For many investors, diversification is key – a mix of equities, fixed income and cash based on your risk appetite. But when it comes to investment advice, does the same approach hold true?
Using more than one investment advisor is relatively common – an Environics Research study recently found that nearly a quarter of investors are doing so. But for some, a multi-advisor approach is less likely to be a strategy than a random situation they’ve drifted into by opening accounts with different advisors over time.
While having a few advisors can make sense in some situations, those with a haphazard approach, says Nancy Grouni, a certified financial planner with Objective Financial Partners Inc. in Markham, Ont., are unlikely to have a good idea of their overall asset allocation, what exactly they’re holding and with whom.
So, if you are one of those investors whose portfolio has evolved to include a number of advisors, it is time to take stock. First – let’s look at the pros and cons of using more than one:
Different strategies: Sometimes, says Grouni, a financial planner will recommend a client use more than one advisor as part of a strategy to pursue a couple of different investment approaches for their portfolio.
“Let’s say we would pursue an active investment approach for their non-registered assets, and perhaps a little more of a passive approach for their RRSPs or their registered assets. So that’s possible, because the two approaches can complement one another nicely.”
Diversity of skillset: As Rona Birenbaum, a certified financial planner with Caring For Clients in Toronto explains, there can also be merit in using more than one advisor if one doesn’t quite cover all your bases — let’s say one advisor explains investment concepts well, but another integrates great tax planning expertise.
“It’s rare to find one advisor that has all the knowledge and expertise that is relevant or helpful for any one individual client, and so advisors understanding their individual limitations can solve that by building a team that has multidimensional knowledge and expertise, either internally or through third-parties.”
Complexity: More advisory relationships bring extra work for clients, says Birenbaum. “You’ve got more than one advisor to keep in the loop, in terms of what’s happening with you, so it just makes for more management of more relationships,” she says.
Those who have multiple TFSA or RRSP accounts with various advisors have the added responsibility of keeping track of what they have contributed and when, to avoid accidentally over-contributing, says Grouni.
“And then you’re paying duplicate admin fees at the various institutions potentially as well,” she adds.
Overlap: Also, two advisors may not each be bringing something unique to the table, says Birenbaum. “I think that investors often aren’t in a position to actually assess how different or how complementary those two separate strategies are,” she adds.
If you end up with two similar, good quality portfolios, the downside is not necessarily the overlap itself, she says.
“The disadvantage is that you’re now dealing with two people for the same outcome and if you were dealing with maybe just one of those individuals, you might qualify for lower pricing because you’ve got a higher amount with that one advisor,” says Birenbaum.
Life stage: There are two points in life when it may be helpful to have one advisory relationship, rather than several, says Birenbaum. One, she says, is during the ‘sandwich generation’ — those with both aging parents and children still at home, who are managing their careers and generally pressed for time.
Multiple advisors may also not be helpful for individuals moving into retirement, she adds, in terms of managing taxation and cash flow in a coordinated fashion.
Ultimately, a strategy like this should be deliberate, says Grouni — step one is to have a financial plan in place. “Step number two is to then develop an investment plan that integrates with your financial plan,” she adds.
When building their portfolio and asset allocation, individuals or their financial planner can then determine whether or not an approach that uses more than one advisor would be advantageous for their situation.
For those who do end up using more than one advisor, the focus will then shift to ensuring the strategy and the asset mix are maintained over time.
“Obviously, the big picture needs to be looked at, which is something that the financial planner can facilitate and liaise with the client and the managers to ensure consistency and continuity with the plan,” says Grouni.