The Merits of Two Investment Advisors
Can an individual investor improve his or her financial well-being by having more than one investment advisor? I believe, in many circumstances, the answer is Yes.
This answer is based on much of the same logic that has steered institutional investors down this path. Several years ago, large institutional investors found that as the size of their portfolios kept getting larger, the number of investment advisors knocking on their door also got larger (I think this is what they call the law of large numbers). And the story line the institutional investors were given was not that they should necessarily fire their existing advisor, but rather that they should hire, for prudence’s sake, an additional investment advisor.
The potential benefits of retaining more than one investment advisor, the institutions were told, were improved investment performance and performance accountability … greater diversity of investment management and reduced investment risk … broader access to different investment ideas and strategies … and lower investment advisory fees. In sum, obtaining better service and a stronger advisory commitment at a lower cost. And over the last several years this is exactly what has happened. Most major pension funds now have more than one investment advisor managing their entrusted funds. Large funds often have several different investment managers.
So, with this backdrop, one might ask why more individual investors don’t retain more than one investment advisor so that they too can have greater diversity of investment management (and reduced risk), as well as an additional source of good investment ideas and financial planning strategies. Not to mention lower fees.
For some individual investors, however, it just isn’t practical or feasible to retain an additional investment advisor. Included in this realm are the “fully satisfied” individual investors. There are many very competent, very committed investment advisors and stockbrokers out there. If you’ve got one of them, and have been getting good investment performance, as well as good continuous service and accountability, then count yourself fortunate and save yourself the due diligence exercise of seeking out an additional investment advisor. There are also many investors whose portfolio size doesn’t justify or support the appointment of two investment advisors. If the account is not that sizable, it is challenge enough for one advisor to construct a fully-diversified portfolio, let alone to have two advisors attempting to diversify two much smaller portfolios. In addition, the reality of the market place is that it’s not easy to find an experienced and competent investment advisor who will take sufficient interest in a smaller account. Since it doesn’t take (and shouldn’t take) a lot more effort to manage a $1,000,000 account than a $100,000 account (assuming the $100,000 client is being properly serviced), many investment firms and their advisors tend to devote more attention to attracting, serving and retaining the larger-scale, higher fee generating clients (that law of large numbers again). Hence, I am inclined to think that any portfolio size less than $500,000 would probably not benefit much from having two investment advisors.
But for many individual investors, I believe the appointment of an additional investment advisor does have significant merit. In today’s market environment, an increasing number of individual investors are starting to demand the same high levels of professional service that are being provided to institutions. With the burgeoning of individual wealth over the past few decades, fueled by a massive build-up in personal pension accounts, service expectations and standards for individuals have been improving considerably.
Just like the institutional investors, more individuals are starting to demand not just good investment performance (which is obviously going to be at the top of the service list), but also continuous portfolio performance accountability, which means an ongoing accounting by your investment advisor of your actual investment performance on both a short-term and longer-term basis, as measured against relevant investment performance objectives and benchmarks. More individuals are also now having their money managed on a prudent portfolio management basis, which means establishing clear investment objectives and employing continuous asset allocation, security selection and investment strategies in response to changes in their personal circumstances and general market conditions. Not surprisingly, and consistent with these changing and increased service demands, there has become an increased client demand for “advisory” accounts (where the fee is based on a percentage of invested assets) as opposed to the traditional commission-based brokerage accounts.
Yet many individual investors, even those with very sizable accounts, are much less demanding with their service expectations. Most individual investor money still resides in the big brokerage firms, and most clients maintain the same investment advisor or broker year in and year out. Their accounts are largely still being managed on a transaction-oriented commission basis. Phone the client, get the order, and charge a commission. Every brokerage client gets a monthly statement, but many clients don’t get much more than this. While the broker and the client might lunch periodically, few clients get a thorough portfolio performance review, complete with short-term and long-term performance results and relative benchmark comparisons. Few clients are provided with a portfolio asset allocation rationale appropriate to their individual circumstances. And yet, unless the client’s portfolio goes to hell in a hand basket, the relationship tends to endure. In bad markets, many brokers just keep their distance (this is known as the law of bad numbers); but in good markets, even a team of Dobermans won’t keep those same brokers off your back.
I also find that many individual investors aren’t necessarily happy with their broker. But for some reason they never want to change their broker. An important aspect of all this mix, I suspect, is that brokers are generally “good guys”; and most people don’t like to “fire” anyone, especially good guys. Brokerage firms understand this psychological truth better than anyone. Which is probably why some brokerage firms seem to spend more time training their representatives in the art of marketing and cold-calling rather than modern portfolio management. Because once they’ve got the money, they know they have to screw up big time before they’ll ever lose it.
The essence of the “retain an additional advisor” thesis is that if an individual investor retains and transfers some but not all of his investment assets to another investment advisor, the following chain of events should materialize:
Investment Service Should Improve Considerably.
If you’ve exercised good judgment in the selection process, you should start immediately receiving from your new advisor the kind of continuous and accountable portfolio management service that institutional investors have come to expect. Additionally, competition among service providers can also be a healthy phenomenon. So the day you retain an additional investment advisor, don’t be surprised if your existing advisor suddenly reawakens to your account. Once advised that you are not firing him, but rather simply retaining an additional advisor out of prudence (i.e. nothing personal), your existing advisor will grudgingly but quickly accept the situation and likely reinvigorate his service efforts so as not to lose your entire account. This is certainly what the institutional investors experienced when they started hiring additional managers.
Your Investment Fees Should Be Reduced.
Retaining an additional investment advisor will not mean additional, higher fees. Rather, you should expect your fees to be lower. In the selection of your new advisor, you will hopefully have negotiated a satisfactory competitive fee arrangement on the investment assets under such new management. Additionally, it is quite likely that in the face of a new competitive environment, your existing broker or investment advisor will become more accommodating with his pricing terms.
So in summary, if you’ve got a sizable investment portfolio upon which a comfortable retirement might be dependent, you should seriously consider retaining an additional investment advisor. It is not that difficult a process (and you don’t have to fire anyone!); and, as virtually all institutional investors will confirm, it can make a lot of sense.
William Shupe
President, W. Shupe & Company
The Merits of Two Investment Advisors
The Merits of Two Investment Advisors
Can an individual investor improve his or her financial well-being by having more than one investment advisor? I believe, in many circumstances, the answer is Yes.
This answer is based on much of the same logic that has steered institutional investors down this path. Several years ago, large institutional investors found that as the size of their portfolios kept getting larger, the number of investment advisors knocking on their door also got larger (I think this is what they call the law of large numbers). And the story line the institutional investors were given was not that they should necessarily fire their existing advisor, but rather that they should hire, for prudence’s sake, an additional investment advisor.
The potential benefits of retaining more than one investment advisor, the institutions were told, were improved investment performance and performance accountability … greater diversity of investment management and reduced investment risk … broader access to different investment ideas and strategies … and lower investment advisory fees. In sum, obtaining better service and a stronger advisory commitment at a lower cost. And over the last several years this is exactly what has happened. Most major pension funds now have more than one investment advisor managing their entrusted funds. Large funds often have several different investment managers.
So, with this backdrop, one might ask why more individual investors don’t retain more than one investment advisor so that they too can have greater diversity of investment management (and reduced risk), as well as an additional source of good investment ideas and financial planning strategies. Not to mention lower fees.
For some individual investors, however, it just isn’t practical or feasible to retain an additional investment advisor. Included in this realm are the “fully satisfied” individual investors. There are many very competent, very committed investment advisors and stockbrokers out there. If you’ve got one of them, and have been getting good investment performance, as well as good continuous service and accountability, then count yourself fortunate and save yourself the due diligence exercise of seeking out an additional investment advisor. There are also many investors whose portfolio size doesn’t justify or support the appointment of two investment advisors. If the account is not that sizable, it is challenge enough for one advisor to construct a fully-diversified portfolio, let alone to have two advisors attempting to diversify two much smaller portfolios. In addition, the reality of the market place is that it’s not easy to find an experienced and competent investment advisor who will take sufficient interest in a smaller account. Since it doesn’t take (and shouldn’t take) a lot more effort to manage a $1,000,000 account than a $100,000 account (assuming the $100,000 client is being properly serviced), many investment firms and their advisors tend to devote more attention to attracting, serving and retaining the larger-scale, higher fee generating clients (that law of large numbers again). Hence, I am inclined to think that any portfolio size less than $500,000 would probably not benefit much from having two investment advisors.
But for many individual investors, I believe the appointment of an additional investment advisor does have significant merit. In today’s market environment, an increasing number of individual investors are starting to demand the same high levels of professional service that are being provided to institutions. With the burgeoning of individual wealth over the past few decades, fueled by a massive build-up in personal pension accounts, service expectations and standards for individuals have been improving considerably.
Just like the institutional investors, more individuals are starting to demand not just good investment performance (which is obviously going to be at the top of the service list), but also continuous portfolio performance accountability, which means an ongoing accounting by your investment advisor of your actual investment performance on both a short-term and longer-term basis, as measured against relevant investment performance objectives and benchmarks. More individuals are also now having their money managed on a prudent portfolio management basis, which means establishing clear investment objectives and employing continuous asset allocation, security selection and investment strategies in response to changes in their personal circumstances and general market conditions. Not surprisingly, and consistent with these changing and increased service demands, there has become an increased client demand for “advisory” accounts (where the fee is based on a percentage of invested assets) as opposed to the traditional commission-based brokerage accounts.
Yet many individual investors, even those with very sizable accounts, are much less demanding with their service expectations. Most individual investor money still resides in the big brokerage firms, and most clients maintain the same investment advisor or broker year in and year out. Their accounts are largely still being managed on a transaction-oriented commission basis. Phone the client, get the order, and charge a commission. Every brokerage client gets a monthly statement, but many clients don’t get much more than this. While the broker and the client might lunch periodically, few clients get a thorough portfolio performance review, complete with short-term and long-term performance results and relative benchmark comparisons. Few clients are provided with a portfolio asset allocation rationale appropriate to their individual circumstances. And yet, unless the client’s portfolio goes to hell in a hand basket, the relationship tends to endure. In bad markets, many brokers just keep their distance (this is known as the law of bad numbers); but in good markets, even a team of Dobermans won’t keep those same brokers off your back.
I also find that many individual investors aren’t necessarily happy with their broker. But for some reason they never want to change their broker. An important aspect of all this mix, I suspect, is that brokers are generally “good guys”; and most people don’t like to “fire” anyone, especially good guys. Brokerage firms understand this psychological truth better than anyone. Which is probably why some brokerage firms seem to spend more time training their representatives in the art of marketing and cold-calling rather than modern portfolio management. Because once they’ve got the money, they know they have to screw up big time before they’ll ever lose it.
The essence of the “retain an additional advisor” thesis is that if an individual investor retains and transfers some but not all of his investment assets to another investment advisor, the following chain of events should materialize:
Investment Service Should Improve Considerably.
If you’ve exercised good judgment in the selection process, you should start immediately receiving from your new advisor the kind of continuous and accountable portfolio management service that institutional investors have come to expect. Additionally, competition among service providers can also be a healthy phenomenon. So the day you retain an additional investment advisor, don’t be surprised if your existing advisor suddenly reawakens to your account. Once advised that you are not firing him, but rather simply retaining an additional advisor out of prudence (i.e. nothing personal), your existing advisor will grudgingly but quickly accept the situation and likely reinvigorate his service efforts so as not to lose your entire account. This is certainly what the institutional investors experienced when they started hiring additional managers.
Your Investment Fees Should Be Reduced.
Retaining an additional investment advisor will not mean additional, higher fees. Rather, you should expect your fees to be lower. In the selection of your new advisor, you will hopefully have negotiated a satisfactory competitive fee arrangement on the investment assets under such new management. Additionally, it is quite likely that in the face of a new competitive environment, your existing broker or investment advisor will become more accommodating with his pricing terms.
So in summary, if you’ve got a sizable investment portfolio upon which a comfortable retirement might be dependent, you should seriously consider retaining an additional investment advisor. It is not that difficult a process (and you don’t have to fire anyone!); and, as virtually all institutional investors will confirm, it can make a lot of sense.
William Shupe
President, W. Shupe & Company
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