Diversification. Harry Markowitz (a Nobel Prize-winning Economist) called it “the only free lunch in investing”.
Why, then, when clients ask if it’s wise to have multiple financial advisors, do we recommend against diversifying who is managing their portfolio? Here are a few reasons:
- Asset allocation – This is what Mr. Markowitz was referring to: Diversifying between non-correlated asset types (stocks, bonds, etc.) is the largest determining factor of a portfolio’s risk and its returns, more so than the actual security selection (which stocks/bonds you choose). In other words, it’s absolutely critical to get the allocation right – a less likely outcome with multiple advisors making those decisions separately.
- Fees and Performance – When a portfolio consists of a number of different actively managed funds (also a likelihood with multiple advisors), while any single fund may vary from its benchmark, the result of combining several different actively managed funds is – by definition – a portfolio that mimics an indexed approach, but with the expensive internal charges of active management. Yuck.
- Taxes – Once again, the culprit here is the lack of congruence between advisors – one might be selling Security A and buying Security B, while the other buys Security A and sells Security B – all the while creating unnecessary taxable events for you, the client, without a meaningful change to your investment plan.
- Discipline – If diversification is the only free lunch, discipline is your meal ticket. Being a long-term, goal-oriented investor means sticking with the plan when it doesn’t appear to be working so you can reap the benefit once it becomes obvious that it has worked brilliantly. And how much of a plan is there, really, if there are three plans? Or four? Like Yogi Berra said, “If you don’t know where you’re going, you’ll end up someplace else.”
A Word About How We Do Things
Our BCM team currently consists of five investment advisors who work within a team approach. Our model portfolios are managed in accordance with the mandates of our Investment Committee, which is responsible for decisions such as asset allocation, security selection, and rebalancing.
Our Financial Planning services integrate the managed portfolios into the client’s overall financial picture, seeking to maximize the probability of reaching their goals.
For more insight into our portfolio management, visit our website and click All-Weather Portfolio, where you can find our most recent fact sheet.