Most investors have a consistent and orderly life so it is somewhat surprising that the current choppiness in the markets would trigger investors to want to alter their portfolios or make even more far reaching changes. Volatile market conditions may prompt investment changes, but giving into temptation and responding to short term circumstances should be avoided at all costs. Volatility is just a normal part of investing and if anything is going to be done it should be to re-assess, re-affirm and ensure your clients goals and objectives are accurate.
Although the basics are mother’s milk to most seasoned investors, they bear repeating: focus on asset allocation as it is the most important investment decision your clients will ever make; use high conviction active managers; pragmatically diversify investments with an emphasis on reducing downside risk; ensure the cost and implementation structure is efficient and disciplined; and avoid the latest fads and flavour of the month as your clients’ portfolios are meant to last for years.
One item that is overlooked or deliberately ignored by most investors is the concept of asset consolidation. It is commonly believed that for every dollar clients have with one advisor they have three elsewhere. However, creating a streamlined and efficient portfolio will benefit clients on many levels. Clients use multiple advisors for many reasons but persuading your clients to consolidate their holding will significantly help them meet their investment needs both today and for future generations. The list of benefits for clients is just too lengthy to ignore but include the following.
Asset mix: Consolidation can help manage the asset mix and limit duplication of holdings. It provides a clear picture of the client’s total holdings. Multiple advisors could lead to dangerous levels of concentration of holdings and poor tax efficiency as the household assets are managed for divergent purposes across different providers.
Simplicity: Get a better view of your client’s overall situation. Multiple advisors means multiple statements, multiple solutions and usually multiple (and likely diverging) points of view of the current state of the market and the future outlook. All of these could lead to a great deal of confusion for all but the most astute clients.
Service: In a perfect world all clients are treated equally. Unfortunately larger clients tend to get better service so having multiple small accounts would likely mean clients would get less than the optimal attention at each institution. Consolidation would overcome this issue.
Reducing Risk: In the past multiple advisors were a way to diversify risk. But in reality excess diversification comes at a great cost because it increases the likelihood of having index–like portfolios but paying active management fees. This is a recipe for guaranteed underperformance.
Savings Fees: Clients often pay lower fees when they consolidate their assets. Since it is not possible to guarantee investment returns, ensuring the best potential results is only possible by minimizing fees and taxes.
Creating a Plan: A major flaw of most financial planning analysis is the need to use expected return numbers. If there are duplicate portfolios across multiple firms then determining potential future results becomes a difficult challenge.
Managing Cash Flow: To obtain a complete picture of a client’s financial situation the advisor needs to understand their total level of income earned. This can be difficult to manage across multiple investment accounts.
Estate Planning: Having investments with one firm will simplify estate planning and administration for navigating the increasingly complex probate process.
Monitoring Performance: Comparing the performance of multiple providers is difficult unless there is really a true apples-to-apples comparison, which is seldom the case. It is easier for clients to understand how their investments are performing when the assets are consolidated.
Better Clarity: Knowing the entire financial picture provides clients with a customized and personalized service. For example, if the registered and non-registered accounts are at different firms, tax minimizing asset mix based opportunities become difficult to achieve. As well, consolidation would limit the confusion and number of tax receipts each year and likely reduce the client’s accounting fees for completing complex income tax returns.
For advisors the opportunities for increasing assets and strengthening relationships with clients is very compelling. Recent retirement demographic trends and the potential wave of money that will be released as the inter-generational transfer of assets gathers steam, will drive the need for clients to consolidate their wealth. The objective should be to plan ahead and act now. Simply reacting at some point in the future will likely cause the rewards to slip through the current advisor’s fingers and into a competitor’s hands.