Why You Should Hire Only One Financial Advisor: Part 1

One key principle of successful investing is to diversify your portfolio as broadly as possible to minimize the risk that any one specific investment will crush you. Many physicians extrapolate that concept to mean that they should hire more than one financial advisor. That usually creates more problems not more sophistication. Here are five reasons why you should work with only one advisor:

1. You control risk.

Asset allocation — which is the broad mix of investments in your portfolio – is the primary driver of your investment returns. Imagine you have a $1 million portfolio and you’ve split that equally between two financial advisors. The first advisor may have you in a 50/50 stock/bond allocation and the second may have you in an 80/20 stock bond allocation:

Advisor 2 is taking more risk than Advisor 1. Your overall portfolio stock/bond allocation — which is what matters – is 65% stocks and 35% bonds. But suppose that you can only tolerate the risk of a 50/50 portfolio. Now you’re taking on more risk than what you feel comfortable with, and when the market goes down you’ll be in for some surprising losses.

2. You control asset allocation.

Let’s say Advisor 1’s investment philosophy is based on the academic evidence that you can’t time the market and that he maintains the same asset allocation over time, but Advisor 2 believes in stock picking and market timing and changes your asset allocation. A few months later your portfolio may look like this:

Now you’ve got a shifting asset allocation (from 65/35 to 75/25) which means you really don’t have an asset allocation at all nor an investment plan — and you’ve lost control of risk even more.

Next time I’ll discuss three more reasons why working with only one financial advisor makes sense.

Setu Mazumdar, MD, CFP® is board certified in EM and he is the president of Financial Planner For Doctors.