Firing Your Financial Advisor? When To Stay, When To Go

Ivanna Hampton: Many investors work with a financial advisor to help them reach retirement or college savings goals, but the client-advisor relationship, like any relationship, may not last long. Morningstar researchers have explored why people fire their financial advisors, and it’s more complicated than fees. Morningstar, Inc.’s Senior Behavioral Researcher Sam Lamas and Morningstar, Inc.’s Behavioral Scientist Dr. Danielle Labotka are joining the podcast.

Why Do Investors Stop Working With Financial Advisors?

So, you all asked people why they decided to stop working with their financial advisor. Danielle, what kind of responses did you guys get back?

Dr. Danielle Labotka: Yeah. So, we asked this in a way that let people give us open-ended responses that they could write out. And that’s kind of nice because it means that people are telling us what they thought in their own words as opposed to checking a box based on something we wrote. But the downside to it is that we kind of get a lot of variation in our answers. Some of them are really short, and you have people saying two words like, “too expensive.” But other people give a whole story about their financial situation and why it changed and why that meant that their advisor was no longer right for them. So, in order to handle all this different kind of data, what we do is create a way of categorizing them into different subsets of information based on what we find about what people think about firing their advisor from both the academic and industry literature.

6 Most Common Reasons to Fire an Advisor

Hampton: So, the responses varied a lot, and they fell into different categories. Sam, what were the six most common reasons why people fired their advisors?

Samantha Lamas: Yeah. It was actually fascinating to see how people’s responses and their reasons for firing varied. But the six most common were actually quality of financial advice and services—so, the person had a problem with the specific services the advisor was providing. Quality of relationship—so, the rapport, that personal connection the advisor has with their client. Cost of services. Return performance driven factors—so, returns just weren’t meeting expectations. And then, comfort in handling financial issues—so, some people reported feeling comfortable enough making these decisions on their own. So, they felt like they didn’t need an advisor anymore. And then, quality of communication.

What Are Investors Actually Looking For?

Hampton: So, you said that quality of financial advice and services was the top reason. Can you describe the responses that you got and why people felt that way?

Lamas: Responses that fit into this category were pointing to a gap between what an investor was looking for in their relationship with the financial advisor and what they actually got. So, for example, some people wanted personalized advice, and then their advisor was just giving them cookie-cutter solutions. Or they wanted advice that fit into their risk tolerance, and instead their advisor was giving them advice that they were uncomfortable with. Or my favorite was people wanted more hands-on holistic advice, and their advisor wasn’t giving them a level of direction that they were looking for. But pretty much all of these gaps are the product of the advisor not taking the time to truly understand what the client wants from the relationship, what they’re looking for, their expectations from the advisor.

Hampton: So, there was also like a gap in communication? What do you want?

Lamas: Exactly.

Quality, Cost, and Performance Factor

Hampton: So, quality of relationship with advisor, cost of services that rounded out the top three. And as you mentioned, return performance driven factors was also on the list, and it came in fourth. But that was actually the reason that people were thinking they were getting fired, right, Danielle?

Labotka: Yeah. And we think that it’s because returns are kind of an easy scapegoat when it comes to understanding why an advisor might get fired. I mean, first of all, they’re straight-up numbers. You can see if you’re doing better or worse on returns. But also, when you have poor returns, people tend to react negatively to that, especially if you see a portfolio go down in value. Nobody likes to lose money. So, it’s easy to blame returns. But we think that there is a problem with it in that it really also kind of absolves the advisor of some of the responsibility for what went wrong in their relationship. After all, markets go up, markets go down. And at the end of the day, your financial advisor, no matter how great they are, they don’t control the market.

When an advisor can say, “Well, it’s because of returns, they were poor, that’s not my fault, that’s the market,” they’re missing the opportunity to step back and think about, “Well, what does it mean that my client thinks that the returns should be higher?” And 11% of the people did say that returns were a factor in firing their advisor. So, I think being able to take a step back and say, “Well, what are my expectations here in terms of returns? Why do I have them, and are they aligned with what they should be?” And this is a conversation clients and advisors can have with each other: Are we focusing on what the returns are in my mind or are we thinking about how I’m going forward and achieving my financial goals? And getting advisors and clients to have those conversations to better understand client’s expectations and, also, maybe reorient them when it’s necessary can be important.

Money Conversations With Your Advisor

Hampton: So, let’s stick with the theme of money here. So, if a client is unhappy with the fees that they’re paying to their advisor, how do they start that conversation?

Labotka: I’d say, just be frank. Go to your financial advisor and ask them, “Hey, I know that you charge this amount for your services, and I’m just kind of wondering what do you do to help me reach my financial goals? How do you justify these costs?” I think it’s important to have these conversations because, in my mind, financial advising is a little bit like watching a duck glide across a pond. It looks really easy on the surface level. The duck just seems to gently move in the direction that they want to go in. But under the surface, well, that duck is paddling its little webbed feet as fast as it can. And it’s not that clients are going to know right off the bat everything that advisors do for them. After all, the advisor’s job is to be an advisor, not the clients. But you want to find an advisor who is going to sit down and have that conversation with you, who is going to say, “Yes, you know, here are the things that I am doing with your money in order to help you reach your financial goals, and this is the value that I add.”

How To Repair Your Relationship With Your Financial Advisor

Hampton: All right. So, Sam, if you’re noticing that the relationship with your financial advisor is fraying, what do you do?

Lamas: In the paper, we list out these three overarching lessons really for the advisor and how to repair those relationships. In the paper, we list out different steps under these different lessons. If you’re really interested, I definitely recommend reading the paper. But these three overarching lessons are: focusing on the person side of personal finance. So, as you mentioned earlier, that communication aspect is essential. An investor has to feel comfortable explaining to the advisor their expectations and things like that. So, you need an advisor that you feel comfortable having those conversations with. Effectively communicating your value—so, as Danielle just mentioned, advisors are the ducks on the water. I love that analogy. But they could be working like crazy underneath the surface. And you need an advisor that’s going to explain to you what they’re doing, but not giving you all the details so you don’t feel overwhelmed. There has to be that careful balance. And then, setting expectations for the relationship early on. And that one has more to do with returns. If the investor has the wrong expectations of the exact returns they’re going to get, that’s going to lead to a bad relationship later on. So, having those conversations early on is important.

Breaking Up With an Advisor

Hampton: So, who is most likely to break up with an advisor, Danielle?

Labotka: We found that investors who were wealthier or older tended to have more experience firing advisors. But we don’t want people to go into a panic about this. It’s not that people who are wealthy or older are just bound to have really bad experiences with financial advisors. We think that this is probably mostly a result of just experience. If you are older, if you are wealthier, you’ve probably been working with a financial advisor for more years, and that just gives you more opportunity to fire somebody. Younger people or people with not as high of income or assets at that point have that opportunity.

Hampton: Sam, can you give the audience a takeaway or two when it’s just time to move on? What should they do?

Lamas: Going back to what we talked about earlier, you should have an advisor that you feel comfortable setting your expectations and explicitly saying what you want out of that relationship. And if you have an advisor that’s rushing through the conversation that just wants to check you off their to-do list, maybe hurry up those meetings—I’d say it’s definitely time to look for another advisor.

Hampton: So, audience, you heard that from our behavioral team what to do. So, thank you, Sam and Danielle, for providing insights on why people fire their financial advisors.

Labotka: Thanks for having us.

Lamas: Thank you.

Hampton: Thanks for tuning into Investing Insights. Thanks to Craft Editor & Cinematographer David Ettinger; Daryl Lannert, who is a video producer; and Senior Video Producer Jake Vankersen. Subscribe to Morningstar’s YouTube channel to see new videos from our team. And you can hear market trends and analyst insights from Morningstar on your Alexa devices. Say “Play Morningstar.”

I’m Ivanna Hampton, your host and a senior multimedia editor here at Morningstar. Take care.

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