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Why Do Advisors Recommend Complex Portfolios?

A reader writes in, asking:

“After talking to a few investment advisors who I’m considering using, as well as reading articles and books written by other advisors, it really appears to me that advisors create portfolios that are more complex than is really necessary. Do you see that as well? And if so, why do you think that’s the case?”

I do agree that many advisors tend toward complex portfolios, but I will also note that there are some who like to keep things simple. For example, most of the advisors from the Garrett Planning Network with whom I’ve spoken are fans of very basic “total market” index fund or ETF portfolios. The same goes for various advisors from the Bogleheads community, such as Allan Roth, Rick Ferri, and Jon Luskin.

But let me back up a step first. There’s isn’t necessarily anything wrong with a complex portfolio. The primary drawback of portfolios with many moving pieces is simply that they’re more work to manage. But if you already know that you intend to hire an advisor to manage the portfolio for you anyway, that’s a non-issue.

I think there are three possible reasons for the preference for complex portfolios among advisors.

The most positive possible reason is that advisors are in fact better informed than DIY investors, and their preference for more complex portfolios is simply the result of better information. Frankly, I have my doubts. I’m unconvinced that a sliced and diced portfolio with 7-10 different funds is meaningfully better than a simple three-fund portfolio.

Then there’s a more neutral reason — one based on simple human nature. As people who were drawn to working in the financial services industry, it’s likely that advisors think portfolio construction is neat. It’s fun. So they have a natural inclination toward portfolios with many different holdings.

Finally, there’s a more negative/cynical explanation. It has to do with marketing.

By showing you a complicated portfolio and the research behind it, an advisor looks smart — or at least, that’s how many prospective clients would see it. Compare that to, for example, the opposite end of the spectrum: if an advisor told you they were going to put your money into a target-date fund, many people’s natural response would be “well then why am I even hiring you?”

And presenting you with a complicated portfolio is almost a no-lose proposition from the perspective of the advisor. If it helps with the sales process, it means more clients and more revenue. And the additional complexity is not a major drawback for a full-time professional with portfolio management software.

And the complexity provides a degree of client “stickiness.” That is, if you’re already somebody who is inclined to have an advisor manage the portfolio for you, the more complicated the management of the portfolio appears to be, the less likely you are to want to switch to a DIY approach at some point.

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