Letters of engagement are im-portant tools that can help you build deeper, long-lasting relationships with your clients. These documents clarify goals and minimize the chances of misunderstandings. And while some financial advisors swear by them as an essential client communication and compliance tool, many advisors still think of these essential documents as just more paperwork.

But, as with almost everything else in life and business, the way you approach letters of engagement determines how useful they will be.

Using a letter of engagement is among the six steps outlined in the financial planning practice standards and also a requirement for advisors holding the certified financial planner designation. The letter is usually crafted individually by advisors.

In some provinces, such as Ontario, certain sections of the letter of engagement, such as those dealing with compensation and conflict of interest, must be formally disclosed in a legal document provided by dealers, insurance agencies, brokers and professional associations. This document is often written in dense, legal language.

The letter of engagement, says Jim Ruta, a business coach and president of Expert-institute.com in Burlington, Ont., allows you to explain the content of those difficult legal documents in accessible terms. Your letter of engagement also is an opportunity to give your client a better understanding of the agreement you are making together and to make your client feel more comfortable about it.

Says Ruta: “It’s like your disclosure letter requires a covering letter.”

Giving your clients a clear, easy-to-understand explanation of your services both enhances your credibility with your clients and functions as a prospecting tool. Prospective clients can decide more easily whether they would like to do business with you if they understand your services clearly. If, say, the prospect is not a good fit, Ruta suggests, he or she can decide not to do business with you early in the process without wasting time and creating hard feelings: “It’s an honest, straightforward way of doing business.”

Similarly, a well-executed letter of engagement can be a good marketing tool, says George Hartman, president and CEO of Market Logics Inc in Toronto. In defining your business clearly, you are distinguishing yourself from other, competitive advisors. “It differentiates you,” he says, “because there are many advisors who don’t provide them.”

So, regardless of the designations you hold or your area of specialization, approach letters of engagement as a tool that presents an opportunity to have an honest, in-depth conversation with your clients. The document provides a chance to discuss your services and both parties’ expectations about the business relationship.

John Page, president of Markham, Ont.-based Wealth Enhancement Academy Inc. , who spoke about letters of engagement at the recent Financial Planning Week event in Toronto, says it’s the conversations you have with your clients before you sign or read out the letter of engagement that will make it successful as a sales tool.

Here are some of the conversations and points you can cover with clients while making those letters a successful and standard part of your business:@page_break@> What’s Important?

Start the process of introducing your letter of engagement with a conversation about the client’s values. The answers may surprise you. Says Page: “It’s hardly ever money.”

Establishing whether issues such as family time are most important to your client will help you avoid misunderstandings when creating both the letter of engagement and a financial plan. Disregarding or forgoing this conversation can cause a client to lose trust in you and withdraw his or her business.

> Consider The Client’s Lifestyle.

Get a clear picture of your client’s expectations, which will eventually be included in the letter of engagement, by discussing his or her lifestyle goals.

Says Page: “[Get the client to] define really what sort of lifestyle they’d like to have now and also in the future.”

> What Do They Have Now?

Before completing a letter of engagement, look at the financial resources the client has now and how that will work with his or her values.

If, for example, a client is really family-oriented, you can’t expect them to work more hours to earn more money, Page says. You must work with what they have. “You have to build their values into the plan,” he says, “in order for them really to buy into it.”

> Consider Potential Pitfalls.

The letter of engagement is an opportunity to lessen financial surprises down the road, so use it to discuss potential pitfalls with clients. For example, Page says, a client whose employment is unreliable faces a potential pitfall that must be taken into account. “We just can’t wait and see what’s going to happen,” Page says, “so you have to have a backup plan.”

> Use Examples Of Successful Plans.

Gain your prospective client’s trust and confidence by showing concrete examples of plans you have used successfully with other clients, who began in situations similar to that of the prospect and have succeeded in reaching their goals. Examples of real (yet anonymous) clients may reassure the prospect.

> Focus On Expectations.

Make sure your client understands that the letter is meant to outline expectations -— for everyone. Explain that the client has obligations to keep you informed on a regular basis of any changes in his or her circumstances, Hartman recommends: “It’s unfair for the advisor to commit to providing ongoing service at a certain level if the client is not keeping [the advisor] informed.”

> Review And Update.

Don’t forget that the letter of engagement has to be kept up to date, says Page: “Review it once a year in terms of any information or adjustments that we need to make.”

For longtime clients who may not have a letter of engagement, introduce one during an annual review, he adds: “Explain that you are improving your systems.” IE