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Money Matters - How Many Advisors

Overview

Published: 05/08/2014

by Warren MacKenzie

Here is how to decide if one advisor is enough for managing your investments.

 

Investors sometimes ask if it’s OK to keep all their eggs in one basket (by using one financial advisor) or if it would it be wiser to have two or three advisors managing their investments – in case one advisor is either incompetent or a fraudster.

 

The answer?  It depends. If certain basic conditions described below are met – and assuming your advisor is competent – it’s best to consolidate. However, consolidating with an incompetent advisor could be a disaster. At the conclusion of this article, I explain how to determine if your advisor is top rate. But first, the reasons why an investor should consolidate with one competent advisor are as follows:

 

1            The account will be simpler and easier to manage.

2            On a percentage basis, fees will normally be lower when the account is consolidated.

3            It’s easier to implement the right asset mix to achieve your investment goals.

4            It’s easier to follow a disciplined investment strategy and rebalance the portfolio as necessary.

5            It’s easier to measure performance against your goals.

 

The common reasons why investors would want to have several advisors are as follows:

1            They have doubts about the ‘old’ advisor, but they like him and don’t want to hurt his feelings, so they invest new money with a new advisor – but they never get around to transferring funds previously invested.

2            They hope that by using more than one advisor, they’ll find out who is better and eventually move it all to the better advisor.

3            They want to protect themselves against the possibility of a fraudster who could abscond with all their money.

4            They want diversification and they try to use ‘best in class’ managers with expertise in different areas, e.g., bonds, Canadian stocks, foreign stocks, small companies, etc.

 

The bottom line is that one advisor is enough if the following conditions are met:

a             Your money is always held with a bank or a custodian and your cheques are always written to a bank or to a custodian.

b            The advisor uses five or six different asset classes and follows a disciplined investment process, and rebalances the portfolio when one asset class has breached the lower or upper limits for that asset class.

c             The advisor provides clear reporting that shows performance compared

               to the both absolute and relative performance targets.

d            The advisor has a disciplined process to clarify your goals and the asset mix that is necessary to achieve them. This is best done by using both a financial plan and a risk- tolerance questionnaire.

 

If your advisor cannot explain the investment strategy in a way that makes sense to you, or does not provide transparent reports showing fees and the performance against benchmarks, this advisor should not manage any of the portfolio.

 

To earn a reasonable return and protect your capital, you need: 1 an investment portfolio with multiple investment classes (mandates), 2 a disciplined investment strategy, 3 low fees, and 4 clear reporting. You can rate your advisor at weighhouse.com/ resources/rate_advisor.aspx. If your score is less that 60, get help. 

 

Warren MacKenzie, CA, CFP, CHFS, founder of Weigh House Investor Services in Toronto, can be reached at warren.mackenzie@weighhouse.com or at 416-640-0550.

 

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