Coming Clean with your Advisor About Other Assets

How often have you sat in the doctor’s office with an ailment that you don’t mention?  The pain isn’t picked up on the yearly checkup, and the doctor sends you away, thinking you are feeling well.  Going to the doctor and not telling the truth is not only counterproductive but can be quite dangerous. The same is true with your financial advisor — many aspects of the financial world impact other areas of your life. Financial decisions not shared with your advisor could negatively impact your current financial journey.

This article is the first of a four-part series covering things you will wish you told your advisor. The four examples we discussed on the May 4th Consider This radio show and podcast were individuals not fessing up to other assets; issues with children; health issues; and debt – especially debt hidden from their spouse!

Owning undisclosed assets may seem acceptable, but it’s not in your best interest. When I started in the financial services industry in 1987, information was contained in various masterminds.  What Goldman Sachs knew was different than Merrill Lynch, and that was different than UBS. Today the information is readily accessible to everyone. The difference is in wisdom and application.

The Financial Enhancement Group has never owned or sold an open-ended mutual fund. The idea of owning multiple mutual funds divided by size (large cap, mid cap, and small cap) and style (growth, blend, or value) seemed to make sense on paper until it didn’t.

During a presentation in January of 2000, we demonstrated how Microsoft, the world’s largest company by market capitalization at the time, was owned by mutual funds in each of the nine size and style boxes.  Again, the information was readily available. The managers of the funds didn’t want to sell “Ole’ Softy” so they justified holding it in small cap value funds. How can the largest company in the world be in a small cap fund (let alone value style!) when it was clearly a growth company?  The financial services industry calls this style drift and is an example of something you can’t control within your portfolio when using these types of funds.

When you own multiple mutual funds, you have a good chance of owning the same stocks in numerous places. This occurred in September of 2018 when mere observers of the markets felt the S&P 500 was doing fine with a reasonable gain. The casual observer missed that 122% of the gain in the index had come from just a handful of stocks. Those stocks were owned over and over throughout the mutual fund industry. When the calamity of the fourth quarter came to fruition, the diversification of various mutual funds with the same stocks spelled disaster for retail investors.

This is why our firm choses to use exchange traded funds (ETFs) and individual equities within our investment models. Owning the same stock in 10 places can give a false sense of diversified confidence. If you chose to use more than one advisor, make sure they know the entire picture. It will save you money and heartburn over the years.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.