Eradicating Advisor Diversification

Matt White, CPA, PFS
April Meyers

To be a comprehensive wealth planner for your clients, it’s critical that your clients understand the risks that may impact their portfolios and goals when they practice diversification among Advisors. This article illustrates three risk factors of diversified portfolio management and provides a strategy to eradicate Advisor diversification. Read on to find out how you can gather more assets from your current clients.

Advisor diversification is the practice of spreading assets among different Advisors. Clients practice this because they are testing performance, they believe they are achieving diversification in their investment portfolio and/or they have loyalty to another Advisor. There are three primary risk factors that are perceived as harmful for clients when they spread their assets among multiple financial Advisors. 

Risk 1: Inappropriate structure of portfolio asset allocation

The client’s consolidated portfolio should be reflective of their current financial situation, anticipated future situation, feelings about their financial well-being, as well as family dynamics. When a client spreads their assets among several firms, there is no coordination with respect to the allocation and there is also a tendency for a client’s portfolio to not be diversified enough.

Risk 2: Failure to monitor and maintain the portfolio asset allocation

There is a constant need to rebalance a client’s portfolio due to current market sectors, styles or major components that may otherwise fall out of balance if his or her entire portfolio goes unaddressed. The time to reallocate is when a client’s current situation, future, feelings and/or family dynamics change.

Risk 3: Inappropriate correlation of investments, funds and managers

Each manager must stand alone as being excellent and have an outstanding track record. Three factors must be considered: risk adjusted return, money management and purity of style. Each investment, fund and manager must also interrelate well with other investments, funds and managers so that there are no excessive overlaps or excessive gaps. In order to develop a process to capture all your clients’ assets, first you need to determine whether this strategy is the right fit for your practice. You need to ensure that your process is flexible; it may vary from client to client. To get started, implement the following steps.

Five Step Process

1. List all clients you know have their assets with various financial Advisors.
2. Schedule a meeting to conduct a standard review.
3. Three key elements to communicate with the client:
• a. Relay to the client you have made a change to your practice.
• b. Mention you have a new process that you believe serves the best interest of your clients.
• c. Let them know you are concerned that they have assets at multiple firms, and as a result, your client     faces various risks.
4. Give your client a deadline; no decision needs to be made during the meeting.
5. Follow up with your client.

When you have conducted your standard review with your client, and you are about to wrap up with a few final points, now is a good time to tell your client you have one other area of concern you’d like to share with them:

1. Tell them about the change in your practice, which affects your relationship with all your clients.
2. Discuss the concern that you are not doing your best job for their financial well being because you can’t evaluate their entire situation.
3. Explain the three risk factors involved.
4. Recommend that they consolidate their investments with you.

Possible Objections

Objection:

I feel committed to my other financial Advisor.

Response:

We feel so strongly in our convictions about consolidating your assets that we are asking all of our clients to either consolidate with us or transfer to an Advisor you do trust. We would rather risk losing you as a client than know that your needs are not being properly addressed.

Objection:

I am more comfortable having my assets diversified among various financial Advisors.

Response:

We believe that it is risky to have your assets at several firms because no one is coordinating what is happening with each account.

Objection:

Why haven’t you talked to me about this before? Why does this matter now?

Response:

We have very few clients for whom we don’t manage all of their assets. However, in reviewing your account, we discovered this risk and believe the risk is very high. Therefore, we feel it’s in your best interest to consolidate your accounts with one Advisor.

Advise your client that if they do not want to consolidate their account with you, they should consolidate their accounts with someone they can trust. If a client is wavering on their decision, tell them you are not comfortable handling only part of their assets without a holistic knowledge of their entire portfolio, and as a result, you will have the account reassigned to a house account. When meeting with prospects or new clients, tell them up front that your firm has a policy that you must manage all their assets, and explain why by conveying your philosophy.

Investment Products: . Not FDIC Insured . No Bank Guarantee . May Lose Value

Securities offered through H.D. Vest Investment ServicesSM, Member SIPC

Advisory services offered through H.D. Vest Advisory ServicesSM.

Non-bank subsidiaries of Wells Fargo & Company,

6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.