Why Would I Want to Give One Adviser All My Assets? Would Several Advisers Be Better?

As originally published in Worth

We often hear this question from potential clients. What concerns are really being expressed here? Primarily, it is a matter of safety— protection against the Madoff-style fraud that is anyone’s worst nightmare. Diversification is also an issue; how can one adviser possibly provide the best investment management in all of the various asset classes?

Both concerns can be alleviated if you seek an adviser with two attributes. First, work with a registered investment adviser (RIA). The SEC requires that RIAs adhere to a fiduciary standard; that is, they are required to put your interest ahead of theirs and disclose in writing (via the SEC-mandated Form ADV II) when they are not. Next, seek an RIA who serves as an investment consultant. This model, in which the investment consultant functions as a chief investment officer, was originally developed to serve pensions and endowments. Some RIAs have adopted this institutional model to serve wealthy families. An investment consultant helps set strategy, conducts due diligence to retain best-in-class independent investment managers, and monitors each manager’s activity to ensure they perform as expected. They also use their client’s collective buying power to negotiate fee concessions and to access otherwise unavailable managers.

Investment consultants typically are not the custodians of assets. Usually a large bank holds the securities the managers are trading. Thus, there is a separate, unrelated record keeper. This arrangement makes it nearly impossible for any manager to perpetrate a Madoff-style fraud. An independent custodian functions as a check on the activities of the investment managers and, by extension, the investment consultant’s activities.

As for sufficient diversification, we agree that no one investment management firm is likely the best at investing in all asset classes. Investment consulting firms such as Altair are not trading individual securities; instead, they are considered “managers of managers.” The best consultants have no proprietary interest (either through fee sharing or brokerage commission arrangements) in the managers they recommend. Instead, managers are chosen based on their own merits and can easily be replaced if their performance falters or key team members depart.

With the risks addressed, the benefits are clear. If you think of the investment consultant as a CIO reporting to you, the CEO of your portfolio, it makes sense that there should be only one. The investment consultant’s interests are aligned with yours. An investment plan overseen by an investment consultant, with best-in-class investment managers and an outside custodian, provides safety and superior investment management.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.