Rules of engagement

“It’s getting almost to the point that [regulation] is too much, but I do understand why, and that there are a few bad apples. This is definitely one of the biggest challenges moving forward,” says an advisor in Alberta who works through Winnipeg-based Great-West Life Assurance Co.’s Wealth and Insurance Solutions Enterprise (WISE) network.

When it comes to adequate client documentation, many advisors aren’t used to the time commitment, says Eric Wachtel, co-chair of regulatory and legislative issues at the Canadian Association of Independent Life Brokerage Agencies (CAILBA) and national chief compliance officer at Mississauga, Ont.-based IDC Worldsource Insurance Network Inc. (IDC WIN).

“When advisors feel like they’re behind, or feel challenged or frustrated, it’s because they still think that compliance takes zero time and zero money. The reality is that, in the life insurance industry, it will now take you a couple of hours a week,” Wachtel says.

The Report Card found that a higher percentage of surveyed advisors are using engagement letters this year.

Simply put, engagement letters are commonly considered to be letters of understanding between clients and advisors, and they outline the business relationship between the two parties in order to set parameters and manage expectations, Wachtel says.

The letters function as part of the seven-step process for compliance best practices referenced in The Approach: Serving the Client through Needs-Based Sales Practices, a document from the Canadian Life and Health Insurance Association Inc. The practices were first published collaboratively by multiple associations in 2006.

To track the use of engagement letters, Investment Executive first introduced questions about advisors’ use of and “support for engagement letters” in the 2013 Report Card. That year, 57.3% of insurance advisors had their clients sign engagement letters, while reporting that 72.6% of clients on average had done so. Six years later, those metrics have risen, with nearly 65% of insurance advisors saying they sign engagement letters with clients. The average percentage of clients who had signed one was 80.1%.

The 2019 research suggests that engagement letters are more commonly used by insurance advisors working through managing general agencies (MGAs) than by those with dedicated sales agencies. The collective percentage of advisors who said they use them at the MGAs exceeded 80%, compared to less than 50% for dedicated sales agents.

The findings are less conclusive when looking at the average percentage of clients with these letters at each firm. Toronto-based PPI Management Inc., an MGA, came out on top at 92.1% of advisors’ clients, but an MGA also came last: Woodbridge, Ont.-based Hub Financial Inc. at 67.3%.

Many of those surveyed who said they use the letters mentioned it’s “common sense” to provide the documentation, especially when financial planning is involved.

Still, some advisors are resistant to using engagement letters with all of their clients, reserving them for high net-worth clients for whom they’re managing more money.

“I usually save [the signing of engagement letters] for bigger clients. If clients want a service agreement or something, I don’t do that a lot. A lot of my clients are small potatoes, so it doesn’t matter as much,” says an advisor in Atlantic Canada with Waterloo, Ont.-based Sun Life Financial Distributors (Canada) Inc.

Another likely reason for this resistance is engagement letters can be considered enforceable contracts. “Either party can pursue actions against the other if elements that are agreed upon are not met or delivered on,” says Earleen Moulton, co-chair of regulatory and legislative issues at CAILBA, and vice president of compliance at Mississauga, Ont.-based BridgeForce Financial Group Inc.

As one Sun Life advisor in Ontario says, “I don’t like to make a client feel like they are contractually obligated to our relationship.”

Nonetheless, regulators in all Canadian jurisdictions expect to see some type of engagement document between the client or prospect and their advisor. “[Regulators] see it can be helpful in eliminating a lot of complaints or concerns that might arise when folks aren’t on the same page about expectations,” Moulton says.

When looking at agency support, there was a satisfaction gap (the amount by which a category’s importance exceeds its performance). Respondents across all agencies rated “support in creating the engagement letter” (not in main chart) an 8.3 on average for performance, while the category’s importance rating was much higher at 9.0.

IDC WIN stood above the rest, with a performance rating of 9.6.

“IDC initiated everything for us and prepared us to provide our clients with everything they need,” says an advisor in Ontario. (Kitchener, Ont.-based Financial Horizons Inc., PPI and Mississauga, Ont.-based RBC Life Insurance Co. also received high performance scores of 9.3, 9.2 and 9.1, respectively.)

On the other end of the spectrum was London, Ont.-based Freedom 55 Financial, with a rating of 6.9. Multiple advisors from the agency said there was general disclosure support, but not specific engagement letter support.

It’s not uncommon for the industry and advisors to confuse engagement documentation with other disclosure documentation, Wachtel says. He suggests advisors begin a client relationship with general disclosure about themselves, how they’re paid, which companies they distribute products for and how they handle conflicts of interest.

The engagement letter — which can be tailored for each client from a template — should then follow. It offers “more detail on how the advisor will work with the client” and can result in an investor “who feels informed and heard,” he says.