The ClientWise Blog

Financial Advisor Prospecting: Revealing a Risk for HNW Investors

Posted by Chris Holman on Jun 13, 2013, 3:26:00 PM


According to Christine Gaze, directory of practice management for TD Ameritrade, the typical high-net-worth investor works with 3.21 financial advisors.

 

What may not be obvious to these HNW investors is that they are assuming a huge risk in their portfolios that greatly outweighs the presumed benefits of multiple advisors.

 

Why Do Investors Have Multiple Advisors?

 

  • Subject matter expertise. Investors look to financial advisors for expert opinions on trends within narrow niches of the economy and the markets. Investors reason that by doing so, they gain a more detailed analysis of the various sectors where their portfolio has a presence. Investors with larger portfolios, i.e. HNW investors, are more likely to want this specialized expertise.
  • De facto asset allocation. Investors reason that by working with multiple advisors, it is equivalent to diversifying one’s entire portfolio through proper asset allocation techniques.
  • Inertia. Over the years, investors can begin working with multiple advisors by making various random connections. At some point, the investor is working with 2, 3, 4, or more financial advisors. Although portfolio consolidation may make intuitive sense, inertia and the status quo prevent this.
  • Lack of Trust. Even though we are four+ years removed from the reveal of Bernie Madoff's Ponzi scheme, presumably there are a number of HNW investors who use multiple financial advisors...because they do not have sufficient trust in one single advisor.

  

More Complicated and Risky

But, here’s the thing. Multiple advisors cannot properly assess risk because they hold only partial information and cannot estimate the outcome of their choices upon the entire portfolio. Having multiple financial advisors can lead to three bad outcomes:

 

  • Complicating financial decisions,
  • Increasing portfolio risk by allowing portfolio overlap, security concentration, and less-than-optimal asset allocation,
  • Decreasing portfolio return.

 

How do financial advisors help HNW investors’ identity the added risk and complexity of using multiple advisors? Simple and obvious questions are a start.

 

What benefits do you seek by using multiple financial advisors?

 

Who “owns” the asset allocation oversight of your entire portfolio?

 

With multiple accounts, how are you able to assess the overall risk exposure in your portfolios? Who "owns" that piece?

 

The basic premise of investing is to increase the value of one’s assets. By adding additional financial advisors, the investor adds additional risk unless there is an intricate, foolproof plan between all of the advisors, and the investor (which, quite frankly, is very unlikely to happen). Also, investors with many financial advisors have a myopic view of portfolio risk. Financial decsions aren’t made in a vacuum. Multiple advisors cannot assess risk properly because they hold only partial information and cannot estimate the outcome of their choices on the entire portfolio.

 

We all know that we live in a complex, ever-changing, and volatile financial landscape. HNW individuals, even veteran investors, are often overwhelmed by the complexity of investing today. It is ironic that, in an effort to gain simplicity and clarity, investors may have created greater complexity and risk for themselves and their families. 

 

For insights into how financial advisors can engage their clients in important and meaningful conversations, please download the ClientWise Learning Tool below:

 

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Topics: Client Engagement, Trust