I met with a new client recently to wrap up their financial plan and noticed they had still had a small account with another advisor that we had not transferred yet. Although they had invested nearly a million dollars with me, there was hesitation to consolidate the last account that was barely over $100,000.
“Why aren’t we moving that last one,” I asked, “is that your money-laundering account?”
“No,” he said, “I’m okay if we move it. It’s just smart to diversify, I feel like having money at multiple firms will lower my risk.”
Hmmm. People sure seem to have different definitions of diversification. My client seems to be equating diversification with the number of investment accounts owned. Having two must be less risky than having one, the thinking goes. I was tempted to ask why he didn’t work with 12 different advisors since that would provide even more diversification. I held back on my hilarious commentary, however, and went a different direction.
“How do you know the other advisor and myself aren’t using the exact same strategies, or aren’t investing in the same mutual funds?” I asked.
He admitted he didn’t know. He was basing his opinion on the fact that the investments statements had different logos on them. The issue wasn’t really with diversifying advisors; it was with making smart decisions with his money, so he didn’t lose it.
Diversifying your portfolio to reduce risk is serious business, but it needs to be done properly. If you don’t have a professional who is aware of all of your accounts, you are in charge of managing your own risk. That strategy can work fine, but when was the last time you analyzed a holdings report for a mutual fund? (If you say anytime in the previous year, I am happy to help you explore various hobbies you may be interested in).
A good example is a different client I was working with recently. His account was at Morgan Stanley, and he felt it was well-diversified because it held 10–12 various mutual funds. I ran what we call an “overlap report” to look under the hood of his portfolio and see if any of the same stocks appeared in multiple mutual funds. Below is a small example of what I found:
What the report shows is the client owned both Johnson & Johnson stock and Facebook stock in five different funds. I’m in full support of washing your baby’s hair and then posting pictures of it on your Facebook page, but if we want to own those stocks, why don’t we just hold them once?
The lazy portfolio shown above isn’t to pick on Morgan Stanley, (haha, of course, it is) building a portfolio with zero overlap is very difficult. The point is that you need one advisor who knows what they are doing, not two or three who are going to put your money into cookie-cutter investment solutions and reduce your diversification.
According to Warren Buffett, “diversification is protection against ignorance. It makes little sense if you know what you are doing.” His point wasn’t that owning multiple asset classes is a bad idea, it’s that one competent person can lay out a plan to ensure you are adequately diversified.
To maximize your odds of success, you don’t need multiple advisors “managing” your accounts. You only need a financial planner that is independent, credentialed, and preferably blonde to make sure your money is performing the way you want.
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