Diversity might be good when investing, but too many financial managers can be a bad thing. Here are five reasons to put your eggs in one basket.
One key principle of successful investing is to diversify your portfolio as broadly as possible to minimize the risk that any one specific investment will crush you. Many physicians extrapolate that concept to mean that they should hire more than one financial advisor. That usually creates more problems, not more sophistication. Here are five reasons why you should work with only one advisor:
You Control Risk
Asset allocation — which is the broad mix of investments in your portfolio — is the primary driver of your investment returns. Imagine you have a $1 million portfolio and you’ve split that equally between two financial advisors. The first advisor may have you in a 50/50 stock/bond allocation and the second may have you in a 80/20 stock bond allocation:
Advisor #2 is taking more risk than Advisor #1. Your overall portfolio stock/bond allocation – which is what matters – is 65% stocks and 35% bonds. But suppose that you can only tolerate the risk of a 50/50 portfolio. Now you’re taking on more risk than what you feel comfortable with, and when the market goes down you’ll be in for some surprising losses.
You Control Asset Allocation
Let’s say Advisor #1’s investment philosophy is based on the academic evidence that you can’t time the market and that he maintains the same asset allocation over time, but Advisor #2 believes in stock picking and market timing and changes your asset allocation. A few months later your portfolio may look like this:
Now you’ve got a shifting asset allocation (from 65/35 to 75/25) which means you really don’t have an asset allocation at all nor an investment plan – and you’ve lost control of risk even more.
You Pay Lower Fees
Each advisor has some fixed costs to operate his business and serve you. When you work with more than one advisor, you are paying for double the fixed costs than you should. Combining assets with one advisor usually gives you a lower fee because the advisor can give you a break on the fee. For example, while two advisors splitting your assets might charge you $5000 apiece, a single advisor might handle the entire account for $7000, saving you $3000.
On top of that, if you choose only one advisor and that advisor uses only low cost funds, you lower your total costs even more.
You Are More Diversified
It seems counterintuitive that you could be more diversified with fewer advisors. But suppose Advisor #1 designs a low cost portfolio using multiple asset classes and he uses the Vanguard 500 Index Fund to represent US stocks. Advisor #2 designs a portfolio using the following funds:
- American Funds Growth Fund of America
- Oppenheimer Capital Appreciation
- Fidelity Large Cap Stock
- Franklin Growth Opportunities
It turns out that all of those funds invest in the same asset class – US stocks. So you’re just getting a ton of overlap, increasing fees, creating more confusion, and not getting any more diversification than using Advisor #1’s multiple asset class portfolio.
You Have a Real Financial Plan and Make Less Mistakes
Your investments are only one part of a comprehensive financial plan. When you work with one advisor and you take control of your risk, asset allocation and diversification, you can more robustly simulate retirement projections. Plus you can minimize mistakes such as over or under-contributing to retirement accounts, paying more taxes by having a less tax efficient portfolio, or overspending during retirement.