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Spreading the Wealth Around: Should Advisors Manage All of Their Clients' Assets?

This week it's the "Sky Houdini," who was caught by authorities in Florida after faking his own death: His wealth management business had been under investigation after he allegedly scammed some clients.

This week it's the "Sky Houdini," who was caught by authorities in Florida after faking his own death: His wealth management business had been under investigation after he allegedly scammed some clients. And just last week, it was Joseph Forte, who was charged by the SEC with conducting a multi-million dollar Ponzi scheme since 1995. In fact, since the Bernie Madoff scandal erupted, stories about the capture of financial fraudsters seem to be rapidly proliferating. With so many fakers in the mix, what investor is going to want to trust a single wealth manager with all of her assets?

Of course, the prospect of getting all of an investor's assets is very alluring. In the current market, you might have even felt pressure from above to pursue your higher-net-worth clients' other brokerage accounts. Broker/dealers are eager to help you by offering fee break points, better interest rates on greater asset deposits, discounted fees on asset-based credit cards with some very enticing rewards—even "scripts" for you to read to clients, extolling the seemingly endless virtues of one-stop shopping in today's busier-than-ever world. And with so many other brokers' unhappy clients lurking about, you may wonder what you have to lose by trying.

All of that said, is convincing clients to give you the lion's share of their assets, particularly in such fragile and unpredictable market, even in their best interests? The answer is yes—and no. For active investors with time to monitor and compare rates on multiple investment portfolios it sometimes makes sense. For passive investors who don't, it may not.

Spreading the wealth around can diminish risk, but it can also lead to conflicts in portfolio strategy. Michael Mazor, first vice president of investments and manager of Stifel, Nicolaus & Co's Boca Raton, Fla., branch, which has 26 reps, admits: "Most higher-net-worth clients have more than one financial advisor—the logic being that it will help reduce risk through diversification." However, he says, "If you don't have knowledge of your client's entire portfolio, I believe this actually creates problems and potential conflicts."

When all of a client's assets are at your firm, he notes, you can coordinate and integrate diverse strategies into a single, comprehensive plan. "If multiple advisors are involved, this can lead to an overlap within their portfolio, which actually creates added risk from lack of diversification". "Clients are really best served by one investment team who fully understands his entire risk profile," Mazor says.

How does he—and the reps he manages—sell the proposition to high-net-worth prospects? "I feel that if a client is not comfortable with a particular advisor managing all of his assets, the advisor probably shouldn't be managing a portion of any of his assets. To work effectively with them, your clients need to trust that you have their best interests in mind."

Marc Freedman, CFP, who heads Freedman Financial Planning, an independent firm with LPL Financial Services in Peabody, Mass., says that while working with a multitude of brokers may be in a client's best interest, working with a multitude of “financial planners” definitely is not.

"It's all about what the client is looking for," says Freedman, who focuses on the mass affluent market, which he defines as people whose total-net-worths range from $500,000 to $3 million. "If he wants information and lots of investment action, then having more than one broker would probably be very helpful. If he wants 'advice' and comprehensive financial planning, then he is best off having one advisor who can completely assess and validate every asset and liability on his financial statement.”

On the other hand, having multiple advisors can help keep them all in line. "If someone is a do-it-yourself type who takes an interest in monitoring his investments and keeping brokers 'honest,’ he's probably best off spreading his wealth around," says Andre Cappon, president of The CBM Group, a New York-based industry research and consulting firm. "If you try to get his other accounts, he'll likely miss the benefits of having multiple relationships—and getting that 'second opinion,’ which is an easy way for him to compare rates and negotiate with his advisors."

There are other drawbacks for investors to putting all their eggs in one basket—not the least of which has been the fact that, up until the recent economic bailout plan, deposits were only FDIC-insured up to $100,000. That coverage has been raised to $250,000, but for portfolios that are much bigger than that, there is still a lot of money at risk. That said, many brokerage firms now use several banks—or the services of cash management companies—to offer FDIC insurance of $1 million or more.

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