Featured

How Many Investment Advisers Should You Hire?

Cooking and investing: What could they possibly have in common? As it turns out, quite a bit. Just as too many cooks can spoil the broth, too many investment advisers can spoil your investment returns. In fact, your “investment soup” tastes best when it comes from the kitchen of one investment adviser.

When I meet with individual investors or potential investors, I am amazed at the number of individuals who use or believe in using multiple investment advisers. These folks are of the perception that more than one investment adviser translates to a safer, more diversified portfolio. With many things in life, perception often differs from reality, and this thinking certainly holds true in investing. While it may look attractive, using multiple advisers does not guarantee a safer, more diverse portfolio.

Initially, using multiple investment advisers seems appealing; however, it creates problems — namely “diworsification,” a failure to gain the benefit of diversification, the exact opposite of what the investor wants.

Diversification

In the investing world, it is commonly accepted that risk and reward travel in the same direction; however, proper diversification can go a long way to reducing risk without sacrificing return – the holy grail of investing. Dr. Harry Markowitz won the 1990 Nobel Prize in Economics for his work in Modern Portfolio Theory, which proved investors could reduce risk without reducing return by properly diversifying their investments. According to Markowitz, “The only free lunch is diversification.” Markowitz’s seminal work, now nearly 30 years old, has stood the test of time and remains the gold standard for portfolio construction. Investors do not need two investment advisers to reap the benefits of Markowitz’s research.

Rebalancing

Because the value of holdings in a portfolio tends to change over time, a key ingredient to making diversification work is rebalancing. Rebalancing involves buying and selling certain asset classes to ensure a portfolio is in line with its original percentages, preserving the full advantages of diversification.

Advisers are not in complete agreement on methods for rebalancing. Some use time as the basis for rebalancing, i.e. once per year, while others rebalance based on stated percentages. Employing more than one adviser pretty much guarantees your rebalancing process will not be synchronized, thus defeating the benefits of diversification. Remember, when investing, it is all about diversification. Diversification, diversification, diversification.

Diworsification and Inefficiencies

1. Investors have only so much money to invest. Using two or more investment advisers limits the amount of money that can be spread around for investment in the requisite asset classes and among different money managers. For example, mutual funds and separately managed accounts have minimum investment levels. When investors divide their money among several advisers, they may not have enough money to reach the stated minimums of top-rated mutual funds or separately managed accounts. As a result, the investor does not “max out” on the money being invested in essential asset classes and/or top-rated money managers. This “limitation effect” can produce long-term negative results.

2. Employing two or more investment advisers increases the likelihood of investors owning more than the intended amount of the same mutual funds, ETFs and stocks. Instead of a diversified portfolio, the investor has a portfolio of unintended concentrated bets, a classic case of “diworsification.”

3. Most investment advisers charge a fee based on assets managed. These fees decrease as assets increase. Mutual funds have various share classes. With a bigger investment, the investor gains access to a lower-fee share class. Higher fees create inefficiency and sub-optimization for the investor, reducing portfolio returns. In contrast, using one investment adviser gives the investor leverage over costs, ultimately increasing portfolio returns.

4. Investors should meet with their investment adviser at least once per year and if possible, twice per year. With multiple investment advisors, the investor’s oversight time is at least doubled. Not only is this a time drain but also a brain drain caused by information overload – two of everything to read and review…and the formats of the reports will be different.

The institutional model

When seeking an investment adviser, individual investors would be well served to follow the institutional investors’ model. Pension plans and endowments, known as institutional investors, typically hire only one investment adviser. Institutional investors hire advisers to: 1) advise on asset allocation, 2) research, select and monitor funds and portfolio managers within each category of the asset allocation, 3) calculate and report investment performance, 4) rebalance the asset allocation as needed, and 5) provide market commentary. This process is exactly what individual investors should do too.

Hiring the one right investment adviser

How do investors hire the right investment adviser? Ask the right questions! Here is a list of questions that will help investors search for and hire “the one” right investment adviser:

— How many years of investment experience does the investment adviser have? When it comes to investing, there is no substitute for experience.
— What specific investment experience does the investment adviser have? Is it retail or institutional? And with what size of accounts?
— What are the adviser’s investment certifications/designations? There are planning certifications, and then there are investment certifications; there is a difference. Ask the investment adviser to describe and explain his/her certification(s).
— Which asset classes does the adviser’s experience include? Stocks, bonds, funds, ETFs, international, domestic, private equity and alternative investments?
— What is the adviser’s practice like? Ask the adviser to describe his/her practice.
— Can the adviser provide a track record of performance? If so, make sure it contains accounts similar to your return and risk objectives.
— Does the adviser issue an investment report? How often is the report provided? The report should contain an investment commentary and performance update. Who writes the investment commentary? Who calculates your investment performance? It should be an independent party. Is the report succinct, and do you, the investor, understand it? Ask for a sample report to make sure you understand the report you will eventually receive.
— How often can you meet with the adviser?
— What are the adviser’s fees and when and how are they billed?
Individual investors, like institutional investors, don’t need to employ multiple investment advisers. Investors should hire, trust and garner the benefits of the right investment adviser. Those benefits are a diversified, optimal and efficient portfolio.

You need only one investment adviser to make your investment broth taste good.

(SOURCE: TCA)

(Article written by Terry Savage)



Source link

health news headlines provided courtesy of Medical News Today.

Advertisement

Advertisement Small

Follow Me

Collaboratively harness market-driven processes whereas resource-leveling internal or "organic" sources. Competently formulate.

View More Job Search Results

Calendar

June 2020
M T W T F S S
« May    
1234567
891011121314
15161718192021
22232425262728
2930  

Pages

Recent Comments

    RSS Meks Blog

    • How to change the WordPress username? An easy step-by-step guide May 14, 2020
      Wondering how can you change WordPress username once you set up your blog or site? Read all about it in our helpful guide! The post How to change the WordPress username? An easy step-by-step guide appeared first on Meks.
      Ivana Cirkovic
    • What’s the best WordPress comment plugin to use? April 13, 2020
      Wondering whether to use WordPress comment plugin or go with the native option? Here are our thoughts and recommendation on which one to choose. The post What’s the best WordPress comment plugin to use? appeared first on Meks.
      Ivana Cirkovic
    • Top 12 WordPress Newsletter plugin recommendations March 17, 2020
      What better way to gain more subscribers and grow your email list than with a little help of a top WordPress newsletter plugin, right? Only, with so many of them on the market – which one to choose? The post Top 12 WordPress Newsletter plugin recommendations appeared first on Meks.
      Ivana Cirkovic
    • Top 3 proven methods to monetize your WordPress site or blog December 17, 2019
      Eager to learn how to monetize your WordPress site or blog in an easy way? Read our guide and learn all about it! The post Top 3 proven methods to monetize your WordPress site or blog appeared first on Meks.
      Ivana Cirkovic
    • Top 8 WordPress audio player plugins to enhance your podcast or music November 15, 2019
      What are the top WordPress audio player plugins to choose from for your next music or podcast project? Take your pick from our suggestions! The post Top 8 WordPress audio player plugins to enhance your podcast or music appeared first on Meks.
      Ivana Cirkovic
    • How to add Instagram photo feed to your WordPress site (in 5 minutes!) October 1, 2019
      How (and why) to add Instagram to WordPress and see more benefits from that match? We give you all the details and tools to do it successfully yourself! The post How to add Instagram photo feed to your WordPress site (in 5 minutes!) appeared first on Meks.
      Ivana Cirkovic
    • 15 best headline & blog title generator tools to easily boost your SEO September 12, 2019
      Ready to increase traffic to your website today? Use these headline generator tools and improve your click-through-rates! The post 15 best headline & blog title generator tools to easily boost your SEO appeared first on Meks.
      Ivana Cirkovic
    • How to create a Facebook Page for your blog (plus PRO tips) September 4, 2019
      Wondering how to create a Facebook Page for your blog knowing that you really do need one? Follow our in depth guide and learn how to create and manage attractive and successful Facebook Page! The post How to create a Facebook Page for your blog (plus PRO tips) appeared first on Meks.
      Ivana Cirkovic
    • Beginners guide on how to redirect a page in WordPress August 29, 2019
      Whether you’re trying to redirect a page in WordPress or just want to discover and understand why it’s important, use this guide to help you get ahead of it and learn all there is to it. The post Beginners guide on how to redirect a page in WordPress appeared first on Meks.
      Ivana Cirkovic
    • The best Facebook Groups for SEO to improve your knowledge and rankings August 21, 2019
      Are you tired of searching for the best Facebook groups for SEO to improve your knowledge and learn about the tricks from the trade? The post The best Facebook Groups for SEO to improve your knowledge and rankings appeared first on Meks.
      Ivana Cirkovic

    Text

    Distinctively utilize long-term high-impact total linkage whereas high-payoff experiences. Appropriately communicate 24/365.

    Archives