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If you want to get a handle on your finances, simplify your life by cutting out the excess investments, advisors and fees that are weighing you down.

It’s ridiculous how complex most ED visits are. It’s not our fault – we’ve got to deal with legal issues, patient satisfaction, understaffing and so on. Instead of telling the patient, “It’s just a cold,” we order a CBC, CXR, and nebs. A patient with every complaint in the book – what I like to call positive review of systems – gets a CT scan when really we should just say “You’re crazy!”

That’s similar to how I’ve seen many physicians and their financial advisors manage money, making things far more complex than they should be. So let’s apply Ockham’s razor to your finances and simplify your life.

Too many accounts
Do you have more than one IRA? Perhaps you opened one years ago at Scottrade and then another with a mutual fund company. Maybe you have another with your financial advisor. What about your 401k from your previous group or employer? Is it still sitting in the same place with poor investment choices and high cost funds? If that’s the case, it’s time to consolidate. There’s no reason to have multiple IRAs spread out over multiple custodians. Combine them into one IRA. You can even combine your traditional IRA with your SEP IRA. Then transfer your old 401k into the IRA as well. Lump your spouse’s taxable account with yours and see if your 401k allows incoming account transfers. Finally, instead of having a separate checking account for personal expenses, make your taxable investment account act as your bank account.

Too many investments
When you’ve got too many accounts you’ve also got too many investments. Here’s a real example of a physician’s portfolio I reviewed recently:

  • 150 individual stocks
  • 30 individual bonds
  • 80 mutual funds

How in the world can anyone keep track of all this? Imagine the number of transactions – buys, sells, dividends paid, dividends reinvested, capital gains distributions, stock splits, etc... If you’ve got a taxable account you’ll have to hire a CPA just to keep track of this. Do you or your advisor really think you can adequately research so many companies and money managers? Think about the financial statements, charts, and economic data you have to pore over. Is this really worth your time and money?

Then there’s the illusion of diversification. Sure, you’ve got a ton of funds and it looks sophisticated. Suppose you own all of these funds:

  • American Funds Growth Fund of America
  • AllianceBernstein Wealth Appreciation Strategy
  • Oppenheimer Main Street Opportunity
  • Davis New York Venture Fund
  • Wells Fargo Advantage Capital Growth


The fancy sounding names might make you feel good, but it turns out all of the funds are invested in the same asset class. That means there’s a ton of overlap in their underlying holdings. If you think you can pick the winning money managers, just pick ONE fund and toss the rest. Better yet, if you own a bunch of funds in the same asset class, you own the asset class in an inefficient way. Why not just invest in the Vanguard 500 Index Fund and be done with it?

Too many advisors
After the Bernie Madoff scandal you might be tempted to have more than one financial advisor. While it’s understandable, it makes no sense. There are many ways you can reassure yourself that your advisor isn’t committing fraud, chief among them is to make sure he isn’t taking physical possession of your financial assets.

Barring that, you may think that having more than one advisor increases diversification, the idea being that maybe one of them will beat the market. Perhaps you will try both out for a year or two and see who performs better. Or you might do some mental accounting. For example, you might hire one guy for an “aggressive” portfolio allocation and another advisor for a “conservative” allocation.

Whatever the reason, you’re doing it the wrong way. The reason is that one advisor has you in one particular asset allocation or mix of investments, and the other guy has you in a completely different asset allocation. The academic studies show that your overall asset allocation drives your returns. So if you’ve got two advisors with two different asset allocations, and those allocations are changing constantly, now you’ve lost control of the single most important decision in your overall portfolio.

Further make sure you account for investments wrapped inside other financial products, like variable annuities and life insurance. If you’ve got these vehicles, then you’ve probably got another advisor – an insurance salesman – who is masquerading as an investment advisor.

Try this: have only one advisor for your investments and one advisor for your insurance, and make sure the investment guy doesn’t sell you insurance, and the insurance guy doesn’t sell you investments.

Too many plans
EPs make tough patient decisions quickly and definitively but we’re flip-floppers with our investments. How many times have you second guessed yourself? This leads to too many transactions in your accounts. You buy high and sell low – exactly the opposite of what you should be doing. This also means you change your asset allocation frequently. You’re 80% stocks one month and 50% the next. That means you change your investment plan too frequently. Just like having multiple advisors, you’ve lost control of your portfolio. You think you’re proactive but in reality you’re reactive. By the time you know something, it’s too late.

When you’ve got too many investment plans, you actually have no plan at all. So choose one allocation. Have a plan. And stick to it.

Too many fees
If you’ve got too many accounts, too many investments, too many advisors, too many plans, or all of the above, then you’re probably paying way too many fees. As you probably know by now, I’m all about keeping fees reasonable.

Here are the fees you may be paying:

  • Account maintenance fees
  • Trading commissions on individual stocks
  • Bid-ask spreads on individual stocks
  • Markups on individual bonds
  • Advisor fees
  • Mutual fund commissions
  • Capital gains taxes in taxable accounts
  • Lower performance due to lack of an investment plan
  • Higher taxes due to a tax inefficient portfolio


The more accounts and investments you’ve got, the more fees you’re paying. Lowering your fees directly results in higher returns.

Investing isn’t necessarily easy but you can make it more understandable. So cut the clutter and simplify your financial life. You’ll have a better grasp on you finances and you might just end up with a larger portfolio.

Setu Mazumdar, MD practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA www.lotuswealthsolutions.com

 

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