Investors have long been instructed to diversify their holdings. By including multiple asset classes in a
portfolio, investors can, of course, often enhance returns and reduce risk.
Today, many investors are taking diversification to a
step further. They seek variation in the advice they receive. Rather than have a single investment advisor,
some net worth families are breaking their wealth into multiple segments and
hiring separate advisors. Other families
maintain multiple advisory relationships because they have been in place for
many years.
Using multiple advisors will certainly bring a diversity
of perspective. However, this process
introduces a number of complexities.
First – investors miss the benefit of fee discounts. As investment professionals provide advice
about larger pools of assets, their advisory fees typically drop to a lower
percentage of the total portfolio. By
splitting up portfolios, investors lose these fee breakpoints and pay a higher
total cost.
Second – investors need to be careful of
over-diversification. If a family hires
multiple advisors and asks them to build broad-based portfolios without coordinating
with one another, the total return of all the portfolios may have little chance
of exceeding traditional index strategies.
By having four or five active managers in one asset class, overall
performance will typically mirror index performance, and may actually be worse
once management fees are accounted for.
Third – investors lose the practical benefit of
comprehensive investment reporting. By
hiring three advisors, for example, one will face a time consuming challenge of
reviewing three separate quarterly performance reports. This review may involve many manual
calculations to judge the combined performance.
Despite these challenges, maintaining multiple advisors
is often necessary for many high new worth families. Long-time bank and brokerage
relationships-especially those involving trusts and family partnerships-must
often be continued in addition to hiring an independent family investment
advisor.
By having a coordinating advisor, long-term relationships
need not be disrupted. Instead, the
aggregate reporting of the coordinating advisor allows for better
synchronization and the introduction of complementary investments – all while
keeping family investments in multiple locations. These creative advancements in client service
allow advisory firms to simplify the lives of clients in ways that more
efficiently meets their needs.
The Family CIO
For high net worth families using multiple investment
advisors, many describe a family chief investment officer as a key advisory
role. By monitoring the overall
portfolio, you can address the complexities of maintaining different family
accounts in multiple locations.
Even when many investment professionals are involved with
a family’s overall finances, the CIO keeps a diligent watch over the aggregate
portfolio monitoring each investment account as well as the total. The advisor who serves in this role may or
may not make tactical investment allocations for certain parts of the overall
portfolio, but by maintaining a view of how the disparate parts are affecting
each other; the CIO can help families make critical decisions for overall asset
allocation.
Studies consistently show that strategic asset allocation
plays the largest role in generating portfolio reports. Engaging a family CIO
as a professional watchdog and co-fiduciary is a new trend, but one that is
quickly gaining acceptance.