Now that your clients have completed a standard know-your-client questionnaire, you have fulfilled your KYC obligations, right?
Wrong.
“You need to know a lot more about the client than what the KYC questionnaire provides,” says Vipool Desai, president and co-founder of Ara Compliance Support in Toronto. “The KYC is simply a regulatory requirement; it’s a check-the-box system that’s been around since the 1970s.”
But it does not meet the goals of the client discovery process.
“To do the KYC justice, you must at least go though a rudimentary financial plan with the client,” says Dan Richards, president of Toronto-based Clientinsights. The KYC should not be used to divert future blame, he adds, but rather to “ensure that advisor recommendations are aligned with client needs.”
Here are some ways to look beyond the KYC questionnaire:
> Explore risk tolerance
The biggest pitfall of the KYC is that it does not adequately assess a client’s risk tolerance, says Richards. Checking off a “low,” “medium” or “high” risk-tolerance box does not provide a true picture of how much risk is appropriate for a given client.
“You need to get a better understanding of risk tolerance,” agrees Desai.
The underlying question, Richards says, should be: “How much risk should a client take?” Not: “How much risk can a client take?”
> Use diligent client discovery
You must have an open discussion with your client as part of the client discovery process, Richards says. This process should provide you with information about the client’s financial position, tax situation and other personal details and risks that might affect their financial objectives.
Says Richards: “The discussion should be beneficial to both the advisor and the client.”
> Employ disciplined information gathering
You must establish a focused process for gathering information about clients. For instance, you may need to verify certain information by looking at income tax returns, bank statements and other asset/liability documentation.
If you have no cause to doubt what your client tells you, Desai says, use your professional judgment to accept the information or, alternatively, verify any perceived inconsistencies.
> Educate your clients
Do not assume that your client understands the investments or strategies you might recommend. You may have to explain concepts such as diversification, long- or short-term time horizons, risk and other financial planning and investment terms you might mention. Avoid jargon and explain the pros and cons of the strategies you describe.
> Make it a continuing part of the relationship
“KYC is absolutely an ongoing process,” says Richards.
Keep notes on all client conversations to determine any changes in goals.
You should also inquire into your clients’ objectives and personal circumstances at least once a year to determine whether there are any changes.
IE