What keeps a financial advisor or planner awake at night? Here’s one potential scenario: when a client makes a poor planning decision and then makes a complaint against you.
At an ethics session on Wednesday at FP Canada’s virtual financial planning conference, Ellen Bessner, a partner with Babin Bessner Spry LLP in Toronto, outlined red flags that can lead to bad client decisions and how advisors and planners can mitigate them.
Among the red flags discussed was information gaps — the client withholds information and the advisor/planner fails to encourage them to share it, perhaps to avoid losing the client. And without full information, an adequate financial plan can’t be created.
To avoid this risk, Bessner suggested planners fulfil their obligation to get all the information they need. (Refer to FP Canada Standards of Professional Responsibility rules 21 and 22, and practice standards 3 and 4.)
To get clients to talk, express curiosity about them. Ask “big fat questions,” Bessner suggested (e.g., What is the key to your success in business?), and be silent after you ask a question so the client has time to think. As the client responds, you can take notes, she said.
Another red flag is when clients have unreasonable expectations, and advisors fail to manage those expectations. At the time of engagement, advisors should be clear about what they can and can’t deliver, Bessner said. And she suggested advisors put that engagement in writing, so that clients aren’t surprised later.
She also warned advisors to be careful about making claims in their marketing materials: in enforcement cases, judges will consider those materials, she said.
Other risks to mitigate involve clients who exhibit incapacity or a lack of basic knowledge, or who are unengaged.
Don’t take comfort when clients don’t ask questions, Bessner said: “Questions … give you an indication as to whether or not [clients] are engaged and following along. It’s up to you as a planner to engage the client.”
Engaged clients are more likely to tell you about personal changes that could require updates to their financial plans, she said.
To motivate engagement, she suggested advisors help clients understand their own roles in the client-advisor relationship (e.g., share personal information, as discussed above) as well as include those details in the written terms of engagement.
Regarding incapacity, “you should know where your client’s power of attorney [document] is and, preferably, you should also know who the powers of attorney are,” Bessner said.
When clients lack knowledge, she suggested advisors/planners spend more time with them so they can sign off on the plan with adequate understanding.
Another red flag: The client says their risk tolerance is higher than it is (or higher than they can afford) because they want higher returns.
Advisors can’t let clients dictate risk in this way, Bessner said. “If the clients can’t afford to lose money and indeed they end up losing money, that is going to come back to haunt you,” she said.
Rather, per the client-focused reforms, advisors must assess risk profile, which should reflect the lower of risk tolerance and risk capacity.
The worst red flag is when clients don’t trust you; for example, they second-guess you. You shouldn’t accept a mandate from such a client, Bessner said.
To help mitigate red flags from the outset of the client-advisor relationship, she suggested you set the stage with clients by being organized, establishing an agenda, setting enough time for meetings and communicating with clear language, which will allow the client to understand the plan and what to do to achieve it.
Communication includes proper documentation. “At the end of the day, you will be judged by the regulator and by a judge in a courtroom based on documentation,” Besser said, and she referenced her five Cs of documentation: notes should be correct, complete, current, consistent and contemporaneous.
A warning regarding joint engagement: If documentation doesn’t include information received from both clients, you’re at risk, Bessner said, so override the client who reassures you that the spouse doesn’t need to attend meetings. (Another tip: Sometimes, the louder person in a joint engagement is the less knowledgeable one, Bessner said.)
She also urged financial professionals to continually manage client expectations and update clients on the progress of their plans: “Remind them that there will be years that will be on course and years that will be off course.”
Despite your efforts, if a client wants to make a poor decision, let them know it won’t happen on your watch.
Referencing FP Canada rules 14, 15, 16 and 23, Bessner said: “If you believe that the strategy the client wants to employ in their plan is not in their interest, you have to terminate the relationship.”