Like Your Portfolio, Your Financial Team Should be Diversified, Too

You don't put all your eggs in one basket, neither should you put all your trust in one financial professional. Having a cadre of pros making decisions about your investments together makes for a better result.

By Reid Johnson, Investment Adviser

published 4 May 2017

in Features

While it’s often overlooked by many financial professionals, diversifying your financial management team can be just as important as diversifying your portfolio. That means you should consider avoiding relying on a financial professional who has a single individual calling the shots and, instead, opt for a financial professional who taps into the expertise and experience of many people.

The True Cost of Financial Procrastination

Too many individuals simply aren’t aware that they have the ability to ask questions about who allocates their money and makes financial decisions. If you want real diversification and strategies that can help preserve your financial assets, you need to ask questions about who gets to sit at the table when your financial professional makes the important decisions.

Most individuals don’t think much about the process of how their financial professional makes financial decisions. They simply trust their financial professional and leave it at that, not asking important questions about who controls their money. That can be a major mistake.

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Everybody thinks they understand what the market is going to do, and they never stop to consider the alternatives. Take, for example, last year’s presidential election. Hillary Clinton was expected to win the White House, and many financial professionals planned accordingly. Of course, when the smoke cleared, Donald Trump was elected, and growth portfolios did better while interest-bearing investments, which were expected to do well if Clinton won, stalled. Investors would have been better served working with financial professionals who were ready for either Clinton or Trump to win and reacted accordingly, rather than those who simply expected Clinton to prevail.

The election’s impact on investments serves as a reminder that listening to a single financial professional who follows one philosophy can undermine your portfolio. Financial professionals can bet on the wrong financial vehicles and destroy their clients’ holdings through their bad takes on the market. Frankly, it happens all the time.

How to Build the Right Team to Manage Your Wealth

Diversifying your holdings in the market is a great strategy, of course, to help protect your assets, but it’s not enough. You also need to consider diversifying your financial management team. That means you need a team of professionals who listen to numerous voices and draw on their insights and experience as they craft together a plan to help increase your holdings and while striving to preserve your retirement.

Different managers rely on different thought processes and often follow different philosophies when it comes to wealth management. That’s usually a plus because they usually will expose you to new ideas and opportunities. Of course, there are downsides when it comes to relying on multiple professionals. Let’s say, for example, you bring in three professionals who invest your portfolio. They might not be talking to each other or looking at your entire portfolio on a real-time basis. That can be a recipe for trouble because they might be putting your money in the same financial vehicles or not seeing the bigger picture. But even the best attempts to diversify your financial professionals can lead to duplication and put your hard-earned wealth in peril.

One way to avoid this kind of problem is by asking questions of your financial professional on how they and their firm operate. The right kind of fiduciary adviser team can help to ensure you are relying on truly diversified management while avoiding duplication. If a company relies on multiple individual institutional managers who each have committees helping guide their investments, that’s a good sign they understand how important it is to diversify the thought process, especially if there is internal coordination and full transparency to cut down on duplication. This kind of adviser team might have two or more income managers who rely on completely different committees and specialists when it comes to managing portfolios. Such diversification also helps ensure your advisers do not follow a single management philosophy, which could be a big problem for your portfolio if all of your eggs are in a flimsy basket.

There are other important questions you can ask to make sure your financial professionals rely on true diversity when it comes to building, maintaining and increasing your wealth.

Ask who makes the investment and buying and selling decisions.
Ask if one person, many people, a single team or multiple teams make these decisions.
Ask who ultimately gets the say when it comes to buying and selling.

The overwhelming majority of financial professionals rely on a single broker who has the power to make decisions. You’ll be better served to work with a professional who relies on numerous experts instead of one individual calling the shots. Simply put, your chances for growing your portfolio are far better if you are relying on numerous experts — some of whom will get the market wrong, most of whom will get it right — rather than a single broker.

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Disclaimer

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Reid Johnson, TX license 1068067, is president and founder of Texas-based Lake Point Advisory Group, LLC (www.lakepointadvisorygroup.com). As a financial professional and fiduciary when providing financial advice, he is dedicated to providing his clients with the individual attention necessary to help them pursue their financial goals. He has contributed to various media sites, including Wall Street Select, CNN and The Star-Telegram.