Avoiding The Status Quo to Fire Your Advisor

Following my post on how to tell if you’re getting bad financial advice, a reader asked:

From my experience (personal and through observation of others), one of the largest hurdles in personal investing is ‘actually’ changing advisers – even when you know you should.

What I mean is this: Many people, after a period, form some level of friendship with a long term (10+ years) adviser. They may also feel that the person is honest and sincere. However, that does not mean that they don’t come to the conclusion that the advice is not the best any longer or suitable to them.

So we have a conundrum – how do you divorce your friend rather than harm yourself to some degree financially over a longer term?

These relationships do matter. There was a study performed a few years ago that asked people what makes them trust their advisor. Two-thirds of the people asked listed their personal relationship with their advisor, while only one-third said it was because of their advisor’s competence.

What this reader is referring to here is the status quo bias, which is the fact that people are often more comfortable sticking with their current state of affairs. I understand how this inertia can set in, especially when that relationship has been developed over the years. It can be difficult to bring yourself to admit you were wrong and have to go through the process of making a change.

I reached out to my friend James Osborne of Bason Asset Management to get his take on the subject. Here’s what he had to say:

I would say the biggest detriment for most people to make changes is the painful process of researching and choosing a new advisor. Background research, interviews, meetings all take time and mental energy and most people are busy and exhausted. So they do nothing, knowing they are worse off for it. I’ve had a few instances where there was a personal relationship with a past advisor that had to be carefully handled, but by and large what I see is just inertia and inaction. It’s much easier to stick with the status quo than make a change.

The actual transition is pretty painless. New accounts are opened and assets are transferred. Sometimes there is a hangup but that’s part of the new advisor’s job to manage. The client should mostly be signing paperwork and that’s it. It’s the decision to make a move and who to move to that is the hardest for most people.

Kahneman and Tversky’s prospect theory argues that people don’t make financial decisions based upon their outcomes, but instead choose a value as a reference point and make decisions based upon gains or losses from that value. And their research also clearly shows that losses hurt roughly twice as much as gains feel good. A combination of loss aversion and status quo can work against you when it’s necessary to make a change.

As with most financial decisions, I like to look at things from the standpoint of regret minimization. What would you regret more? Staying with your current advisor and potentially hurting your own finances? Or leaving your current advisor and potentially hurting their feelings?

I think it’s great when financial professionals are able to create solid relationships with their clients, but you have to remember that it’s still a business. If the there are greener pastures out there and you know you’re not getting the right advice for the fees you’re paying then it’s time to move on. You don’t owe them anything other than an honest explanation.

I could run through a huge checklist of things to look for in a competent financial advisor, but there are really two big considerations if you currently have an advisor:

  1. Is you current advisor doing exactly what they told you they would do for you in terms of services and setting expectations?
  2. Is there a better value proposition elsewhere that is more suited to your needs?

As James mentioned, the transition process itself isn’t all that difficult. The hard part comes from having to force yourself to go through a thorough review of potential advisors. This process should be somewhat easier since you already have an advisor to compare new hires to. It’s the emotional aspects of forcing yourself to move on and getting over the inertia of making the change that requires some effort on your part.

Further Reading:
How Financial Advisors Can Fend Off the Robots

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  1. Hurrow commented on Jun 03

    I think you’ve given advice on the mechanical parts of changing advisors but missed out on the emotional aspect. By changing advisors, particularly one who you see yourself as being friends with, you’re telling them that you think that you think someone else is better than them at what they do for a living, and that you’re potentially willing to lose them as a friend. I see that as being far harder to do than the actual process of looking for a new advisor.

    • Grant commented on Jun 03

      Hurrow, I agree with you. If it were just a business decision to move, although there is some hassle involved, it is just a business decision. But it’s often more than that. Often advisors cultivate a friendship with you, so when you want to move on, it’s like contemplating breaking up with and old friend. It can be very difficult. Hence the advice to not employ a family member, or someone who is already a friend as a financial advisor, as that just magnifies this issue.

      • Ben commented on Jun 03

        Good point. It’s OK to be friendly, but maybe not true friends? Situational I guess, but I agree that it’s not easy to leave that relationship if you’re friends.

  2. annelykke commented on Jun 04

    The first time I went to an advisor, I had a real issue on my mind, mainly how to plan for retirement with a 15 year age gap between my spouse and I. My advisor, a former high school math teacher, and quite popular around town, told me that “he doesn’t get into the math.” I was so shocked I left. Scroll forward 5 years and my 53 yo athlete husband drops dead on a bike ride. My attorney sends me an advisor from Smith Barney, also the guy around town. He wanted to play with my insurance proceeds while LTCM was burning, and dump my low cost funds for proprietary product.
    Due to my own ignorance and sensing danger from these wackos, , I basically kept a large sum in CDS for a decade, drawing for household expenses.
    Sometimes I really regret being too conservative, but when you’re worried about putting a roof over your head and college I’m not sure that my fumbling was so terrible. Since then I’ve gotten a lot sharper, and even less trusting. Experience is what you get right after you could have benefited from it I suppose.

    • Ben commented on Jun 04

      That’s tough. Sorry you’ve had such a tough time finding good advice. It’s no fun paying your tuition along the way, but it sounds like you’ve gotten things figured out on you own now. Good luck.

  3. James Madelin commented on Jun 22

    So true! I recently discovered my Mom’s silver-haired fox of a financial adviser was giving her boilerplate advice and charging her thousands of £££s a year for it. We had a HUGE struggle to get her to pull the plug because she kept saying to us “He’s SUCH a nice man!” Eventually when she’d seen the numbers in black and white enough, it slowly dawned on her. Disgusting how he had put himself into a position of trust. Then when I tried to call several FAs here in the UK to charge me for an hour to double-check my suggested portfolio, all but one flat-refused, trying to outsmart me with bullshit jargon. I don’t envy anyone looking for a reliable FA, although they are out there. Ask them simple questions like “How much will you charge me and why?” and if they don’t give you a simple answer, thank them and move onto the next one.

    • Ben commented on Jun 22

      Yup, clients definitely have to ask way more questions than they do. And a legitimate FA will gladly share that info and more.