Instances of clients using multiple advisors rose after Bernie Madoff’s Ponzi scheme was revealed during the 2008 financial crisis.
However, in good or bad times, multiple advisors can lead to higher fees and lost efficiencies.
Ponzi Scheme Protection
Nobody wants to be the victim of a Ponzi scheme, so using multiple advisors sounds appealing as you diversify your portfolio across different advisors.
The big issue for investors in Bernie Madoff’s Ponzi scheme was that Bernie’s firm was the one’s holding the funds and issuing the statements. No third party was involved to ensure that the funds available matched the client statements.
This can be avoided by using an advisor that, unlike Madoff, uses a third-party custodian to hold investments in the investor’s name and issue account statements.
For example, John Smith is a financial advisor with XYZ Wealth Management. XYZ Wealth Management employs large Canadian bank X to hold their client’s assets and issue statements. In this scenario, John Smith doesn’t have direct access to his client’s money, and if XYZ Wealth Management were to go out of business, client assets wouldn’t be affected as they are held with a large Canadian bank.
Another reason to use multiple advisors is to diversify your investment holdings.
If one advisor specializes in Canadian stocks and another in European stocks, you are receiving the benefits of diversification.
However, this is generally not the case.
What we often see is both advisors buying the same type of investments.
For example, Jane works with two advisors. Advisor A bought her the BMO S&P/TSX Capped Composite Index ETF, whereas Advisor B bought her the iShares Core S&P/TSX Capped Compost ETF.
If we look at the top 10 holdings of both of these investments, they are essentially the same, and there are no diversification benefits to using two advisors. (source: Ycharts, Aug 8, 2022)
The asset classes/ETFs featured in this video are for illustration purpose only, this should not be viewed as a solicitation of buy or sell. Always talk to a professional before investing to know if the product is right for you. Past performance does not necessarily predict future results, each asset class has its own risks.
Would you rather have 7-11 or Wal-Mart pricing?
Financial Advisors are compensated based on the amount you invest with them. Generally speaking, the more you invest with an advisor, the lower their management fee will be.
Rather than paying two advisors higher fees, you’ll likely pay less by only investing with one.
Tax Planning & Efficiencies
A crucial part of tax planning is being extremely precise.
Using multiple advisors makes you risk missing out on efficiencies as the left hand isn’t talking to the right hand.
It can be challenging for multiple advisors to coordinate and agree on the best strategies.
For example, Rick is 66 and working with two advisors.
Advisor A put a plan together to cap Rick’s income for the year at $80,000, so he is not affected by the Old Age Security Clawback.
Unknowingly, Advisor B withdrew funds from Rick’s RRIF and triggered gains in his non-registered account. This increased Rick’s annual income to $110,000, and he was now losing out on Old Age Security payments.
When using multiple advisors, the client is the one left in the middle to coordinate strategies. This can lead to more work and stress, which is the opposite of what most people are looking for when hiring an advisor.