Multiple advisors can result in unintended consequences
By David Haggard, CFA®, CFP
Some investors, when selecting financial advisors, think more is better. After all, doesn’t everyone know that you shouldn’t put all your eggs into one basket? The rationale is simple: Two (or more) brokers will offer a better defense against a single broker’s mistakes, right?
Wrong.
Using multiple brokers could very well open up an investor to greater risk and other unintended consequences. Here’s how:
If a portfolio is distributed among multiple brokers, sometimes called Financial Advisors, who’s minding the client’s financial store, looking at the big picture? Probably none of those brokers.
Each might be investing in a few favored categories, yet overlooking opportunities in others. Most families or individual investors are not skilled at spotting those threats to their wealth, which is why they delegated responsibility to outsiders in the first place.
It’s deceptive to think that, as an investor, it’s generally easy to judge individual performance when there are competing brokers. Under competitive situations, the players compete to post the best short-term numbers by taking more short-term risks, when in fact, what may be needed are investments to maximize long-term gains. It all depends on understanding a complete picture of a client’s wealth. Few brokers have that view.
Communication is difficult. The several brokers or Financial Advisors on the job may be good at working the stock market, but unless they are in constant communication with a client’s CPA, banker and tax lawyer they are unlikely to comprehend the whole picture.
I don’t often use sports metaphors to make financial arguments, yet this one works: Every investor needs a quarterback who looks over the defense, makes a judgment about the probability of success of various options, calls the plays and learns from the outcome. Like a quarterback, a skilled advisor has to see the whole field of play and all the interconnections that create and sustain wealth.
That’s a fiduciary. Brokers are licensed to sell securities, for which they receive a commission. And there’s the rub for the investor because the more the brokers sell, the more money they make for themselves. A fiduciary, on the other hand, is paid a flat fee, not a commission, to act in the best interest of the investor.
In the United States there are about 640,000 brokers (registered representatives) governed by the Financial Industry Regulatory Authority (FINRA), and only about 13,000 licensed fiduciaries (Registered Investment Advisors), who are guided by the higher standards of the Securities and Exchange Commission (SEC).
A fiduciary has no stake in how much or how little a client buys or sells. The job is to “stand in their shoes,” to act only in ways that will benefit that client. Sometime action is doing nothing, counseling the investor to hold back on changes in a portfolio. At other times, the fiduciary’s job is to research the tax implications of a client’s selling his business.
A fiduciary looks holistically at a family’s complete financial picture to be alert to risks and opportunities, and to make recommendations. Brokers are successful because they can sell; fiduciaries are successful because they don’t have to.
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