Helping your busy clients: Part One

Adena Franz’s phones were silent on June 2.

“Sino-Forest blew up, and we didn’t get one call,” recalls the Montreal-based advisor. And despite having the beleaguered stock in her clients’ portfolios, they won’t hear about the hit until their annual reviews.

Franz is a discretionary portfolio manager with Richardson GMP. She decides on investments without consulting the client, subject to the parameters laid out in the investment policy statement (IPS).

During reviews, she’ll be upfront about what happened. “I explain, ‘This is your performance. By the way, we had a stock that blew up,’ ” Franz says. “It’s all about the way it’s handled. Responsibility means taking risks, and you’re not always going to be right.”

Know your client

Part of that responsibility – which, in a discretionary relationship, is a fiduciary duty – is ensuring the IPS reflects the clients’ wishes. It’s the blueprint for how the advisor will execute going forward.

“You say what kind of house you want, and I as the architect will draw the plan,” says Franz. “You might suggest a paint colour. But I make the decision.”

The statement is revisited at least once a year, and also in response to events such as setting a date for retirement. Barring a major life change, risk tolerance is modified every three-to-five years. That’s because of the flexibility afforded by the ranges in the IPS – a manager can go between, say, 10% and 50% in fixed income, depending on how they read the market.

Nancy Hoi Bertrand, a director with Citi Private Bank who uses discretionary managers, says determining the IPS and long-term asset allocation for her clients, who have at least $25 million in investable assets, can take up to two years before a client is satisfied.

“It is an iterative process,” she says. “The most difficult part is figuring out somebody’s real risk tolerance. That’s hard for someone to express until they’ve actually experienced volatility.”

To that end, Julia Kim, an investment counsellor with RBC Phillips, Hager & North, delves deep into a client’s financial situation, previous investment experiences and life goals to determine investment needs.

She then presents the IPS as a work-in-progress. “When the client reviews it, I say, ‘Hopefully it prompts you to ask more questions. If I didn’t capture [your needs] correctly, let’s flush them out further,’ ” she says. “Only after they’re fully aware of the nature of the engagement do I let them sign off.”

Franz had a client who presented as very conservative. He had mentioned precious metals, so she asked the amount he would invest in a certain stock to gauge his interest. “He gave me a number that was double what I would have done [based on his IPS],” she says. “It turned out part of him wanted to be speculative.” To reflect this, Franz changed his asset allocation to include a small allowance for riskier investments.

Customer’s not always right

The role of a discretionary manager is to make sure clients don’t jump ship at the first sign of trouble.

“There’s a financial and emotional cost every time a client abandons the investment strategy,” Kim says, and that taints the discretionary relationship.

“The moment the client makes a decision to buy or sell, we have to share in the performance,” says Franz. “We run portfolios according to models, and that would completely interfere with the process.”

For example, a client phoned Franz asking her to buy back Sino-Forest stock because it had doubled in the past week. That’s not how the process works, she says. “When we sell [a stock], we reinvest the cash, and we don’t buy it back.”

Standing firm when a client tries to go off the rails is important, but there’s a fine line between following your own investment strategy and overriding a client’s wishes.

“If the client tells me he doesn’t like gold, I’ll respect that and not put him in gold,” says Bertrand. “If our client fears inflation, we’ll overweight the portfolio with inflation-protected offerings: real estate and commodities. For clients who are deflationists, we’ll use managers who will express that view.”

And even if you haven’t crossed the line, there will always be the clients who push back on your decisions.

In that case, “the IPS is the document that protects us,” says Franz. “[It says] we alone are responsible for the buy-sell decisions. It’s the client’s responsibility to set forth how we do that. But what we do is not the same as how it’s done.”

Franz knows this well. During the middle of the 2008 market turmoil, an ex-client remembered – erroneously – he’d told her to sell all his equities that June.

“I asked [compliance] if he had a leg to stand on,” says Franz. The answer was no, since he would have had to change his IPS to go 100% into cash.

It’s important to keep meticulous records of client conversations and research that justifies investments made. And if an event does shake a client’s confidence, a discretionary manager’s role is to talk him through it to avoid overreaction.

“I say, ‘What’s different that would cause us to rethink your plan? We discussed this two years ago. Have your needs changed since then?’ ” says Kim. “That step-by-step discussion is why they engage us.”

Panic can also stem from legitimate concerns that mandate a change in the IPS’s risk profile, such as anxiety about job security or the spectre of an impending divorce. Other times, good news prompts a switch.

“I had an elderly client who had done such excellent estate planning that [his] money became designated for his grandchildren,” says Kim. “This resulted in a significant change to the investment strategy, as the time horizon changed from being his lifetime to that of his grandchildren, who were in their 20s.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.