Diversification
Diversification. What does this mean when it comes to wealth?
One of the deceptive roadblocks that I noticed when I set off on my journey of learning all things finance was the use and understanding of seemingly simple words. Because they are so commonly used in everyday life, sometimes we don’t think twice about them and perhaps assume we know how the term is applied despite a different context. For me, diversity was one of those words. (Dividend was another one of those words but that definitely deserves its own space to better explain.) Diversity implemented in the right environment and circumstance has been proven time over time to be fruitful for the investor, but there are other instances not as commonly discussed where it can be unwittingly deployed to an investor’s disadvantage.
Well before med school, I remember learning that smart wealth generation includes “Making sure to diversify”. I understood this to be synonymous with the phrase “Don’t put all your eggs in one basket”. Made sense to me; if your single and only basket breaks, your precious eggs are goners. But if you put some of your investments in stocks (typically higher risk, higher reward), and another part of it in bonds and GICs (safer bets but typically lower returns), then even if the market crashes and your stock ‘basket’ breaks, you still have some eggs saved in your fixed income ‘basket’ to make the perfect quiche for that rainy day. Pretty straightforward, right?
Even when you don’t have a lot of money to invest, options may be limited, but diversification can still be put to use in a different way, that is diversification in location, and by location, I’m talking about different accounts: think RRSPs, TFSAs, medicine professional corps, permanent life insurance policies etc. But diversification by location can also mean something else and to me, in my early career, that meant diversifying between the banks and investment companies.
Lesson Learned the Hard Way
My reasoning at the time for splitting investments between the bank’s investing arm and an investment firm was to make a better informed decision. I thought this would be a good way to keep each advisor accountable if they knew that I was seeking advice from more than just them as a single source. This was my strategy to ensure that the advisor was keeping my best interest in mind if they knew I was double checking their work with a peer. I didn’t know at the time how to discern the good advisors from the not-so-good ones.
Unfortunately, what I failed to realize was that as our family’s investments grew, I was overpaying for the cost of management by diversifying between two institutions. Increased costs detracts from positive performance. Had my younger self known what I know now, I would have recognized that splitting your investments between two different advisors was leaving me with higher fees. Wealth management firms that offer a sliding scale when they employ the assets under management model will charge a cheaper percentage, the more you invest with them. But more importantly, the level of service offered differs between the values invested.
Does it make sense that an advisor is going to treat a $300k client in the same way they would a $700k client or a combined $1mil client for that matter? What I forgot to realize is that the client with more money to invest will deservedly receive a higher level of service due to the financial complexity that is associated with the amount of their wealth. And better service translates to more personal time for me. But it also allows more opportunities and potential to employ different investment tools and strategies when you have a larger pot to work with. So I paid more in fees to experience more headaches and shrink my wealth building opportunities - instead of reducing my fees - and my headaches by consolidating.
What added insult to injury was that this was something completely within my control; a completely avoidable cost to incur on my assets. And I later discovered that there were duplicated holdings between accounts which again, may have been cheaper for me if held in a single account, but also meant that I wasn’t as diversified as I thought I was. Funds including mutual funds, ETFs etc may be labeled differently, but they may contain some of the same stocks/holdings. So I also lost out on a global oversight of my wealth to eliminate redundancies within my portfolio.
Now, I am happy to report that I have implemented diversification to the benefit of and in consideration of our investments as a whole. We have anticipated the growth in sometimes forgotten spaces (a common one is life permanent life insurance policies) to ensure they don’t overlap with personal and corporately held funds, thus keeping our risk tolerance balanced. If you are a high net worth physician who has investments across different institutions like your RRSPs and TFSAs at one bank and maybe a different broker or professional who sold you permanent life insurance, and perhaps another bank that deals with your med corp, your baskets may not be built as sturdy as they could be - and they certainly won’t experience any synergistic benefits. Might be time for an evaluation to build more wealth sooner by lowering unnecessary costs and leveraging a more universal and integrated approach to your financial wellness.
