The ClientWise Blog

Delusional Diversification Redux

Posted by Chris Holman on Dec 9, 2010 6:18:00 AM


In our most recent blog post, "Delusional Diversification: The Flawed Logic of Using Multiple Advisors" we discuss the inherent risk and complexity that results from investors who use more than one advisor. We also point out the unfortunate paradox. One of the reasons that investors use multiple advisors, unconsciously or not, is to reduce portfolio risk by increasing diversification. The paradox lies in that, by creating layers of communication and efficiency boundaries, the investor increases portfolio risk.

As we reflect on this situation, a number of questions spring to mind. These are questions that an advisor might ask an investor who has created this circumstance...or questions that investors might ultimately ask themselves:

  1. Why do you have multiple advisors?
  2. What is your asset allocation strategy?
  3. Who is accountable for your asset allocation strategy?
  4. How do your advisors coordinate and collaborate with each other?
  5. What's the communication plan amongst all of your advisors...and you?
  6. How do you prevent portfolio overlap?
  7. If all of your advisors have partial information about your entire portfolio, how do you estimate the outcome of choices on the final portfolio?
  8. Which of your advisors has the responsibility of considering your unique investment variables, i.e. your age, current taxable income, future income needs, investment strategy, asset allocation strategy, etc.?
  9. Have you considered the hidden risks of having multiple advisors?
  10. Most all of the affluent investors who I work with have a fundamental need for a trustworthy relationship with one financial advisor. Would it help you to work with one advisor who has a deep understanding of your personal goals and monetary philosophy?

From our observation, the benefits of working with one advisor are three-fold: simplicity, more effective and efficient portfolio management, and having one relationship seems to increase the level of trust and understanding that the advisor has of the investor's needs.

On another completely different note, today is the birthday of author, humorist, and professional "epigrammatist", Ashleigh Brilliant. Brilliant makes his living authoring witty pronouncements, such as:

  • I feel much better now that I've given up hope.
  • I try to take one day at a time, but sometimes several days attack me at once.
  • I have abandoned the search for truth, and am now looking for a good fantasy.
Brilliant once sued television journalist David Brinkley who wrote an autobiography entitled, "Everyone is Entitled to My Opinion."Brilliant proclaimed that the words were originally his, and Brinkley's publisher paid Brilliant $1000.00.

 

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