Four Major Pitfalls of Having Multiple Financial Advisors

Harry Markowitz, the Nobel Prize-winning economist known for his work on modern portfolio theory once said, “Diversification is the only free lunch in investing”. While diversification is a core tenant of a sound investment strategy, diversification of your financial advisors may not be such a great idea. Although insight from an array of credible advisors may appear to bring the most success, it often leads to a multitude of pitfalls. In this blog, I highlight four major pitfalls clients experience when juggling multiple financial advisors.

Redundant Advice

In the 1980s, the financial industry was vastly different as financial advisors (more aptly named stockbrokers) were primarily used to access the stock market to buy and sell stocks. While there are still many advisors who only offer investment management, the industry has evolved over the last fifty years. Many advisors now offer comprehensive advice on all aspects of one’s financial plan. With holistic advice including retirement planning, tax strategies, and estate planning, a cohesive strategy is developed to achieve one’s goals and create a complete financial picture. However, when working with multiple comprehensive advisors, incentives easily become misaligned.

When more than one financial advisor is attempting to provide holistic advice, their recommendations may be redundant, resulting in inefficiencies. Consider other service providers you may already use such as a CPA or estate attorney. You typically only have one CPA filing your tax return and one attorney drafting your estate documents. Including more service providers would likely result in a worse outcome, adding unnecessary complexity and fees. This line of thinking should also be used when considering multiple advisors.

Misaligned Incentives

Advisors may have different investment philosophies and varying approaches to asset allocation and risk. Multiple advisors working independently without a unified strategy can cause an imbalanced portfolio, potentially creating unnecessary risk and negatively impacting returns.

Moreover, if two advisors are each managing half of your money, it may be tempting to compare portfolio performance to determine which strategy is more effective. Advisors may be incentivized to take additional risk in an attempt to showcase their investment strategy is superior.

While long-term investment performance is a critical component of a financial plan, this “competition” between advisors is usually measured over a short timeframe (e.g. one year). The advisor’s investment strategy that outperforms in a one-year period has little bearing on the long-term success of achieving your financial goals and the quality of the advice they are providing.

Higher Costs and Taxes

Working with multiple financial advisors also results in increased costs as each advisor charges a fee for their services. Fees are typically charged as a percentage of assets under management, hourly rates, or flat fees. Hourly rates and fees can double when meeting with more than one advisor. Additionally, advisors who charge a percentage of assets under management often have a fee structure that decreases cost with the more assets you have held with them. Unnecessarily high advisory costs can be avoided by seeking the advice of one, knowledgeable advisor.

Lacking a unified strategy with multiple financial advisors can also cause negative tax consequences. For example, one advisor may opt to purchase Apple stock, but your other advisor may choose to sell it, causing a wash sale. A wash sale occurs when someone sells a stock at a loss and buys the same stock within 30 days of the sale. IRS rules indicate that the capital loss from the sale cannot be used to offset current capital gains and is added to the cost basis of the repurchased stock. These transactions can result in higher tax bills and complex tax reporting.

Lack of Consolidation and Organization

Utilizing multiple financial advisors also creates an unnecessarily complex process for your financial goals. With different advisors, there can be a multitude of additional accounts for your investments making it disorganized and more difficult to gain an overview of your financial picture. Having additional login credentials, statements, and performance reports spread across different institutions and custodians not only creates disorganization but can skew your perception of your progress.

Conclusion

Although the expertise of multiple financial advisors may appear as a helpful strategy to gain additional perspectives, it often causes increased fees, potential tax complications, misalignment, and disorganization. For a comprehensive financial plan, it is recommended to work with a single, trusted advisor who provides holistic services and is aligned with your goals. By doing so, you can help ensure that all aspects of your financial plan are working together to maximize your potential for long-term success.

Contact us today for a 15-minute introductory call to discover how Innovia Wealth can work with you to create a comprehensive plan to help achieve your financial goals.