Client questions are a good thing

Advisor scandals like the alleged one perpetrated by Earl Jones have clients coming in with a battery of questions about their advisor’s credentials. This is an opportunity because the more a client understands what an advisor does, the more likely they will recognize the value of their services.

It seems every major consumer newspaper has published an article about what questions clients should ask their advisor. Generally speaking, most hard working, accredited advisors are more than happy to oblige.

In fact, arguably the most influential standards setting body for retail advisors, the Financial Planning Standards Council (FPSC), which administers the Certified Financial Planner designation, has released a media release entitled “What You Should Know Before Hiring A Planner.”

Included in the release are 10 questions every client should ask their advisor.

1. What are your qualifications? 2. What experience do you have? 3. What services do you offer? 4. What is your approach to financial planning? 5. Will you be the only person working with me? 6. How will I pay for your services? 7. How much do you typically charge? 8. Could anyone besides me benefit from your recommendations? 9. Are you regulated by any organization? 10. Can I have it in writing?

For the majority of advisors in Canada, answering these questions should be standard fare, says Cary List, president and CEO of the FPSC. He believes that clients need to better understand what their advisor does in order to avoid scandals, like the one perpetrated by Earl Jones in Quebec, that taint the entire Canadian advisor industry.

Having clear answers to all of these questions can quickly alleviate any lingering doubt a client, or prospective client, may have about an advisor.

“It’s interesting, we hear so much about the importance of financial literacy, it needs to start with the [client’s] own education. We recognize that not expect all consumers will become financial experts. One of the easy things consumers can do is to get a better understanding of credentials and licenses of their advisors. If they think they are working with a financial professional, this will ensure they are,” List says. “We even have some media referring to Earl Jones as a financial planner. He was a not a financial planner, he was never licensed as a financial planner. If consumers actually recognize how important it is for them to do their own due diligence, they can do a lot to protect themselves.”

Scott Plaskett, a CFP and the CEO of Toronto-based IRONSHIELD Financial Planning, welcomes the opportunity for a hard line of questioning. He says it gives him a chance to highlight the value he brings to clients, and to alleviate any concerns they may have about the security of their money.

“You’re never going to see an article about an advisor who has their client’s assets deposited into a dealer’s trust account. That happens every day but you never hear about that. The only way I know how to differentiate myself is through full disclosure to clients,” he says. “When they ask me the very simple question, “what’s there to protect me against another Earl Jones?” My response is usually quite lengthy. Let’s go through everything from start to finish so you can see how everything is put in place, and you can understand this is not an Earl Jones-type situation — it’s an organization that follows the rules and your going to be protected every step of the way.”

Plaskett says he’s been sitting down with a number of clients to explain how, with an advisor with a licensed mutual fund dealer, client funds are never deposited in his firm’s bank account. They are deposited with the investment company and custodians are used to make sure everybody’s funds are protected.

Under the mutual fund dealer association rules, an advisor can’t promote they are MFDA licensed, but they can disclose they have a license through their dealer when asked by a client. Plaskett says he’s had clients check his licensing through his dealer in the past, and he’s fine with that.

The same applies to credentials, such as the CFP designation. Clients can easily check the standing of that credential by going to www.fpsccanada.org/good_standing.

Compensation disclosure

If there’s a bit of a sticky point in the questions, the FPSC suggests it likely has to deal with compensation. Not all advisors are comfortable disclosing how they earn money. Indeed, there are some commentators in the media particularly who equate earning a commission on selecting product for a client as tantamount to a conflict of interest.

Holders of CFP designation must disclose how they are compensated by clients, List points out. The organization does not make any call on what form the compensation takes.

Advisors shouldn’t be defensive about taking a commission, if they can explain to clients how they are compensated and the value of advice that compensation entails, says advisor Stephanie Holmes-Winton, who runs the Halifax-based practice The Moneyfinder. She goes out of her way to disclose her product commissions to clients and the service that brings them. Holmes-Winton is life-licensed only and always discloses what type of services she’s licensed to provide.

“I categorize my clients as investment product clients, financial counselling clients or financial planning clients. The investment clients still get financial counselling and/or planning, no problem. The financial counselling or planning clients only pay a fee for advice and I never sell them a product. For those clients who pay me for the planning, I charge them based on time, I explain to them how much it costs me for that time,” she says. “Clients know how I’m compensated and how it’s related to the amount of money that is being deposited and the amount of work I’m going to do to show I’ve earned that compensation. That’s my big pet peeve, people in this industry who make lots of money but do not do very much work for their commission. ”

She adds, “[Commissions] are not passive income. People’s lifesavings should not be passive income. I do an awful lot of work for that commission.”

Plaskett has a similar take.

“The model I offer is a fee-based model where I’ll charge a client a fee for writing a financial plan. If I’m administering their investment than I’m actually saying my fee is going to be to be X-percent and it will be withdrawn on a monthly or quarterly basis,” he says. “With my clients it’s always full disclosure up front. They know the compensation; it’s going to be there on the statement. I go through how it shows up in the statement and why it shows up in the statement. That may be more full disclosure than they’ve been used too.”

(08/11/09)