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