How to run an airtight practice that protects clients and yourself

Regulatory guidance continues to evolve and new technologies that boast automation are continually available, yet the basics of running a wealth business remain the same, according to an expert panel at CFA Society Toronto’s event on Wednesday about how advisors can run a practice that protects themselves and clients.

Alongside scrupulously documenting all client interactions and meetings, advisors must dig into the details during know-your-client (KYC) and risk tolerance discovery processes, the panel suggested.

Complaints from registrants about their clients’ resistance to longer KYC and investment policy paperwork are common, said Richard Roskies, senior legal council with Toronto-based AUM Law (part of Borden Ladner Gervais LLP’s Beyond BLG services).

But, he added, “What registrants can miss is explaining to the client why [the paperwork and information collection] benefits them. It’s a pain, I get it, but I’m on the other side and see what happens when the paperwork isn’t properly filled out and when you’re not doing your job.”

Carol Montgomery, regional manager of governance with RBC PH&N Investment Counsel, agreed that there’s “a perceived onerousness” around discovery that can be addressed early in an advisor-client relationship. Truly understanding your client’s life, tendencies, goals and investment needs “is a vital piece” that informs your entire relationship and helps you make suitable recommendations, she said.

When the discovery process is explained and done well, “[clients] do actually enjoy it. You’re interacting with and listening to them,” said Julie Brough, executive vice-president and portfolio manager with Toronto-based Logan Wealth Management.

Brough onboarded an experienced investor this year who was surprised but satisfied with her in-depth process, Brough added, saying the investor told her they’d never been asked to explain their past market experiences and how working with advisors had made them feel.

Rather than treat KYC and risk discussions as tick-the-box exercises, Brough asks many followup queries about people’s concerns, tendencies and preferences. “These aren’t rocket science questions, but you change the dynamic,” she said, noting her relationship with the experienced client “was borne in that [realization] moment. If you’re prepared to invest the time, these are huge relationship-building moments.”

The investment will produce gains should problems or disagreements arise, whether from market moves or people’s own circumstances and emotions.

The ideal scenario is when an advisor can simply remind a client of their investment process and the created plan, and what has been discussed in the past, the panellists said. Detailed records, which can include supplementary materials like slides, graphs and offering memorandums, can prompt an open, solutions-focused discussion about a client’s issues or needs.

If problems are escalated to the regulatory or court level, said Roskies, copious notes and details also are key.

“In your [wealth advice] profession, 99.9999% of the time, you want everything in writing,” he explained, because an advisor doesn’t want a he said/she said situation for which they’re not prepared. An advisor might have hundreds of clients and many conversations per day, Roskies said, “and the judge knows that, versus the client who’s standing up and saying, ‘These are my life savings. I’ve had one conversation about it and I remember it.'”

Regulatory guidance is designed to be technology-agnostic, Roskies added, when asked whether notes must be taken by hand or manually, or whether efficient digital tools can be used. (Brough and the advisors with which Montgomery works both take notes more traditionally, but each said they use some CRM technology to store and build notes out.)

What’s more important is deciding which notes you need to keep on file, keeping in mind that all notes must be kept for seven years. Think of the security of the data. To protect clients and yourself, consider what clients are providing with consent and what’s more private, and what you need to know to do your job, Roskies said.

Other practice risks for advisors to consider included whether they have too many clients to properly care for them all and meet all requirements, as well as any instances where they’re taking on tasks for clients that they shouldn’t based either on rules for their practice or gaps in their knowledge.

Brough warned, “It’s really easy to fall into the trap of doing things you shouldn’t do in the name of customer service,” which is why it’s important to know your limits.

Still, advisors must also be aware of a client’s full financial details. If an investor takes money elsewhere to invest in a way their advisor can’t or won’t, there should be documentation.

Especially if you’re a portfolio manager, the client-focused reforms stipulate that process, Roskies said. Where an advisor is aware of external holdings, “there better be notes that you’re factoring that in to your portfolio construction. It can’t just be that’s not my problem.”