ReInventing the client relationship

“It may be helpful to view the conversation as similar to presenting your case to your boss if asking for a raise,” says Sandra Kegie, a compliance consultant and executive director of the Federation of Mutual Fund Dealers in Toronto. “Advisors who have a good relationship with clients shouldn’t be afraid to tell them: ‘I earn a living and this is how.’ It’s an opportunity to articulate your value and deepen the relationship, and should be viewed positively.”

To prepare for these conversations dealing with enhanced disclosure about investment costs and performance, advisors should try to anticipate the types of questions that clients may ask and the potential for adverse reactions.

Part of those preparations should include a detailed and confident explanation of the value and services advisors provide. The goal is to present themselves as professionals, similar to accountants and lawyers, who are legitimately compensated for their services, qualifications and skills.

“If your service is of value, clients understand why it entails a fee,” says Tina Tehranchian, certified financial planner and branch manager for Assante Capital Management Ltd. in Richmond Hill, Ont. “As long as your fees are competitive and you provide value, it’s not a problem.”

Among the services an advisor can highlight specifically for clients are:

– development of a personalized, comprehensive financial plan that covers major financial goals, such as retirement and education savings;

– constant monitoring of the plan, including investment performance and fund portfolio manager changes, qualitative and quantitative analysis, and adjusting and rebalancing of holdings, if necessary;

– expertise in insurance strategies or investment management, if applicable;

– securities research and monitoring of economic factors, such as inflation, interest rates and political changes, and how these may affect the client;

– risk management and strategies to weather volatility;

– record-keeping, compliance with regulatory standards, updating technology and providing regular account statements; and, possibly,

– tax planning.

“If the client balks, the conversation is over,” says Julian Wise, president of Wise Advisory Group Inc. in Oakville, Ont. “If clients don’t perceive they are getting enormous value for what they pay, the yellow light is going to turn red. The key, for those who give value, is to define and illuminate that value.”

One of the benefits of CRM2 is that all advisors are required to make the same disclosures, in terms of fees and performance, which leads to an apples-to-apples comparison if clients are shopping around and making advisor comparisons. Disclosure and the accompanying conversations will provide greater clarity on a topic that previously could be cloudy and confusing for clients.

Jim Rogers, retired founder of Rogers Group Financial Advisors Ltd. in Vancouver and now an industry speaker and practice-management consultant, suggests that advisors put in writing the services they offer, organizing them in clearly articulated points in a personalized letter on company letterhead, which then is dated and signed by the advisor. The letter should also include information about the advisor’s experience and professional credentials.

“Provide a comprehensive disclosure document that gives the client information even before the various CRM deadlines,” says Rogers. “That would be a smart business decision and would really serve to set the advisor apart from the competition. Every client has the right to know the services they will be receiving – which often vary from client to client – and what they will pay for those services.”

There is research available from the Investment Funds Institute of Canada that shows that clients with advisors do better in accumulating financial wealth than investors without, and Rogers suggests having these numbers at the ready. In addition, various mutual fund companies have prepared materials to help advisors with these challenging communications.

For example, through a project called Value Dialogue, Toronto-based fund-management firm Bridgehouse Asset Managers (a division of San Diego- based Brandes Investment Partners LP) is offering written materials and a series of four instructive videos by Nick Murray, renowned American advisor coach and author of the investing book Simple Wealth, Inevitable Wealth, to help advisors prepare for CRM2-related conversations. The videos are designed to help clients understand the role of advisors, and how working with an advisor is beneficial to clients’ long-term wealth.

“The videos are motivational in helping to explain the value that a professional advisor delivers,” says Carol Lynde, president and chief operating officer of Bridgehouse. “They are easily shared with clients, and advisors can also watch them for specific ideas on how to have the conversation with clients.”

The videos are accessible from the Bridgehouse website, and advisors can send links to their clients directly and/or add the link to their own websites. In addition, Bridgehouse has developed a customized, Excel-based tool called Value Spectrum that assists advisors in describing their qualifications and the services they offer to each client, as well as the fees charged (both advisory and product fees). Once completed, this Excel document can be printed and given to a client.

When discussing portfolio returns with clients, it can be helpful for advisors to provide backup materials as an aid to the conversation.

An example is a spreadsheet showing the performance of the client’s portfolio over a variety of time periods and how that compares to performance as shown by market benchmarks during the same period. Assuming the comparison is positive, the numbers can demonstrate concrete financial value for the fees paid by the client.

“There is a concern that clients will see costs that they never realized they were paying before,” says Barbara Amsden, managing director of the Investment Industry Association of Canada in Toronto. “A key point that can be brought up in the conversation is that the returns [that clients] have been shown in the past have always been after fees, and that these are not new costs and will not change the client’s net return.”

It’s important to speak to clients in friendly language, and to explain carefully any terms clients don’t understand. There is potential for confusion, Amsden says, given the choice of terms to describe the various costs associated with investing, including front- and rear-end load, trailer fee, management fee, commission, spread and markup.

It may be less confusing to a client to use just one or two of these words consistently to describe the costs in various situations, such as “commission.”

“Advisors must emphasize the value they bring to the table, and not just once,” concludes Tehranchian. “Clients tend to forget some of the details, and it’s good to continually remind them in conversations and in meetings.”

Hot spots ahead

As the new CRM2 rules come into effect in stages, there are some potential sinkholes on the path to clarity. Advisors may need to turn to their individual firms for guidance or to their regulator. Below are some topics on which advisors need to tread carefully:

DSC disclosure. Advisors must bring clients’ attention to the deferred sales charges (DSC) for the specific funds the clients hold; at the time of purchase, this will be the redemption fee schedule. Until a client redeems, it is not possible to calculate the actual dollar amount. When a client redeems, the advisor must disclose the percentage and actual dollar amount of the DSC before executing the trade.

Advisors receive a commission of about 5% paid by the mutual fund sponsor at the time of the sale when they sell DSC funds. Although clients do not pay this fee and it does not affect the value of the investment, it is a commission paid to the advisor. How this should be disclosed to clients is still under discussion, and advisors should take direction from their firms.

Off-book accounts. A new obligation will be reporting on performance of and fees for off-book positions – assets not held with the dealer – often where the dealer receives a fee. These could include funds held in client name in an in-house account with a fund-management firm, or in registered disability savings plans or registered education savings plans held outside the advisor’s firm. One of the challenges will be obtaining the necessary data from the custodian holding the off-book position. Work is underway by regulators to ensure the required information is provided to dealers so they can report it to clients.

Calculating rates of return. Advisors will be required to use money-weighted rates of return rather than time-weighted rates of return to show how an investment portfolio actually performed. Money-weighted returns take into account the various purchases and redemptions during the year, and adjust the return according to how much money was invested for how long. Time-weighted returns measure the performance of an index or a managed portfolio during a specific time frame, and do not take into account the individual’s purchase and sale decisions. While advocates say that a money-weighted rate of return will provide a more accurate picture of how well a client’s account is doing, there is concern about confusing clients, given that benchmarks, which must now also be explained, use the time-weighted method. It will be up to dealers and advisors to educate investors about using these different measures to assess the performance of their portfolios.

Account transfers. Reporting information for accounts transferred from another firm may be challenging. Most account transfers are made “in kind.” Industry best practice is for the dealer receiving the new account to ask the client to obtain an estimate of the transfer charges from the originating firm, before executing the transfer. However, the rules are still unclear on how to assess the original value of accounts that are transferred. Investments could be valued at the time of transfer into the new firm or their value could be based on the cost of acquiring the securities at the originating firm. The most accessible information is likely to be the market value at the time of transfer. It’s recommended that advisors check with their firm for guidance.

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