One adviser isn't enough, say investors

WASHINGTON (Reuters) - When the going gets tough, the tough find more financial advisers. That seems to be the message of the last few years, as rocky markets and investment scandals have sent investors into the arms of more than one professional.

Valerie Arbogast, France's Banque Populaire financial adviser, speaks with Eric Fresnel (R), head of packaging company Sleever, during France's Economy Minister Christine Lagarde's visit to meet bank employees and clients in Paris October 29, 2008. REUTERS/Benoit Tessier

“Over the past three years, the number of advisory relationships maintained by investors has increased continually,” wrote research firm Cerulli Associates in an article titled “Are Clients Two-Timing Advisors?”

Investors use multiple advisers for a variety of reasons. Some want to play one money manager against another to see which one produces a higher return. Others keep some money separate so they - or their brother-in-law, the broker - can manage it. Some use different managers for different types of assets. And, in the post-Madoff, post-2008 era, some people simply feel safer splitting up their money.

“Fear is outweighing the convenience of a consolidated relationship,” the study’s author, Katharine Wolf, told Reuters. “The impetus was the downturn. The trust in financial firms, which wasn’t anything to write home about to begin with, fell off when there were a lot of questions about whether those firms put their clients’ interests first.”

In 2008, investors maintained 0.67 advice relationships, the report said. (Many investors don’t use any advisers, which is why it’s less than 1.) By 2011, that figure had grown to 0.83 relationships. High-net-worth investors are most likely to use multiple advisers; those households with more than $5 million in assets to invest have an average of 2.25 advisers now.


Typical of recent money-splitters is Joe Trapane, a retired schoolteacher living in Heathrow, Florida. He managed his own individual retirement account (worth in the mid-hundred thousands) until 1998, when he turned much of it over to Merrill Lynch, holding some of it back to trade himself. In 2000, “things weren’t doing so good,” he said, so he started shopping around for another adviser. After interviewing a few, he chose Susan Spraker of Maitland, Florida.

“I broke the Merrill money in two, left half there and moved the rest to Susan,” he said. “I did that for a while, and kept comparing the two back and forth. I thought it was good not to keep all my eggs in one basket.”

But as many investors eventually do, Trapane did end up consolidating his money. About three years ago, Spraker encouraged Trapane to put his money together, even if it meant giving up her account and moving it all to Merrill. She says she found coordinating the two different accounts challenging and “a very laborious and failed experiment.”

Instead, Trapane chose her. He has since closed his Merrill account and also moved his wife’s IRA over to Spraker’s firm.

Perhaps surprisingly, it wasn’t any superior performance that had him shifting and consolidating his funds. He felt like he was getting more personal attention from Spraker.

That’s fairly typical, said Wolf, who added that many clients eventually decide that money splitting is too time consuming and inconvenient they end up consolidating with the adviser with whom they feel the deeper personal connection.

“Once the trust returns, they will reconsolidate,” she said. “It will happen when they trust one adviser’s integrity and ability and service.”


Simply splitting money among advisers doesn’t decrease risk and may even increase it, according to a separate study released by State Street Global Advisors and Knowledge@Wharton, a publisher affiliated with the University of Pennsylvania’s Wharton School of business.

“Using multiple advisors, often with little or no communication among them, has led many investors to unwittingly increase risk rather than dilute it,” the study said, noting that it “often can lead to overlapping exposures or to divergent allocations that result in neutral market positions.”

That’s a restrained way of wording it. Advisers who have to coordinate investments for clients who split their money are less tactful. “It’s chaos,” says Joe Duran, of United Capital Financial Advisers in Newport Beach, California. “They have no idea what they have in their financial lives. They’ll have one manager shorting something while another manager is long on it.”

Duran is unusual because his firm specializes in taking on clients who have many money managers. A fee-only adviser, he sees himself as a planner who pulls together the various fragments of a client’s financial life.

“The fastest area of growth for us is playing the financial quarterback for clients who use multiple advisers,” he said.

The possibility of overlapping investments or portfolios working at cross purposes turn many advisers off to the idea of sharing their clients. “We’ve made the decision not to work with clients who desire to have multiple financial planners,” says Bryan Lee of Strategic Financial Planning in Plano, Texas. “It would be like having more than one general contractor when building your home.”

Mitchell Rubin, a financial planner in Katy, Texas, says that he tries to keep an eye on the money he doesn’t manage for his clients. He wants to make sure his advice dovetails with the other investments they already hold. And while aggregation technology makes it easier to see portfolios he’s not managing, some issues remain.

“From a regulatory standpoint, there are some risks there,” he said, pointing out there are also risks of family members focusing on a partial portfolio and complaining about it. “It can make my overall positions look unbalanced,” he said. Say, for example, that he only buys stocks for a client who holds bonds elsewhere. When the stock market tanks, the portfolio he manages can look irresponsibly unbalanced unless the full picture is considered.

The move to diversify advisers may not last. Wolf says it’s a sign of the cycle, and others agree. “When the markets are good they consolidate; when the markets get bad they go to more and more advisers. They stay that way until it gets too chaotic and then they have to simplify,” says Duran. “It’s the wave of the future.”

Editing by Beth Gladstone