Buying a Service without a Guarantee: The Financial Advisor Selection

Many investors looking for an advisor tend to choose someone who makes them feel the most comfortable. That may be human nature, but it's not necessarily the best strategy.

Choosing an advisor that might perform well is not an easy task if it can be done at all.

According to a 2012 book by Harry Beckwith entitled “Selling the Invisible,” investors looking for an advisor tend to choose someone who makes them feel the most comfortable (or, in other words, the least fearful). This is because the average person has no way of judging advisor skills so she picks an individual primarily based on a feeling of her own well-being with that person.

That is, if an advisor is chosen at all. Inertia is so strong that often a would-be client can’t even begin the process of looking for an advisor so one isn’t chosen. Her choice has been indecision rather than decision.

All of this suggests to me that a lot of past columns written on advisor selection may have less merit than a reader would hope. This is surely true if we believe what Beckwith claims, that the advisor choice is primarily emotional rather than objective.

Another way of expressing this is “Sell the sizzle, not the steak” (from the Library Journal that reviewed the book). Many advisors do this by employing tactics such as dressing the part, placing their offices in prestigious buildings, decorating in an elegant manor and hiring a front desk person trained in people skills. This is impressive, but a cautious person might ask, “Is there more?”

No, there probably really isn’t. Because investment advisors are in a service industry, people look to the obvious. And, since those interested in hiring an advisor really don’t have the skills to judge performance and it often isn’t available as well, they make the decision by acting on instinct rather than analytics. It is the sizzle, not the steak that attracts a client. In fact, most actively managed funds underperform the market so it almost certainly salesmanship that continues to hold a client, not performance.

Still, discomfort about handling one’s own investments is a powerful motivator to hire a manager for many people. For some, it is essential if they are financially illiterate. In doing so, buyers of financial services are better off if they are aware that selecting an advisor is like choosing a new restaurant. A lot depends on impression and ambience rather than knowledge of the quality of what is served. The problem with investment advisors compared to restaurants is that the feedback is nowhere nearly as immediate. But, if the game has to be played, the risk has to be taken.

For Further Reading:

Benefits of a Financial Coach over a Financial Advisor

Financial Adviser Secrets Exposed

Your Advisor's Compensation Has Increased Dramatically

Advisor? What Advisor?