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.
7. More Is Not Always Better – If a client has the idea that diversification also can be achieved by having accounts with more than one RIA, the client needs to be advised about the law of diminishing marginal utility and the potential of diminishing returns.
8. Client’s Family – If a client has named a family member to serve as agent under a durable power of attorney or as a successor trustee under a living trust, and then becomes incapacitated, the family member might feel overwhelmed with the dual task of caring for the client and managing the client’s investments when he has accounts with two or more RIAs. The family member might feel less overwhelmed when called upon to serve in this dual capacity if the client has all of their accounts with one RIA.
Additionally, if the client has accounts at several institutions and a family member is required to suddenly step in for the client, the family member might appoint a bank trust department to manage the assets because the family member feels the need for one-stop shopping in a time of crisis.
The irony here is that these family members often select a bank trust department based upon its location and the size of its building. They do not select the bank based upon a preliminary consultation with the staff that will manage the investments.
9. Peace of Mind – The above features should help clients see that by having their accounts with one RIA, they will probably achieve their goals while facing fewer challenges, and experience better service, better performance, lower fees and more peace of mind.
Just as a client knows it is in their best interest to have one attorney to provide 100 percent of the service for their estate planning legal issues, the challenge of an RIA is to solicit and accept clients who have meaningful balances with the understanding at inception that the client will transfer 100 percent of their other accounts within an agreed upon time frame to the RIA. Such relationships should generate referrals and help an RIA retain a client’s assets long into the next generation!
10. Uncovering New Assets – The best way to uncover new assets is by asking questions and the best way to learn about a client’s other assets is by reviewing the client’s tax return. During the next review with a client use this statement: “The better I know your assets and income the better I can advise you about your investments.” Then prep the client by asking: “Does that seem to make sense to you?” Gently seek confirmation of that idea.