Why Having All Of Your Eggs In One Basket Makes Sense
“The rich invest in time, the poor invest in money.”
– Warren Buffet
I was recently referred to a wonderful family who had come into a significant windfall as a result of a commercial real estate sale. I thought the potential relationship was moving ahead swimmingly well right up to the point when I mentioned that one of my “non-negotiables” was that I manage all my clients’ portfolios… or none of it. I have to assume that I was not very persuasive as they chose option “b”. 😳
This family believed that the prudent course of action was to diversify their sizeable investment holdings between more than one wealth adviser. I appreciate the apparent logic of this attitude, after all, is not diversifying your portfolio an effective strategy to reduce your risk? However, in much the same way you probably do not have more than one family doctor, lawyer, accountant, or car mechanic, this idea of having more than one wealth adviser is ultimately self defeating.
The following are five reasons why.
1) Time – Referencing Buffet’s quote above, time is not a renewable resource. With more than one wealth adviser, the amount of time it takes to manage your wealth has increased exponentially. A few examples are (but not limited to) more meetings, phone calls, emails, tax slips, paperwork, and statements that need to be reviewed.
2) Less Tax – Having your accounts in one place allows for 100% tax efficiency. As just one example, making sure that all your interest bearing assets (highest taxed) are in your registered plan accounts and your growth and dividend assets (lower taxed) are in your non-registered accounts.
3) Lower Management Fees – Given the sliding percentage scale that most advisers make available to their clients, you also lower your annual fee when you consolidate your accounts.
4) Poor Portfolio Design – Given the likelihood of little to no co-ordination amongst your competing wealth advisers, it will be impossible not to experience duplication in your investment portfolio. You may own the same stocks, the same investment style (all value or growth), market cap size (all large or small stocks) or be over or underweight in specific sectors. As an example, too much in technology or too little. Even more important is having an accurate, customized asset allocation, which is one of the keys to successful investing and impossible to facilitate amongst competing advisers.
5) The Wrong Incentives – When working with new clients my focus is to maximize their returns for the amount of risk they are willing to take on. When you have two or more wealth advisers managing your money you will inevitably be comparing their respective returns. This puts into place a “performance derby” incentive structure whereby each adviser will try to outperform the other in the short term. The possible result of this? Your portfolios could be much riskier than if you were working with only one adviser.
I’m a great believer in diversification by asset class, geography, industry, investment style (growth and value) and size (large cap stocks and small). If you do not wish your financial life to look like the image on the left, consider working with one trusted financial planner instead of juggling multiple wealth advisers. In this way you will be able to develop a comprehensive wealth plan and investment portfolio where all the pieces fit together like the jigsaw puzzle on the right, saving you time, money and headaches down the road.