The Cost of Too Many Cooks: Multiple Advisors, Higher Risk
The Cost of Too Many Cooks: Multiple Advisors, Higher Risk
Don’t put all your eggs in one basket. A wise saying indeed, and one often quoted in the financial services industry. However, as with everything, context matters. This is generally great advice when it comes to investments. Don’t invest all your money in one stock, or one fund, or one bond, or one…. you get the idea.
Strategically investing in multiple investments reduces risk. Naturally, many apply that same logic to working with an advisor. If they can reduce risk by spreading their assets across multiple investments, wouldn’t it make sense to reduce risk even further by spreading their investments across multiple advisors? The short answer? No. In fact, doing so can substantially increase risk.
There are fundamentally two different ways of working with multiple advisors: telling them about each other, or keeping them in the dark. Both can put your finances at risk.
Here’s why.
In the first scenario, let’s say Beth, a hypothetical investor, is working with three advisors, and they are all aware of each other. Beth even tells them she is going to keep the accounts separate for now, but perhaps one of them can earn more of the accounts depending on how they do. This creates an atmosphere of competition. In an attempt to earn more business, it is conceivable that the advisors may take on undue risk in the accounts in an attempt to achieve a better return.
This means that Beth’s total portfolio may have far more risk than she would actually want or could handle in a market downturn. This is not prudent, and this is not good financial planning. Now, hopefully at least one of her three advisors is a high quality, trusted fiduciary advisor and would relay to her the importance of knowing the assets in each of her accounts.
In fact, some advisors may simply turn down a client like this, as they know they can’t do their jobs properly and accurately. And this presents another risk to Beth. If the highest quality advisors won’t work with her if she isn’t willing to be 100% open and transparent about her other accounts and how they’re invested, then she is left with the advisors who don’t mind not having the full picture. So instead of having one trusted advisor who cares and can do thorough financial planning with her, she has three advisors who are just happy to have some of her accounts, none of whom can do any legitimate financial planning. In no way is this a positive scenario for Beth.
Now, if Beth has three advisors but keeps them in the dark about each other, then that presents a whole other type of risk. It would be nearly impossible in this scenario for all of her accounts to fit into a cohesive strategy for her. How could they? The advisors don’t even know the other accounts exist. Of course, this would also make financial planning from any of the advisors meaningless, as none of them have the full picture.
But what about the risk of choosing only one advisor who turns out to be untrustworthy or a bad investor? This is a reasonable and legitimate concern. Although you could argue this risk is technically mitigated by having multiple advisors, that approach simply introduces different risks as mentioned above.
The way to eliminate that risk it with thorough and proper vetting. Look at how long the advisor has been in business. Look at reviews and what their clients are saying. Meet with the advisor in person if possible, get to know them. Examine their process. Is their focus on you and what’s important to you? Is their focus on creating a comprehensive financial plan tailored to you? Or is their focus just on how much money you have? When you meet with them, do you feel you’re in the presence of an advisor who cares about you, or a salesperson who cares about their commission?
Lastly, don’t just examine the advisor but who they clear through as well. Here at Everest Wealth Advisors, we clear through LPL Financial; a fortune 500 company and the largest independent broker-dealer in the nation*. Here is a link to their site: https://www.lpl.com/
Don’t fall into the trap of thinking that having multiple advisors somehow decreases your risk. It doesn’t and it makes financial planning nearly impossible. Find one advisor you trust, with the competence and experience to help you, with whom you enjoy working with, and who knows and understands your full financial picture.
Haven’t found that advisor yet? Reach out to our team and see if we’re a good fit for you. At Everest Wealth Advisors, there are no suits, no pressure, just real conversation and thoughtful guidance.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
*As reported by Financial Planning magazine, 1996-2024, based on total revenue
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
