Most clients have one internist, one dentist, one estate planning attorney, one CPA and one P&C agent. If you asked these clients whether they considered having two internists or two estate planning attorneys they might look perplexed and respond by saying: “No”. Yet, these same clients often have two registered investment advisors for their personal investments. This article explains how clients benefit by having one investment advisor.
1. Objectives – It is a challenge for clients to state in a questionnaire what their total rate of return expectations should be for the indicated time horizon of an account. It also is a challenge for clients to state whether their goals are growth, growth and income, or income. If clients have accounts with two registered investment advisors they have doubled the challenge of stating their objectives with the RIAs and adhering to them.
2. Strategy – It is a challenge for clients to state how assets should be allocated among equities, fixed income assets and M.M.A. Should the equities be large cap, mid cap or small cap? Should there be foreign developed-country equities? Should there be REITs? Should the fixed income investments be taxable or tax-exempt? Should the investments be individual securities, defined portfolios or funds; if funds, should they be open, closed-end, indexed or ETFs? Should the funds be load or no-load? How many fund families should be used and how many funds should be used within each family? Should the investments be domestic, regional, global or a combination? Should each sector be even-weighted, under-weighted or over-weighted, and lastly, when should the assets be invested? If a client has accounts with two RIAs, he has doubled the chance of having strategies that might overlap or be at cross purposes.
3. Risk Tolerance — Whether a client’s degree of risk tolerance is conservative or aggressive, it is a challenge for him to manage it. If a client knows his risk tolerance and has accounts with two RIAs, he has doubled the challenge to manage and balance the financial risk with the expected return for each account.
4. Performance – If a client has accounts with two RIAs, and if the accounts have identical goals and strategies, and if the client records the return of both accounts, the client cannot know which account out-performed the other until the client goes through this exercise for a market cycle to know if it made sense to have the second account. This does not necessarily mean that a client should keep the accounts with two RIAs for a market cycle.
5. Fees – If a client has accounts with two RIAs that have similar objectives and strategies and does not record the return and the fees of both accounts to know if the economies of scale were positively offset by the return of the second account, the client has probably overspent for an unnecessary account with a second RIA.
6. Account Reviews – If a client has accounts with two RIAs, and makes more trades in an account with the first RIA than in the account with the second, and repeats such actions, the client’s objectives might be at risk because his increased rebalancing with the first RIA and reduced rebalancing with the second RIA might negatively affect his objectives.
If a client has accounts with two RIAs regardless of the accounts’ objectives and strategies, the client has doubled their challenge to prepare for each review and then to consolidate the action plan of each review into one consolidated plan.