Key Points
Advisors have a fiduciary responsibility to act in their clients’ best interests.
Knowing your customer and being laser-focused on investment suitability is vital.
The discovery process between advisors and clients & potential clients needs a facelift.
Investors are more confused than ever
Over the last 3 years, we have experienced a global pandemic, 2 equity bear markets, wild volatility across all asset classes, a historic tightening cycle led by the Federal Reserve, the highest inflation in 40 years, a de-anchoring from zero interest-rate policy, interest rate spasms, the worst returns for a 60/40 portfolio in our investment careers, and a brand-new banking crisis. Investors and advisors have a lot on their plates these days and keeping clients engaged while helping them protect themselves and sleep at night is as difficult as it’s ever been. I thought I would spend a little time this week highlighting some important ideas that can help streamline the process of keeping happier clients and helping them reach their goals in difficult markets. In order to accomplish this, getting back to basics might be in order. It’s time to revisit our clients goals, objectives, and needs and also to help protect ourselves as fiduciaries.
Know your customer & be laser focused on proper suitability
FINRA Rule 2090: Know Your Client Rule (KYC). It requires advisors to know the “essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer” when opening and maintaining a client investment account. Unfortunately for advisors, the process of discovery is a fragmented one and things often fall through the cracks. Every firm has their own forms and processes, and every advisor tends to have their own approach to getting to know a client or prospective client. Sometimes it’s a yellow note pad and a face-to-face conversation(s) and other times the process gets more automated using technology and an online questionnaire. Regardless of the process, the data ultimately needs to get stored & updated periodically. That’s where the potential problems or deficiencies often begin. Fortunately, with the advent of sophisticated CRM platforms, the client information is now able to be accessed and altered as circumstances change.
FINRA Rule 2111: Suitability
Every year, there are thousands of customer complaints filed with FINRA citing poor recommendations that led to bad outcomes driven by problems with suitability. In its simplest form, advisors determine the suitability of an investment via matching proper investments based on a customer’s real-time investment profile. I say “real-time” because the goals, objectives, risk tolerances, time horizons, and return expectations change as a customer ages. If the customer profile doesn’t get updated as their needs and preferences change, the recommended investments may deviate from the original purpose creating a “suitability” mismatch.
When markets are quiet and most asset classes are generating solid returns with lower daily volatility, clients are generally happy and content. But when the economy has a problem and asset values get volatile, clients often begin to critique what they are invested in and whether each investment is still an appropriate choice for them. If clients do not fully understand and appreciate what they own and why, a wedge often creates created between them and their advisors. It’s times like today that revisiting the suitability and know your customer rules add the most value to everyone concerned. Using today’s uncertain world as the air-cover for catching up with clients is a wonderful way to service them, build deeper ties, and update investment portfolios. My general rule, when the client profile & suitability changes, so too must the portfolio recommendations & allocation weights.
Automating the discovery process can protect you & enhance your client relationship
As I stated earlier, every firm and advisor team has their own process for building an investor profile, storing the data, and updating the data over time. Because client sophistication and market knowledge tend to have a wide gap, I thought I would create a resource for advisors to use as a template for re-connecting on suitability metrics given clients’ current angst with investments & markets. The daily volatility we are seeing now can have a lasting effect on an investors willingness to take risk for goal achievement. The link below is meant to be used as a collaborative tool between the advisor and his/her clients on a 1-1 basis. How a client answers the 25 questions will paint a clear picture of: 1) their risk tolerances, 2) their return requirements, 3) their customer service preferences, 4) their time commitments, 5) their liquidity needs are, 6) what an appropriate mix between public and private alternatives might look like, and 7) what their behavioral temperament towards taking risk is. Once an advisor has this data, making sure they have the most prudent portfolio mix that matches back to their profile gets a lot easier. I can guarantee you, using something like the discovery process below will make it much easier for you to go line by line across an investment portfolio to spot-check if proper suitability is intact. Whether you go through this assessment online together and I send you the results or you use what I have created as a general guideline, I hope you find the quick assessment helpful and useful.
One opportunity you will likely uncover: more clients would prefer to be shielded from the day-to-day volatility of traditional stocks, bonds, and in public markets. This might lead to deeper conversations about public and private market exposures that might be more suitable. The bonus: to have a less volatile ride along the way, clients are likely willing and able to give up some daily liquidity or to consider asset classes that offer less correlation to traditional stocks and bonds. And you get the opportunity to re-connect and build a more institutional portfolio.
Take me to the Investor-Advisor Profile Quiz
If you would like to discuss this Q&A assessment 1-1 with me, I’m happy to chat. My email is eric.clark@accuvest.com.
Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.