The Price of Friendship

Following is a narrative that discusses the difficulty of firing an advisor who is also a friend.

Rick and Phil had been friends for more than 30 years. It was a tradition that they would have lunch to celebrate the New Year. As Rick and Phil shared the same stockbroker, Stuart, a mutual longtime friend, the conversation inevitably turned to investing.

Rick: How did you do last year?

Phil: I did OK, I guess.

Rick: No; specifically, I mean what rate of return did you earn?

Phil: I have no idea.

Rick: And what has been your rate of return over the last 10 years?

Phil: I have no idea.

Rick: I never knew either until I finally decided to calculate the return on my investments. And I can tell you I was unhappy with what I found. I think the bull market made us all complacent. We enjoyed returns that were pretty good, certainly from a historical perspective. I learned, however, that the stocks and mutual funds I owned provided returns well below that of the overall market. So while I did OK, I should have done much better. And that was on a pretax basis. When I went back and looked at my 1099s, and took into account the taxes I paid each year, I learned while I was taking all the risks, our broker and good friend Stuart was the one getting wealthy. The losses of the last few years caused me to take a serious look at the results. I have decided to seek another advisor. I asked co-workers and friends who had experienced better results and were happy with their financial advisor for recommendations. I already have several interviews set up.

Phil: You mean you are actually going to fire Stuart?

Rick: Yes.

Phil: How can you do that? You have been friends for a long time.

Rick: Yes, I know it will be tough. But the way I look at it is this: If Stuart is truly my friend, he should want what is best for me. If his friendship is based solely on his being my advisor, he really isn’t my friend anyway. If the price of friendship — all the commissions and fees I have paid to his firm — is putting my ability to retire and live the lifestyle I desire at risk, the price is too high.

Phil: I hear you, but I just don’t think I could do it.

Golf More, Worry Less

The following year, Rick and Phil got together again. Once again the conversation turned to investing. Rick told Phil he had hired a financial advisory firm with which he was pleased. He pointed out there were two reasons he was pleased with his decision to change advisors.

The first reason Rick was pleased with his decision was that for the first time in his life he actually had a financial plan in place. The plan was tailored to his unique situation, and it was also integrated into a well-developed estate, tax and risk management plan.

Rick explained that with the change in investment advisors also came a change in strategy that had improved the quality of his life. The advisory firm used a strategy that Rick explained was based on the belief that while stock-picking and market-timing efforts provided the possibility of market-beating results, the odds of success were so low it was just not prudent to try. Rick explained that the firm had showed him the historical evidence to support this claim. And his own experience with Stuart told him this was true. Because of the historical evidence, the advisory firm adopted a strategy of investing in mutual funds that basically bought all the stocks in a particular asset class and held them. And they built a globally diversified portfolio so that not all of his eggs were in one basket. This significantly reduced the odds he would ever again experience the kinds of swings in value he had once experienced and had caused him to lose sleep — and a small fortune.

The second reason Rick was pleased with his decision was since he had adopted this passive investment strategy he was no longer paying attention to the stock market. This meant he was no longer worrying about it either. This allowed him to pay more attention both to his golf game and his wife. As a result, he had being doing much better with both of them.

There Are No Free Tickets

Phil asked Rick how it had gone when he told Stuart he was no longer going to be his investment advisor.

Rick: Stuart was very upset. In fact, we are no longer friends, and we no longer talk to each other. I learned our supposed friendship was only a result of my business relationship with him — a relationship that helped pay for his lifestyle. Phil, how did you do last year?

Phil: Talking about it is painful. I was still invested mostly in technology and other growth stocks and funds that were invested in those same types of stocks.

Rick: So why don’t you do something about the situation?

Phil: I would find it really hard to fire Stuart. He is a longtime friend. And besides, he is also the coach of my daughter’s soccer team.

Rick: I just told you about how “friendships” can be based solely on a business relationship that benefits only one party. And there are plenty of other good soccer teams in the area. Just think how much your friendship cost you in returns last year alone.

Phil: But Stuart also takes me to some of the best sporting events. I have been to the Super Bowl and the Final Four with him.

Rick: Do you really think he took you out of friendship? Or was it because you have been providing him and his firm with a good income all these years? Just think how much those tickets are actually costing you. I have learned there are no free tickets to sporting events. By the way, I brought with me a book that my advisor gave me, The Only Guide to a Winning Investment Strategy You’ll Ever Need. It explains why the strategy you are following is called the loser’s game. It also explains why passive investing is the winner’s game. It also shows you how to implement a passive strategy. Why don’t you take it home and read it? You can return it whenever you have finished. My advisor’s name and contact information is in the book in case you are interested.

Phil: Thanks for the book. I promise to read it.

Phil did read the book. However, while it made lots of sense to him, he still did nothing. It was just too hard to fire a friend, and he was worried about his daughter’s position on the soccer team. And 2003 was turning out to be a much better year for the market. In addition, he did enjoy those tickets to the Super Bowl.

Spousal Support

January 2004 rolled around and it was time for their annual lunch. This time the wives joined. And when the conversation turned to investing, Rick asked Phil if he had made any decision about his advisor. Phil’s wife, Phyllis, asked Rick to explain more about his approach — which he proceeded to do, emphasizing the part about having a well-developed plan for the first time. Rick’s wife added that she was much happier too. Rick was no longer spending time watching CNBC or reading financial publications.

When they got home, Phyllis asked Phil about their investments and the difference between the performance of Rick’s and their portfolio. It was the first time she had ever asked him about their investments. Despite the important role investments played in her ability to retire to a desired lifestyle, because the stock market did not interest her, she had never before paid attention to their investments. Phil went over the entire history. When he had finished, Phyllis told Phil she was calling Rick’s advisor to set up a meeting and she was going to attend.

The next week the meeting was held, and Phil and Phyllis were both impressed with the logic of the investment strategy and the competence of the advisor. They shook hands with the advisor and told him they would get back to him shortly. When they got home, Phyllis told Phil she thought they should immediately change advisors. Phil agreed that he was impressed but he just could not get himself to face Stuart and tell him he was no longer going to be their advisor.

Phyllis: What are you afraid of? If he is truly your friend, which I doubt based on Rick’s experience, he will still be your friend. If he ceases to be your friend, he never was in the first place.

Phil: But what about our daughter? Stuart is the coach of her team. He might take it out on her.

Phyllis: There are plenty of other good soccer teams. And given our investment results, it has cost us a small fortune to have her play on that team, if that was the price. And, by the way, if you are worried about losing access to those free tickets to those sporting events, forget about it. Either you can watch them on television, or you will be able to buy them for a lot less than what his advice has cost us in lost opportunity. So if you cannot fire Stuart, I will.

Phil: Thanks for the offer. You can call him tomorrow.

Moral of the Tale

All too often, investors continue to work with advisors solely because it is difficult to fire an advisor who is also a friend, and even more difficult to fire one that is a relative. While this story is hypothetical, we see these struggles all-too-often. The moral of this tale is that you are best served by evaluating the true cost of those relationships, keeping in mind that a true friend wants what is best for you, and does not put their self-interest above your own. A secondary moral is that there are no free tickets.

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2013, The BAM ALLIANCE

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