4th Annual Dollars & Sense Survey: Beyond KYC

(October 11, 2005) Many critical details related to an advisor’s practice — providing adequate planning and service, creating a credible liability defence in case it is ever needed, and ultimately transitioning the business when the time comes to retire — all depend on good habits and high quality record keeping.

Advice for advisors about setting client expectations, meanwhile, is so often repeated that the platitude is quickly becoming industry cliché. And yet, despite this, many advisors are not keeping up with changing industry standards.

Of the advisors polled for our annual survey, only 45% said they used investment policy statements when profiling clients. And less than 60% said they used some form of written engagement or disclosure documentation, beyond the standard know-your-client (KYC) requirements.

Those who follow the industry say there are a couple of reasons for this. Financial advisors for the most part haven’t yet been hit by lawsuits similar to those in the property and casualty industry where plaintiffs won in cases where it was their word against the advisor’s and the advisor was not able to show any record of communication.

Secondly, Harold Geller, partner at Milton, Geller LLP in Ottawa, says professionalism among financial advisors is a relatively new concept. “It wasn’t that people didn’t provide a similar level of service, it’s that they [mutual fund advisors] weren’t claiming to be professionals. As a result, the court wasn’t holding them to professional standards. They were more like sales agents. We all know that’s not what the standard is anymore.”

“Clearly the acceptable standard for a relationship with a client includes an investment policy statement. There is a huge practical need for an advisor to define in plain English, and in a recorded form, the nature of his relationship or her relationship with his or her clients.”

Defining goals and expectations at the beginning of the relationship, he says, is a key part of the KYC process. Carolyn Fallis, director of professional and student affairs at the Financial Planners Standards Council (FPSC) agrees. “The engagement letter really clarifies the term and scope of the advisor client relationship for both parties,” she says. “If there was ever an event where there was a misunderstanding between a client and their financial planner, the engagement letter can always be referred to.”

In the event the relationship ever sours, Geller points out that an advisor’s defence is directly related to good record keeping. “It’s almost impossible to defend the KYC step and the analysis step if you don’t have records,” he says. “Also essential is to get the client to review and sign off on the statement. Don’t simply send it to them.”

Even if no misunderstandings ever arise, and there is never any need to show a history of good record keeping, detailed notes can make the difference between good and bad service.

“For any professional, record keeping is really the only way in which they can provide a high level of service,” says Geller. “You need to be able to refresh your mind about the specifics of any given client, because you deal with so many individuals. It also provides the necessarily information if for any reason somebody else needs to take over your files — for example, if you’re ill for a couple of weeks, or on vacation or if your secretary or administrative assistant needs to answer a question. If you hold the information in your brain primarily it’s not available for your team to work with.”

Things are changing however. Where many financial sales people would at one time have drawn a blank when asked about providing an IP statement or letter of engagement, it’s safe to say most financial professionals today are at least aware of the concept behind those documents.

Many organizations, like Advocis and FSPC, have created their own codes of conduct as well as templates for advisors. There is also a chance risk managers at errors and omissions insurance providers will catch on and make proper documentation a requirement of coverage.

“Most professions sanction people for failing to adhere to basic standards,” says Geller. “Sooner or later the financial advisory industry will do the same thing if they wish to protect members of the public and the reputation of the business itself.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(10/11/05)