I found myself thinking about eggs this morning. Maybe it’s because Easter just passed. Or maybe I was just hungry.
Or it could have been because of a recent conversation about not putting all your eggs in one basket.
This simple wisdom is hard to deny and when applied to investing, it is at the heart of one of the most important and talked about concepts of risk management: The technique of diversification.
Investopedia defines diversification as a risk management technique where you include a wide variety of investments in a single portfolio. The idea is that a portfolio constructed of different kinds of investments will, on average, deliver higher returns and pose a lower risk than any of the individual investments in the portfolio.
In short, by diversifying our investment portfolio, we hope to have more return with less risk.
But what if in addition to diversifying your investments, you diversified your investment advisors? What if instead of working with one advisor you worked with three? Would you have even better returns? Would you have even less risk? What do you think would happen?
The answer may surprise you!
Here are four reasons why dividing your retirement nest egg between several financial advisors could actually decrease your returns and increase your risk.
1. Higher Fees and Lower Performance
Dividing your retirement nest egg among multiple advisors is likely to increase your fees and decrease your returns. How could this be, you wonder?
When you invest, fees tend to go down as your assets go up. In other words, the more you invest with a financial advisor, the more they can reduce your fees.
If you divide your investments among more than one advisor, you are likely to pay more in fees. And if your fees are higher, your returns will be lower. And aren’t lower returns the essence of poor performance?
2. Wasted Time
One reason to work with a financial advisor is so they can manage your investments for you. But that doesn’t mean the advisor will be doing all the work while you do nothing. Working with a financial advisor takes some time and effort on your part.
If you’re working with a good advisor, they will want to meet with you at least once or twice a year. This is important because things are always changing in your life and in the world. Your financial advisor will want to talk with you about these changes and make adjustments in your investments and financial plan .
If you are going to work with several advisors, you might want to plan ahead for the many meetings you’ll be having.
3. Advisor Competition
Another negative consequence of using multiple financial advisors is that they may begin to compete with each other.
Once your advisors become aware you have assets with other advisors, they may try and show you better performance in an attempt to “win” the rest of your business.
This is a problem because higher returns often come from taking greater risks. If you have 3 advisors all trying to outperform one another, you could unintentionally become the owner of 3 unique investment portfolios, each with higher levels of risk than you need or want.
This problem could easily go unnoticed for some period of time.
In fact, you may not become aware there is a problem until the next market correction. It is during turbulent and volatile times that fissures in an investment portfolio often appear.
4. No Real Financial Plan
When I create a plan with my clients, we spend a lot of time deciding on what we want to accomplish and how we are going to make things happen. When we are done, everyone feels confident, optimistic, and happy. But until this plan is put in action it is only numbers on paper.
The way we put the plan into action is by creating an investment portfolio that can meet the goals of the plan. It needs to balance the growth and income that is required as well as stay within the client’s risk tolerance. It also needs to perform in good times as well as bad.
If I am only in charge of half or a third of your investment portfolio, how can I know how the balance of your investments are being managed? How can I know if they are performing in line with your plan? How can I know if your retirement is on track if I can only see a portion of your retirement nest egg?
The Bottom Line
Working with multiple advisors can create the illusion that you have a team of advisors looking out for your best interest when in fact no one is paying attention to the big picture. Working with multiple advisors can be an accident waiting to happen.
Contrary to popular wisdom, when it comes to your retirement nest eggs, a single basket is the way to go.