By Peter Mastrantuono
Many individuals divide their investment assets among two or more different financial advisors in an attempt to diversify their investments and the advice they receive. Often that strategy can actually result in less diversification and less informed investment advice since investors tend not to reveal to their advisors the assets held with other advisors.
Nevertheless, there are circumstances under which it may make sense for an investor (typically a high net worth investor) to employ more than one financial advisor.
Reasons to Have Multiple Financial Advisors
Like most professions, many financial advisors have areas of specialization in which their education and experience give them a level of expertise in a particular niche that exceeds that of the typical financial advisor. When investors have highly specific investment needs or objectives, leveraging the specialized expertise of a financial advisor can be highly beneficial. For example:
Investing in Nontraditional Asset Classes: Nontraditional assets, like private equity, hedge funds and alternative investments, can be a compelling way to diversify an investment portfolio and gain access to investment opportunities outside the traditional asset classes. While most financial advisors can connect accredited investors with nontraditional investments (often a limited menu of pre-approved choices), a high net worth investor may want to seek out an advisor with deep knowledge of these products and broad access to available opportunities. While an extensive menu of nontraditional investments is important, more critical is working with an advisor capable of selecting from among those choices the most appropriate investment given an investor’s specific investment objective and risk tolerance.
Fixed Income Investing: Many high net worth investors look to bonds to provide steady and predictable income streams. That means moving beyond pooled investments like mutual funds and ETFs and creating a portfolio of individual bonds that meet income and risk objectives. Bond investing, however, is extremely complicated given that every issue has different provisions that can affect the value of the bond and the reliability of its income payments over time. Building such a portfolio requires a financial advisor with deep knowledge of credit issue analysis, enjoys access to superior credit research and fully understands the mechanics of managing a bond portfolio’s duration and identifying opportunities along the yield curve as credit markets change. Similar to nontraditional investments, most financial advisors can rely on the expertise of a home office bond research group, but a financial advisor with specialized experience and knowledge will be in a better position to create a more tailored bond portfolio to fit an investor’s specific needs and risk profile.
There may be additional instances for which having a different financial advisor may make sense, e.g., charitable trusts whose investments may be guided by unique considerations, including trust language, the named beneficiaries and their priority interest and managing illiquid assets.
Although using multiple advisors can make good sense under certain circumstances, it never makes good sense to keep a primary financial advisor in the dark. The primary financial advisor should always be kept informed of investments made with other advisors since that knowledge will better inform his or her overall planning advice and allow the portfolio he or she builds to account for the asset class and risk exposures of the investments held with other advisors.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.