Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Before I became a consultant and coach to a number of financial planning firms, I used to run my own investment advisory firm. I believe the advice I give today is far superior to the actions I took when I managed my own firm. Now I understand why.
Decisions confronting advisors
This is, undoubtedly, a challenging time to be an investment advisor. New technology is changing the business and significantly reducing costs. Ric Edelman, chairman and CEO of Edelman Financial Services, recently predicted that robo-advisors will put most of the current crop of investment advisers “out of business.”
Whether or not that dire outlook proves true, it’s very clear that the landscape is changing. Pure "investment advice" is becoming more of a commodity. As such, much of the work advisors do can be relegated to algorithms and implemented online.
Compounding the problem, the costs of increased regulation make it difficult for smaller firms to maintain profitability. This combination of price competition and higher expenses is putting traditional advisory firms under intense pressure.
According to Michael Kitces, the average profit margin of a “typical” advisory firm is 22%. The looming possibility of a market correction could decrease profits at advisory firms by as much as 25%. Kitces believes that "the greatest risk for most firms may be that their profit margins are still too small to withstand the next bear market when it comes along."
Given all these issues, advisory firms are confronted with many decisions that will impact the future of their business. As a result, it’s increasingly important to maximize the possibility of making the right choice.
The impact of “self-distancing”
A fascinating study by Igor Grossmann from the University of Waterloo and Ethan Kross from the University of Michigan examined a bias we have when it comes to making decisions that affect ourselves. The bias is called "Solomon's Paradox," after the wise biblical king who proved inept at making personal decisions.
In this study, participants hypothesized an event in which either their partner or the partner of a friend had engaged in an adulterous relationship. They were then asked to answer a series of questions about each scenario.
The results were surprising. The study measured various dimensions of wise reasoning, including recognizing the limits of the participants’ expertise, efforts to find a compromise, the ability to consider the point of view of others and the different ways in which the scenario could unfold.
In all variations, participants gave wiser advice when they thought that it was being given to third parties than when the advice was applied to their own, personal situation.
In an interesting twist, the study found the result was the same with both younger adults (ages 20–40) and older adults (age 60–80). Previously, it was thought that older adults made better decisions about themselves because of their greater accumulated wisdom and experience.
Mr. Grossmann summarized the conclusion of the study as follows: “We are the first to demonstrate that there is a simple way to eliminate this bias in reasoning by talking about ourselves in the third person and using our name when reflecting on a relationship conflict. When we employ this strategy, we are more likely to think wisely about an issue.”
The takeaway
When making important choices relating to both your personal and business life (including those relating to the future direction of your advisory business), you should distance yourself from the issues at hand and envision yourself making recommendations to a third party. This will improve the quality of your decision-making process. If you find this exercise too difficult, you might benefit from using a qualified consultant.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read. He limits his sales coaching practice to advisory firms that advocate evidence-based investing.
Read more articles by Daniel Solin
