As a successful long-term investor, you probably understand the importance of diversifying your assets. By allocating a portion of your portfolio to stocks, bonds, real estate and alternative assets, you can avoid the risk of over concentration: putting all your eggs into one basket.
For high-net-worth individuals and families, the same principle applies to the banks, brokerages, trust companies, and other financial institutions that manage those assets. Diversifying your managers offers a number of potential benefits that can help you boost your returns, reduce your risks and keep you moving toward your financial goals.
One of the best reasons for spreading your assets among three to five managers is to take advantage of different skill sets and knowledge. One manager might focus primarily on equities, while another has greater experience with fixed-income assets. Allocating those assets to different managers can result in better overall performance.
Financial institutions and in some cases their bankers, will more often than not, have differing views. How those views are expressed will have an impact on your portfolio’s performance. Working with multiple institutions gives you access to these differing views, which means more knowledge and the ability to question their outlook, rather than just take them on face value.
Diversifying your asset managers also allows you to compare their performance. If one institution holds all your assets, it can be very challenging to determine how much value the manager is adding to your portfolio. In general, you should look at performance on an annual basis over a period of several years. Some managers do a better job when the markets are rising, while others can minimize the damage in a downturn.
You should also compare your portfolio’s returns to appropriate market indexes, so you can see if active management results in any improvement over low-cost passive investments like an index fund or exchange traded fund (ETF).
Putting all your assets in the hands of one institution also leaves you vulnerable to a change in personnel on your team. An experienced manager might retire, leaving you in the hands of a newcomer, or your team leaders might move to a different institution hoping you will move your assets as well.
Finally, working with several asset managers can also give you options in terms of finding the best fit for your personal investment style and goals. Some managers may aggressively pursue returns, increasing the risks as well. That might be fine for some investors, but others may prefer a more conservative approach that focuses on preserving capital while still seeking growth opportunities.
Of course, the downside to engaging multiple asset managers is an overall increase in fees. However, increasing the performance of your portfolio by a few basis points could more than compensate for those added costs. In addition, you may be able to reduce those costs by engaging an experienced financial professional to negotiate on your behalf.
An outsourced chief financial officer can also help you in other ways, such as comparing the performance of your managers and making recommendations for a replacement if necessary. In conclusion, if you have several million dollars in assets, you should consider dividing those funds among several managers and take advantage of this diversification strategy.