The Psychology of Adviser Replacement

17 June 2024

At some point or other, all UK pension trustee boards are going to encounter a problem with one of their advisers that’s big enough to trigger a full market review.

ZEDRA’s Director of Trustee Executive Services, Manjinder Basi and Better Decisions Founder, Paul Richards share their combined insights on the psychology of replacing pension scheme advisers.

We’ve seen many approaches, but typically this will involve issuing and then wading through Requests for Proposal (RFPs) and then meeting with potential advisers, usually via some form of selection process. As part of this process, most boards will give their existing adviser an opportunity to demonstrate their expertise and commitment.

Unless there is an incontrovertible reason for change, the board will then face a choice. Stick with a relationship where there are issues which need to be addressed or pick a new firm with the possibility of a better outcome, but the uncertainty of change.

Anyone who has had to make that choice knows how hard it can be. Part of the reason it’s tough is that there are many overlapping quirks and biases in human behaviour to overcome. We’ve set out below some of the key issues for trustees to be aware of and how they can manage them, so that boards can make a confident and effective decision.

Status Quo Bias

At the very start of the process, it’s worth understanding that trustees may be fighting an uphill battle with human nature. This is because of a tendency known as the ‘status quo bias’. This reflects a predisposition to stick with what we already have, even when it might not be the best outcome for us. It’s a powerful driver of behaviour – we’ve both seen many surprising examples of where there have been substantial issues in a relationship, where good alternatives were available, but where the board stayed with an existing adviser.

The status quo bias is perfectly natural – the tendency to stick with what we’ve got has been carved into us by evolution. It’s driven by many things, in particular, the dislike for uncertainty and a preference for familiarity.

Familiarity and uncertainty

In our evolutionary history, uncertainty often signalled potential threats or dangers and avoiding uncertainty was likely to be advantageous for survival. This leads us towards a natural desire to seek control and predictability, which often comes with familiar situations, people and routines.

There is nothing wrong with this desire per se, but it can lead us to stay in relationships that aren’t working, whether that’s with a partner or an adviser. For some people, managing something that’s not working well for them, but not outright disastrous, can be preferable to the uncertainty and upheaval of something new.

These concerns are entirely natural and much of the time subconscious. A simple way to help manage this process is to get these issues out in the open by asking questions that draw out trustees’ individual and collective concerns.
Paul Richards
Founder, Better Decisions
Boards rarely change key advisers, so it’s natural that there is a degree of apprehension. Those with wider experience of the change process such as professional trustees and governance executives can give boards confidence that, with a properly run process, clarity can be achieved, uncertainty managed and that the switch can be handled effectively.
Manjinder Basi
Director of Trustee Executive Services , ZEDRA

Fear of Loss

In all of their activities, trustees want to create good outcomes for their members. The natural flipside of this is the desire to avoid losses. Again, this is entirely natural behaviour rooted in our evolutionary history. However, nature’s desire to keep us alive has given us some innate behavioural predispositions that psychologists have labelled as loss aversion.

In short, humans feel the pain of losses (or potential losses) more acutely than the pleasure of equivalent gains. This has some powerful implications when deciding whether to change an adviser. Put simply, when sacking an adviser (even one that’s not performing perfectly) we lose something, e.g. relationship history. When trustees look at a new adviser, they will be acutely aware that there is a risk that the new adviser may be no better than their current one. The question is, by how much?

Paul notes, “Researchers suggest that we generally want gains to be twice as large as potential losses. If this type of thinking extends into the selection of advisers, it creates a very high bar for change. A new adviser could be theoretically better in many dimensions, but the existing adviser is still retained. Like all biases, the starting point is being aware of it. An effective way to manage it is creating a process that helps trustees manage their inherent biases.”

Manjinder explains, “A well-designed process helps trustees to think clearly about these (and other) issues. In particular, boards find it helpful when there is clear criteria to compare the available choices. Secondly, a point that we make to all advisers is that they need to be both clear and bold about how they will help the trustees and what makes them different or unique. Most trustees will not see the subtle differences between advisers unless they are made clear and compelling. Lastly, it’s vital to use the experience in the room effectively. There are notable differences in how some firms operate and it’s vital for professional trustees and governance executives to help trustees understand how those differences might impact them and their members.”

Fear of regret

One of the most powerful emotions that can shape the decision to change a key adviser is regret – what if I get this wrong? Whilst we commonly think about regret in the context of judging things we have or haven’t done, ‘prospective regret’, the regret we might feel in the future, exerts a powerful influence on our choices.

Whilst regret is an unpleasant emotion, it has value – in short, it makes us stop and think about our choices rather than jumping in where angels fear to tread. Whilst this can be valuable, it can also steer our decision-making in an unhelpful way, towards the choice that we might regret least rather than the one that might be best for us.

This is summarised well in the phrase, ‘Nobody ever got fired for buying IBM’. In the early days of computing, IBM was seen as the safe choice. Its computers may have been more expensive, not as agile, and perhaps not the rational choice in many situations, but if things went wrong, the choice could be explained to stakeholders.

Paul explains, “Research suggests that to reduce the impact of regret, there are some simple things that boards can do. Two of the simplest interventions are having a clear, well-designed process and taking expert advice.”

Manjinder notes, “Our practical experience supports the research. It’s natural for boards to be able to want to justify their decisions to interested stakeholders, such as the sponsor. A good process not only improves the decision itself, but can also reduce feelings of regret by showing the work and rationale that went into the decision. Expert input helps in the same way.”

In conclusion

The decision to retain or replace an adviser brings several behavioural challenges. But with a little forethought and a good process, boards stand a much better chance of reaching a solution that will help them deliver good outcomes for their members.

How ZEDRA & Better Decisions can help

Whatever pension scheme or pension trustee board challenge you’re facing, our team of experts is here to support you.

ZEDRA’s highly qualified specialists guide the way for boards to meet their objectives, providing bespoke governance and secretariat services, either stand-alone or as part of professional trustee services.

Better Decisions support boards by providing workshops to help understand and improve decision-making.

Contact Manjinder Basi to find out how we can help you.

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