savings accounts (HSAs), Medicare, Social Security, etc. It’s unrealistic for a solo advisor to have the knowledge, expertise and resources to best help a client through all of the various stages of life. Finding a firm that has multiple areas of expertise and utilizes a team approach not only eliminates the need to have several advisory relationships but will also help you get the most out of your relationship and wealth.
Making the Choice
In choosing to work with multiple advisors vs. one advisor, it’s important to take an objective approach and not let emotions influence your decision. Choose the route that best fits your needs and lifestyle. Should you choose to work with multiple advisors, communication is paramount. Be sure to designate the quarterback of your team and make sure he or she works closely with your other advisors. Alternatively, choosing to work with one firm, advisor or team can not only simplify your life, but can also provide a clear, comprehensive and coherent strategy to reach your long-term goals—which, after all, is much more important to how you feel than advisor diversification.