Everyone has heard the saying “Two heads are better than one.” Usually that is true, but not when it comes to hiring financial advisors. Many people split their assets between two advisors as a form of diversification. This blog will discuss the reasons why this type of diversification is not helpful.
Summary and Takeaways
Hiring multiple financial advisors is a common mistake. Dividing responsibilities between various professionals is sometimes a good strategy. But when it comes to your financial advisor, the opposite holds true. A mistake people too often make is that they attempt to diversify by hiring multiple advisors, across different firms.
As a result, what they expected to strengthen their financial situation only makes it weaker. That’s due to a number of compelling reasons, and this blog points out 10 of the most important ones to avoid.
Key Takeaways
- Advisory firms typically charge lower fees, the more money you have under their management. Hiring multiple advisory firms costs more, undermining your financial growth.
- Licensed advisors don’t hold your money the way a bank does. They use safe, secure custodians. So dividing funds between multiple advisors to safeguard your cash is usually ineffective – but more expensive.
- Different advisors may invest your money in duplicate ways. That increases transaction costs without increasing diversification.
- When you hire advisors from different firms, they have little incentive to collaborate for your benefit.
- Managing your assets with one advisor reduces the time and paperwork involved – and makes estate administration easier for you and your heirs.
- Fees—most advisory firms offer a graduated fee schedule. This means the more money you have with an advisor, the less your fee will be as a percentage of assets under management. Cardinal Point charges a fee of 1.25% on the first million under management and 0.85% on the second million. If you have two million to manage and you hire Cardinal Point to manage one million and another advisor to manage the other million, you are potentially paying 0.2% too much each year ((1.25% + 0.85%) / 2 = 1.05%). Over a 30-year period, this means you would pay $123,641 more in fees than you would have if you had hired just one advisor and taken full advantage of the graduated fee schedule.
- Custody—Registered Investment Advisors in the U.S. and Canadian Investment Managers in Canada do not hold any of your money. You give your advisor limited power of attorney to trade on the account, deduct investment management fees, and distribute funds to your pre-authorized bank account, but the advisor does not take possession of any of your money. Each advisor uses a custodian, or maybe several custodians, to hold the funds, facilitate trading, prepare statements and tax documents, and provide an additional layer of security for your money. Institutional custodians such as Fidelity, Charles Schwab, Fidelity Clearing Canada, and National Bank Independent Network are considered very safe and make it highly unlikely you would ever have a problem getting your money due to custodian insolvency. They are not banks and do not carry cash, so any potential “run on the bank” would not affect them. Most of the custodians offer services that are largely identical to each other. There are some slight differences in fees, but their primary functions are to facilitate trading and keep your money safeguarded. If two advisors are using the same custodian, then splitting your investments between them literally provides no additional diversification in and of itself. Of course, two advisors can invest you in different securities. We will also discuss why that is not necessarily a good thing.
- Qualifications—one advisor is likely more qualified to meet your needs. In the case of those living a cross-border lifestyle, this is usually the result of an individual moving across the border and leaving their retirement accounts (RRSP, RRIF, 401(k), IRA, Roth IRA, etc.) with their previous advisor in their home country. Generally, this should not happen because investment managers are regulated based on where their clients live. If an advisor in Toronto has a client who moves to Miami, that advisor needs to be licensed and registered in both Ontario and Florida to continue to provide advice to that client. When clients leave real estate in their home country, advisors often continue to use the client’s old address so they can keep the account open. This is unethical, not only because the advisor is now advising a client who lives in a jurisdiction where they are not registered as an investment advisor, but also because they are no longer qualified to advise the client. The advisor is likely not familiar with the tax laws or investment regulations of the client’s new home country, nor will the custodians be producing the required tax documents needed in the new home country, and the tax documents may be in the wrong currency with the wrong tax cost basis. For example, U.S. citizens living in Canada must report capital gains on their tax returns for both countries. Taxable accounts get a step-up on the tax cost basis on the day the client entered Canada, referred to as the “Deemed Acquisition Day,” which means their Canadian basis is the fair market value on the day they moved to Canada and is different than the original U.S. basis that is reportable to the IRS. Domestic-only advisors are not going to be prepared to help you report your taxes accurately in both countries.
- Repetition—two advisors may be investing your money in largely the same manner. This means they may be purchasing and holding the same, or similar, securities across your accounts. When viewing your portfolio as a whole, this does not increase diversification and really just increases your transaction costs.
- Strategy—you are better off pursuing one cohesive strategy. If two advisors are managing your money differently, or providing opposing financial advice, then you are really pursuing a strategy of your own, not the strategy of either advisor. If you want to be that involved in your portfolio management, maybe you should just manage your assets yourself. If your intent is to delegate the management of your investments, then you should “pick a horse” as they say.
- Simplification—dealing with just one advisor will simplify your life. You will receive fewer statements, trade notifications, tax forms, etc. You will only have one advisor to meet with and more time to spend doing the things you enjoy.
- Consolidation—hiring more than one advisor usually results in more accounts than necessary. The more your money is spread out, the more work you make for your heirs when you pass and your estate is administered. It is best for your children and loved ones if you consolidate your assets as much as possible while you are alive. You should also provide those involved in your estate plan with the contact information of your advisor who can help walk them through the administration of your estate and beneficiary distributions.
- Fairness—if one advisor is providing comprehensive financial advice and the other is not, you should reward the advisor who is giving you better service and understands your overall situation better by giving them all your business. Additionally, the advisor who is providing comprehensive advice is really advising on all your accounts and should get paid fully for their efforts.
- Risk Management—you do not want either advisor being more aggressive with your money than they should in hopes of outperforming your other advisor and gaining more business. If your two advisors get into a horserace, the result will be that you have a portfolio that is invested too aggressively for you.
- Tax ties—unnecessarily leaving investments in a jurisdiction where you no longer live can be considered a tax tie and increase your tax filing obligations. For example, if someone in Arizona moves to British Columbia but leaves their taxable investments with their old Arizona advisor and keeps their real estate as a vacation home, the custodian will produce a 1099 with an AZ address on it, creating an obligation for that client to file an AZ tax return and report the income. Likewise, if someone moves from Alberta to Texas but leaves their taxable investments with their old AB advisor, having that account in AB and managed by a Canadian investment manager can be considered a tax tie by the Canada Revenue Agency. If you are deemed to have failed to sufficiently sever your Canadian tax ties, you can be deemed a Canadian tax resident and obligated to file Canadian tax returns and report your worldwide income. This is usually something individuals want to avoid as Canada is a higher tax jurisdiction than anywhere in the U.S., especially those states that have no personal income tax.
From the perspective of diversifying the minds that are managing your assets, what is helpful is hiring a financial planning firm that has a well-qualified staff made up of individuals with varying specialties. Two advisors working for different firms will not collaborate the way you need to ensure your best interest is being served. As the leading Canada-US. cross-border wealth management firm, our portfolio managers, private wealth managers (financial planners) and tax professionals work in a collaborative way to ensure you have access to the specialized knowledge and experience your situation requires. We provide the diversified thought necessary to serve our clients best and as fiduciaries, our only job is helping them achieve their financial goals from an unbiased and transparent perspective.
Over the years, many articles have been written reminding U.S. citizens living in Canada to file a U.S. 1040 tax return annually, in addition to the FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR). While the U.S. 1040 and FBAR are key documents most U.S. expats must complete, there are other U.S. tax filings that unfortunately and all too often, are missed or not filed properly.