Advisor at Risk

Ellen Bessner

Ellen Bessner is a well known, leading litigator with commercial litigation firm Babin Bessner Spry LLP. Her more than 20 years of experience includes defending investment and insurance industry participants, including dealers and individuals at all levels of courts.

Ensure clients understand their obligations in a financial plan and that these are reviewed at regular client meetings

By Ellen Bessner |

Financial planning has never been more important than it is now for both clients and advisors alike. Clients are asking their advisors how much they need to save to meet their financial goals for retirement while advisors offer financial plans to clients to demonstrate their added value — especially with the transparency of fees coming as part of the requirements of the second phase of the client relationship model.

However, there are risks to those who provide their clients with a financial plan. Here are three of the most prominent:

  1. Regulators are flexing their muscles. The Financial Planning Standards Council (FPSC), is no exception. Specifically, the FPSC is keeping an eye on the Mutual Funds Dealers Association of Canada's (MFDA) and Investment Industry Regulatory Organization of Canada;s (IIROC) websites and cross-referencing to its own membership those who have been penalized by the self-regulatory organizations (SROs).

    The FPSC is reviewing the circumstances of each infraction and rendering its own decisions concerning whether those who hold the certified financial planner (CFP) designation should be penalized further. Much like IIROC and the MFDA, the FPSC's decisions are posted on its website. Therefore, the advisor who also has the CFP designation can be panelized by two different organizations.
     
  2. Clients sue financial planners even if the financial planner is not the main person overseeing the client relationship. Several advisors delegate the preparation of the financial plan to others who may or not meet the clients, but whose name is usually on the financial plan document. These financial planners may or may not be licensed with an SRO and may or may not hold the CFP. The main thing is that if the client sues, he or she will likely sue the dealer, the advisor and the person who prepared the financial plan.
     
  3. Lack of supervision exposes both the advisor and the financial planner. Someone needs to be supervising the quality of both the written content and the communication of the financial plan. A second set of eyes can ensure the financial plan is consistent with the know-your-client (KYC) forms on file and the trading in the account; they can also identify any inconsistencies that need to be flagged to ensure the financial plan is followed to protect the client, the advisor and the financial planner. This can reduce the chances of disappointed clients and regulatory involvement.
     

So, with the regulatory scrutiny, risk of lawsuits and disappointed clients if the financial plan is not followed, what is an advisor or financial planner to do to reduce his or her risk? Here are five considerations:

  1. Be sure you get an accurate picture of the client's financial situation. For financial planners, it would be useful to review the KYC forms and the meeting notes the advisor has to support the conclusions on the KYC forms. If you feel a meeting with the client is required, then make the necessary arrangements. Do you understand the clients' expectations, goals, fears and needs? These are crucial for the preparation of a financial plan.
     
  2. Is the financial plan complete? Does it integrate the information provided? Is the KYC information integrated into the financial plan? Are there scenarios that explore the results depending on different returns? Are these returns realistic? Does it anticipate clients' expenses and anticipated spending habits?
     
  3. Is the financial plan based on current information? Has this information been updated as the client changes?
     
  4. Once a financial plan is prepared, go back and review all the materials collected about the client to ensure the materials are consistent with the financial plan. Are there gaps between information/documentation and the plan? These need to be explored and gaps filled in with explanations.
     
  5. Was the information given to the person preparing the financial plan provided orally or in writing? How reliable is the information Is the client in tune with his or her personal goals? Most important, is the financial plan reviewed with the client in a way that he or she understands any assumptions and what his or her responsibilities are? If not, expectations need to be managed so the client is aware of his or her role in fulfilling the goals set out in the financial plan. Clients sue when they are surprised, so managing expectations when the financial plan is delivered is key.
     

Overall, you need to understand the risks associated with preparing financial plans and follow these guidelines to reduce your risks. Remember that financial plans have become very important to your clients and that it reduces the risks you could face if you ensure clients understand their own obligations and that these are reviewed at regular client meetings.