Question: Everyone has heard the old saying about investment diversification; “Don’t keep all your eggs in one basket”.  “Does having more than one financial advisor help me stay diversified?” 

I will concede that having more than one financial advisor could offer benefits of diversification if you are worried about your advisor’s competence.  It would be impossible for your advisor to invest 100% of your retirement funds in Pets.com stock if he/she only has ½ of your retirement funds.

However, assuming that your advisor knows what they are doing, having more than one advisor could be harming your financial plan, in fact, it could be the kiss of death to your investment portfolio. 

Focusing too much on the investing component of financial planning could be of detriment to your overall retirement plan.  Behavior management and expectation setting are crucially important areas of financial planning. Traditionally, our efforts as financial advisors are focused 90% on our investments and 10% on our behavior, these numbers should be reversed.  

As advisors (and as investors) we have no ability to control the stock market, so why do we pay it so much attention?  On the other hand, we can control our behavior.  Having more than one financial advisor makes it more likely your exclusive focus will be on your investments rather than your financial plan.

That’s bad.  

Another reason why you shouldn’t have more than one financial advisor: One advisor’s advice could counteract the other advisor.  Example: Advisor #1 says small cap stocks are overvalued and recommends rebalancing your portfolio.  Advisor #2 thinks small caps are undervalued and wants to buy more.  The two recommendations cancel each other out. You are paying for two advisors and potentially not getting results from either of them.  

Having more than one financial advisor will likely cause your advisors to take too much risk in an attempt to wow you with returns. This example is extremely common and I’ve personally been approached with this challenge by prospective clients.  I politely refuse. I’ll paint you a hypothetical example. You are a recent retiree with a $600,000 nest egg. You have a moderate risk tolerance and after including your household’s Social Security, you desire a gross annual income of $40,000.

This task could be accomplished by a competent financial advisor with relative ease.  You are having difficulty choosing between two financial advisor acquaintances and rather than disappoint one of your friends, you take the democratic approach and split your nest egg and instruct your advisors, “We’ll see how you do”.  Without realizing it, you’ve just instigated a financial advisor arm-wrestling match, with each advisor using your retirement accounts to take unnecessary risks in an attempt to outperform the other advisor.

Where one advisor could have used an investment mix suitable for your risk tolerance and desired income, competing advisors, motivated by the incentive of the other half of your nest egg, take big risks in an attempt to earn big returns. Focusing on short-term investment performance – which is the only way to compare advisors in the short-term – removes focus from behavioral management, the exact thing that is the most important for your portfolio’s longevity.  It isn’t difficult to imagine scenarios where this could be disastrous for the client’s retirement portfolio.

A financial advisor’s job is to look at the complete picture of your financial life, analyze your goals, and assist you in making positive financial decisions. A competent financial advisor will assist you in creating goals and helping you track your progress.  Taylor Schulte, a San Diego Financial Planner and founder of Define Financial adds, “There’s a lot of moving parts in a financial plan and it’s difficult to keep track of what has been reviewed and what hasn’t. A good financial planner will spend time getting to know you and maintain detailed notes about you in their file. But if you are responsible for notifying more than one Advisor, it could be challenging to keep everyone apprised of all the different aspects of your financial life and your ever-changing goals.”

In summary, assuming that your financial advisor is competent, hiring two advisors to execute one financial plan might cause more harm than good.