“Don’t put all your eggs in one basket,” is an old sage saying. While this is certainly good advice, it is sometimes misapplied to investment advice, custody of assets and financial planning.
Occasionally, a potential new client will tell a financial advisor (“FA”) that they want to give that FA only a portion of assets to manage. The client will then give one or more other FA’s a portion of their assets to manage. One reason is the client may think that avoids putting “eggs into one basket” and another common reason is that the client wants “to see how they do.”
“Seeing how they do,” could be called, “Dueling Advisors.” This situation pits FA against FA. While it may seem wise, generally it is likely not in the client’s best interest. Unless the client and the FA’s are very sophisticated and the roles and objectives clearly defined, then the usual outcome is for each FA to be encouraged (psychologically and perhaps subconsciously) to take extra risk trying “to win” the rest of the assets of the client.
Many ads for financial services or investments place emphasis on performance as measured by a rate of return or “beating a benchmark.” Investing should never be a contest of outperformance. Instead, investing should be a carefully thought out strategy to target achieving goals while trying to take as little risk in doing so as reasonable. Having dueling advisors encourages the advisors to seek returns over risk management.
While the client may be thinking that something wise has been done by diversifying FA’s, this isusually not the case. The reason is that the client in this situation will often have the overall risk of the portfolio increased as each advisor seeks to impress with returns. Furthermore, unless the FA’s coordinate portfolio actions and holdings (not only rare, but quite difficult in practice to implement), the portfolio is likely to become unbalanced. For example, even if both FA’s have very specific guidelines from the client regarding risk and objectives, both might be buying ABC stock to a 5% position of the total portfolio inclusive of the known asset value that the other FA is managing. The result would be for the client not to have 5% exposure to ABC’s risk, but 10%, doubling the objective risk to the stock for the client. Instead of having eggs in different baskets, the client in this example has twice the eggs in one basket than should be there.
Many independent financial advisors have a preferred custodian. (A custodian is usually a broker-dealer – “BD” – firm that actually holds the client’s assets, such as Raymond James, which is TWPM’s preferred custodian.) The reason is that FA’s often negotiate with the BD for better rates, technological benefits, etc., that may allow the FA to offer lower costs and better service to their clients and for ease of management platform. It is usually easier to use one custodian than multiple ones for technological reasons.
Most BD’s are members of the Securities Investor Protection Corporation or, “SIPC.” The SIPC does not insure investors against changes in market value of their investments. It protects investors against insolvency of the BD and/or fraud up to $500,000, which includes a cash limit of $250,000. (Read more here: https://www.sipc.org/for-investors/what-sipc-protects .) Many investors have more investment assets than are covered by SIPC. Recognizing this, many BD’s buy extra insurance for client accounts that have more than what would be covered by SIPC and a competent FA takes this into consideration when choosing a preferred custodian. (For example and more information, here is a link that discusses such extra insurance protection at Raymond James: http://www.raymondjames.com/munnmorris/pdfs/howraymondjamesprotectsyouraccounts.pdf .) Additionally, some investments held in a BD account, such as bank deposits, CD’s, etc., may have other types of insurance coverage, such as FDIC. The combined coverage offered by most of the larger BD’s far exceeds what most clients would ever need.
Therefore, there is little to be gained by using more than one custodian in most cases. Even in the one custodian account or accounts a proper investment strategy should see a broad diversification of client investments. Each investment (stocks, bonds, etc.) should properly be considered an egg in a different basket. Once insurance and diversification within the portfolio are considered, having a diversified portfolio with one custodian is not really the same as having all eggs in one basket.
A proper FA-client relationship starts with the FA gathering information about the client’s assets, risk tolerance, needs, goals, tax situation, time horizon and all other things that are important to the client with bearing on the formulation of a portfolio strategy. At TWPM we strive to help clients optimize all the moving pieces of their financial life in accordance with their whole financial picture. This is what all competent FA’s should endeavor to do.
A client should choose an FA whom they are comfortable and feel they can trust. The client should, of course, consider all the relevant aspects of what the client needs from the FA and a BD custodian. The FA’s and the client’s personalities should be such that communication is easy to allow for common understanding.
No FA or firm can be an expert in everything, so while a single advisor may be chosen, a good FA will be willing to work with a client’s CPA, attorney, insurance agent and other experts to serve the client as completely as possible. Indeed, a professional FA should serve clients to help optimize and oversee all these different aspects of a client’s financial life, including the pieces that the FA does not directly execute. A competent FA is usually the best person to be the coordinator of all the other financial professionals’ inputs, guiding the client in the execution and/or follow-up of the others’ recommendations.
Because of all the foresaid, TWPM recommends that clients generally choose one financial advisor to serve all their portfolio and financial planning needs and to avoid “dueling advisors.” This is true even if TWPM is not chosen, as the client’s best interests should always come first. TWPM would rather see a client’s needs best served than to compete as a dueling advisor, though we are always honored to be considered in the choice.
Richard Tomes, CFP®
Total Wealth Planning and Management, Inc.