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When I was a financial advisor, I found the process of trying to convert prospects into clients extremely frustrating.

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I’ve since learned that the difficulty advisors face when trying to persuade clients to abandon their long-trusted way of investing is rooted in a well-known psychological bias. Understanding this bias is the key to gaining more assets.

The perception of irrational conduct

At the time, I thought all I had to do was marshal the evidence. Since that can be a bit dry, I sprinkled my pitch with references to practices that influenced brokers’ recommendations, like trailer fees and kickbacks from mutual funds. I closed with Standard and Poor’s SPIVA data, which perennially shows how few actively managed funds outperform their benchmarks and the daunting odds of repeating outperformance, especially over the long term.

But more often than not, I was unsuccessful.

The impact of the endowment effect

In an interesting blog post, Andrew Hallam explained this anomaly. It turns out what looks like irrational behavior has a logical underpinning.

Hallam explained the powerful impact of the “endowment effect.” It’s based on a paper published in 1991 by Daniel Kahneman, Richard Thaler and Jack Knetsch. The authors found people often demand much more to give up an object than they would be willing to pay to acquire it. Once we own something, we tend to overvalue it.

The endowment effect causes investors to eschew data and cling to discredited notions of investing because of their misplaced faith in their broker and their mutual funds and stocks.

Deja vu

Every advisor I meet follows a process to convert prospects into clients. Often, the process differs within the same firm. It can be unique to each advisor.

When I ask advisors to explain their process to me, they typically tell me they rely on a “script.” Some actually read from the script during the initial meeting with prospects. Others have memorized the script.

Further inquiry reveals the script is a way to determine if the prospect is a “fit” for the advisory firm. After a few preliminary questions, the advisor delves into the goals and personal financial details of the prospect.

Since all of my clients are evidence-based advisors, I formulated this question that I thought would be compelling: What’s the peer-reviewed evidence supporting this process?

No one has shown me any evidence for using a script or for any other aspect of his or her conversion process. Some have told me that their process “works for them,” which is a valid point.

By Dan Solin, read the full article here.

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