Some people like to spread their money between two—or even three—investment advisors. They believe they’ll have better diversification in the market. Or maybe they believe it’s best to “hedge their bet” among different advisors to reduce their risk of loss.
This usually isn’t a good move. There's no good reason to have more than one advisor, especially if you have a good one you trust. It takes only one advisor to develop an investment plan tailored to meet your goals. And if that includes increasing the value of your investments, there’s no way to guarantee they won’t lose value at various times in the market cycle. Working with multiple advisors won’t eliminate that risk.
[In Pictures: 5 Ways to Measure Investment Risk.]
It's easy to end up with multiple advisors or brokers, especially if you have friends or acquaintances who work in the financial services industry. You see a friend at a party and he recommends a stock. After mulling it over, you decide to buy it. Then another friend calls a few weeks later and convinces you to buy a fund.
Over time, you end up with a hodgepodge of investments without considering how each investment fits in within your overall plan. If you have two or three advisors, they won’t be able to create one cohesive investment strategy for you. One advisor will use a certain approach; another will craft a different one. When you use multiple advisors, there are often a couple of outcomes:
1. You can end up with large concentrations of certain types of investments because your advisors are putting money into the same kinds of things.
2. You can have competing investments. One advisor buys a certain investment for you, while another advisor buys the exact opposite. Then you end up neutralizing your strategy.
Neither scenario is ideal. Diversification is good; it’s necessary. But it’s usually best achieved with one advisor. Beyond that, a number of problems can arise when you use multiple advisors, all of which move you away from your need for an investment plan that’s best for you.
Your advisors may use different methods to understand your risk tolerance. One might consider you an aggressive investor; another might decide you’re more conservative. Their resulting strategies aren’t going to keep you on the same path.
Hiring more than one advisor may also cost you the most precious commodity of all: time. When you consider all the things that go into selecting an advisor, do you really want to go through that process more than once?
[See 6 Things to Expect From Your Investment Advisor.]
Ultimately, you hire an investment advisor to quarterback your investments. You rely on him to develop the best plan for you based on your unique circumstances. If you work with multiple advisors, each with a different plan, who’s going to quarterback them to make sure the plans mesh? It’s unlikely your advisors would work together to coordinate their efforts on your plan. That leaves you coordinating your advisors.
My recommendation for you: Find one advisor you trust to develop and implement the investment plan that’s best for you.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.
Reader Comments Read all comments (14)
Pork Chops, Greasy of WY 11:34AM November 06, 2011
The Lubricated Goat of AK 7:23PM October 31, 2011
I'm too Sexy for my shirt of MT 11:20AM October 31, 2011