When it comes to investing, one key tenet the financial services industry preaches universally is diversification. Stock and bond markets, real estate values and interest rates will rise and fall because of a host of unpredictable factors, but, as long as your holdings are adequately diversified, you will do well in the end.
Many Canadians, consciously or not, engage in another form of diversification: They invest their money with multiple institutions and advisors.
Does it make sense for several advisors to oversee your money, and for you to manage some additional funds yourself through a self-directed brokerage? Or are you better off committing wholeheartedly to one advisor and institution?
Experts make arguments for both approaches, but most of the evidence seems to fall on the side of consolidation.
The first and perhaps strongest argument boils down to simple math. One of the biggest brakes on the growth of investment assets is fees. Canadians are slowly wising up on fees – witness the shift from high-cost mutual funds to low-cost exchange-traded funds.
Putting all of your investment eggs in one basket, so to speak, by funneling them to one advisor and institution will in most cases result in lower fees, experts say. With most institutions, the percentage you pay in fees falls as assets rise. A one-quarter or half-a-percentage-point difference in fees doesn't sound like much, but it can mean thousands of dollars annually and tens of thousands over decades.
"The main benefit of [account consolidation] is economies of scale," says John DeGoey, a certified financial planner and portfolio manager with Industrial Alliance Securities Inc. in Toronto.
Many advisors and financial institutions reduce fees when assets reach a certain level rather than lowering them gradually. Mr. DeGoey supports the latter approach. "It is kind of silly how your fee goes down by so much just because you are crossing an arbitrary threshold," he says.
He uses a sliding scale with his clients, and divides the investor market into roughly four segments:
- The “emerging affluent,” those with investible assets below $250,000. They pay an average of 1.4 per cent in fees, according to his schedule.
- The “mass affluent,” with assets between $250,000 and $1.5-million. They pay between .9 and 1.3 per cent in fees.
- The “high net worth,” who have $1.5-million to $6-million. They pay less than 1 per cent.
- The “ultra-high net worth,” above $6-million. They also pay less than 1 per cent.
So consolidating investments and thus crossing those magic thresholds at most firms makes a great deal of sense, especially over the long term.
Some investors pit two or more advisors against each other in the hope that it will benefit returns, an approach not favoured by Mr. DeGoey.
"Oftentimes, diversification becomes 'di-worsification.' You can have an advisor who wants to buy McDonald's and another who wants to sell McDonald's. In the end you have traded it twice, you have paid two fees and have triggered some taxes."
Beyond the prospect of paying multiple advisors who might be rowing your investments in different directions, advisor shopping has another potential pitfall.
"The more you spread it around, the more you are likely to find a dud" of an advisor, says Dan Hallett, a certified financial planner and vice-president at HighView Financial Group in Oakville, Ont.
Having multiple advisors handling your investments illustrates that you don't really have sufficient confidence in one to let him or her take charge of your financial future, he adds. "I would say if you are not confident enough of somebody running all or the vast majority of your portfolio, why would you feel comfortable with them running half of it?"
It may make sense to have multiple advisors in some situations, says Sterling Rempel, a certified financial planner and principal advisor at Calgary-based Future Values Estate & Financial Planning.
One might be a couple who are each starting a second marriage and are bringing their long-time investment experts into the picture. Or a particular advisor may bring special access to investment products, or provide hard-to-find expertise, or might be a good complement to another advisor who offers a more holistic approach.
Such examples are the exception rather than the rule, Mr. Rempel contends. Most Canadians will do better with the one account/one advisor approach. "If people have multiple accounts, multiple advisors, it would indicate to me that they do not have a single cohesive plan."
Mr. Rempel points to data from the Financial Planning Standards Council that indicates Canadians are more likely to reach their goals if they create a comprehensive financial plan with a qualified advisor.
In his experience, investors tend to prefer advisor monogamy as they get older and more established. "As people age, there is a natural tendency to want to simplify their affairs. Both for themselves in terms of the amount of paper that they get and eventually for the estate's executor, to ease the administration."
Beyond the benefits of simplicity, people have "this contented feeling that at least somewhere in the world there is one advisor who knows everything about our financial situation and if something happens our family can go to that person."