A reader recently asked for some feedback on his approach to diversification. I give it a thumbs-down as a classic case of di-worsification.
It's not that this person owns too many funds or stocks, which is the classic definition of di-worsification. Rather, the issue is that he has two investment advisers. Another person asked me this week whether multiple advisers makes sense, so I figure I should speak out. The answer is no.
Here are six reasons not to have more than one adviser:
- You may pay too much in fees: One large portfolio might have lower total costs than two small ones.
- You may not get the best possible advice: Advisers need to know your complete financial picture to properly plan your finances and design an appropriate portfolio. If you divide your assets between firms, crucial elements may be missing from the information both of your advisers are using.
- Your advisers may give you a second-rate effort: If you won't commit to them, why shouldn't they give you only the bare minimum of service?
- You may not have a full understanding of what you own: It's hard enough to stay on top of one portfolio in terms of what stocks you own directly, or through funds, and which geographic regions and economic sectors you're in.
- It's harder to track your returns: New disclosure rules for the investment industry require that clients be shown personalized rates of return. But this information gets muddied when you have to blend two portfolios that probably aren't of equal size to get an overall return for your investment accounts.
-You haven't found "the one": Having two advisers means you haven't found someone who you can really trust and relate to. Until you do, you won't be getting the full benefit of having the right adviser.
One exception to the one-adviser rule is when you're a high net worth individual who requires multiple experts. For example, you might have a portfolio manager for your investments and a financial planner who provides expertise in areas likes estate planning and taxes. Otherwise, having two advisers is really just saying you haven't yet found one you really like.