At my firm, we have a policy that we don’t accept clients with accounts at multiple firms. At first glance having multiple financial advisors may seem like a good idea. After all, that’s increased diversification, right? While maybe our policy could come off as selfish or greedy, the reason for it is quite simple; it’s not in the best interest of the client.
The Pitfalls of Working with Multiple Financial Advisors
Conflicting Advice and Strategies:
One of the most significant drawbacks of having multiple financial advisors is the risk of receiving conflicting advice and strategies. The financial world is complex and multifaceted, and different advisors may have varying perspectives on investment choices, asset allocation, and risk management. When clients receive conflicting advice, it creates confusion, indecision, and even paralysis. They may wonder which advisor to trust, and this uncertainty can have detrimental effects on their financial decisions.
Lack of Accountability:
When clients have multiple advisors, it can be challenging to establish clear lines of accountability. Each advisor may have their own goals and objectives, which may or may not align with the client’s overall financial plan. This can result in a lack of accountability, making it difficult to measure progress or assess the success of the financial plan. Clients may find themselves in a position where no one advisor takes full responsibility for their financial well-being.
Complicated Coordination:
Effective financial planning requires coordination across various aspects of a client’s financial life, including investments, taxes, insurance, estate planning, and more. When clients work with multiple advisors, coordinating these efforts becomes cumbersome and inefficient. Different advisors may not communicate well with one another, leading to missed opportunities or duplicated efforts. This lack of coordination can be especially detrimental during critical life events or when time-sensitive decisions need to be made.
Potential for Overdiversification:
Overdiversification is a situation where clients hold a wide array of investments across multiple accounts, often resulting in a lack of focus and diluted returns. Having multiple advisors can increase the risk of overdiversification, as each advisor may recommend different investment products or strategies. This can lead to a complex, hard-to-manage portfolio with excessive trading and potentially higher costs.
Increased Costs:
Engaging multiple financial advisors can be an expensive endeavor. Clients typically pay fees to each advisor separately, which can add up quickly and erode investment returns. The costs of working with multiple advisors far outweighs any potential benefits, especially if those advisors do not effectively coordinate their efforts.
The Benefits of Consolidating Advisory Relationships
While there are clear pitfalls associated with having multiple financial advisors, consolidating advisory relationships offers several key benefits. Here’s why clients are often better off working with a single, trusted financial advisor:
Clarity and Consistency:
When clients work with one financial advisor, they benefit from a consistent and unified approach to their financial planning. A single advisor can develop a clear, comprehensive financial plan that aligns with the client’s goals, risk tolerance, and time horizon. This plan serves as a roadmap for making financial decisions, providing clarity and a sense of purpose.
Holistic Financial Planning:
A single advisor can offer holistic financial planning, taking into account all aspects of a client’s financial life, such as investment management, tax planning, retirement planning, estate planning, and risk management. This comprehensive approach ensures that all elements of the financial plan work together seamlessly, optimizing the client’s financial well-being.
Personalized Service:
Working with a single advisor allows for a more personalized and tailored approach to financial planning. The advisor can build a deeper understanding of the client’s unique financial situation, goals, and preferences, which enables them to provide customized recommendations and solutions.
Effective Communication:
Consolidating advisory relationships simplifies communication. Clients can maintain a closer and more effective dialogue with their advisor, which is essential for making well-informed financial decisions. This open channel of communication ensures that the advisor is aware of any changes in the client’s life or goals and can adjust the financial plan accordingly.
Streamlined Costs:
By working with a single advisor, clients can often reduce costs. They pay fees to a single professional, which is often more cost-effective than paying fees to multiple advisors. Additionally, a single advisor can implement a more efficient investment strategy, reducing trading costs and minimizing the risk of overdiversification.
Increased Accountability:
A single advisor takes on the responsibility for the client’s financial well-being. This clear accountability means that clients can hold their advisor to a high standard and evaluate their performance based on the outcomes of the financial plan. It fosters trust and transparency in the advisory relationship.
Enhanced Financial Decision-Making:
With a single advisor, clients can make financial decisions more confidently and swiftly. There is no need to second-guess or weigh the advice of multiple professionals. This can be especially important during periods of market volatility or when critical financial decisions must be made.
How to Choose the Right Financial Advisor
For clients seeking the services of a financial advisor, finding the right professional is crucial. Here are some key considerations to keep in mind when selecting a financial advisor:
Credentials and Qualifications:
Look for advisors with appropriate credentials and qualifications. Financial planners who hold recognized designations such as Certified Financial Planner® (CFP®) or Chartered Financial Analyst® (CFA®) have met rigorous educational and ethical standards.
Expertise:
Expertise matters in financial advising. Consider working with advisors whose specialty aligns with your particular needs. In other words, if you are trying to retire find someone who specializes in retirement planning, or if you need advice on stock options find an advisor who specializes in that.
Fee Structure:
Understanding how the advisor is paid is critical to making an informed decision. Some advisors charge fees based on assets under management (AUM), while others charge commissions based on the underlying financial product. Understanding the underlying fee structure can help you to identify potential conflicts of interest.
Fiduciary Duty:
Opt for advisors who are bound by a fiduciary duty to act in your best interests. Fiduciary advisors are legally obligated to prioritize their clients’ financial well-being.
Communication Style:
Assess the advisor’s communication style. Effective communication is vital, so ensure you are comfortable with the way the advisor conveys complex financial information.
Compatibility:
Choose an advisor with whom you feel comfortable and with whom you can establish a strong working relationship. Personal compatibility is essential for effective financial planning.
In the end, my firm’s policy of not taking on clients who already have another financial advisor is rooted in our commitment to the best interests of our clients. While the idea of multiple financial advisors may seem appealing, it often leads to a host of complications and potential pitfalls. Consolidating advisory relationships under one trusted advisor can offer clients numerous advantages, including clarity, accountability, streamlined costs, and enhanced financial decision-making.
Choosing a financial advisor is an incredibly important decision and careful and deliberate consideration is necessary to ensure that you get this decision right. That’s why the goal of our initial client meeting is to help the client make an educated and informed decision about hiring a financial advisor…whether it is my firm or not.
This post is for educational and entertainment purposes only. Nothing should be construed as investment, tax, or legal advice.