Maintaining trust

For financial advisors, the toughest moments in adapting to the new disclosure rules may occur in the same spot where they have had some of their most rewarding experiences as professionals: the give and take of a confidential conversation in the quiet of their office with clients they have known for years. The usefulness of these meetings depends on trust and a sense of shared objectives between client and advisor, and the most successful of those conversations lead to positive outcomes on both sides of the desk.

But, as advisors begin the task of methodically ticking off their new obligations to disclose risks, fees, commissions and other costs, as well as portfolio performance, to comply with point-of-sale (POS) rules and phase 2 of the client relationship model (CRM2), many clients are likely to pose some potentially uncomfortable questions: What is a trailing commission? Why am I paying thousands in fees when my investments are flatlining? Why are costs this high when I see you so seldom?

And if you think that many of your long-term and sophisticated clients already know the answers, don’t be too sure. Generally well-informed clients have given surprising responses in preliminary test runs. Susan Silma, a lawyer who helped to draft the new rules and who now helps smooth the transition to the new disclosure regimes through her firm, Guelph, Ont.-based CRM2 Navigator, says there can be a disconcerting gap between the response that advisors and their firms anticipate from clients and how they actually respond.

“Many advisors tell us they’re having these conversations in a fee-based world,” says Silma. As a result, she adds, these advisors fully expect that CRM2 disclosures will go smoothly. “[But] when we go to that advisors’ clients, they may say, ‘I don’t remember having that conversation’.”

However unpleasant or awkward the reactions from across your desk may be, you are well advised to be forthright with your clients – sooner rather than later. That will be the best preparation for client conversations when the new reports begin landing early next year, whether the account is fee- or commission-based.

“There definitely are clients who will be angry at themselves, and will ask pointed questions,” says Silma, “[and will say], ‘I feel like I’ve been tricked.'”

One strategy for managing these discussions is to marshal information in advance, so you can feel confident in client meetings. Carol Lynde, president and chief operating officer of Bridgehouse Asset Managers in Toronto, says one useful approach is to review videos and infographics that explain CRM2 in simple terms; doing so will help you appreciate the learning curve from the client’s perspective. “We don’t do a great job as investment managers in describing the amount of regulation and systems required,” Lynde says.

Examples of this type of information include materials in simplified language prepared by the Investment Funds Institute of Canada. Many dealer firms also have prepared internal resources to help advisors. Resources such as these drill down into the fine details of CRM2 and POS, cutting to the core of how advisors and their firms are compensated for the investment services they provide.

“We all respond better to pictures and video presentations than just dry paper,” says Neil Gross, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), the Toronto-based advocacy group for investors. “We’re all bombarded by written material,” he notes. (FAIR Canada has a series of short videos on YouTube designed to help investors understand the new performance and cost reports.)

The key to dealing with an upset client is to avoid taking a defensive stance, says Silma, in which you end up listing every detail involved in serving that client: “What they don’t appreciate is you getting into record-keeping services, administrative [tasks]. That doesn’t mean anything to them at all. They don’t know how to attach value to that.”

However, some specifics are important. Silma proposes structuring the conversation around your “fee-worthy value” – specific things that distinguish you from other advisors. Most important, your clients need to be able to connect costs to the value that they receive, and that means putting numbers into context by reviewing a client’s personal rate of return, for example, and how it corresponds with his or her goals. “Talk through things that may not be obvious,” says Lynde. “You can itemize the services you provide and work on what that portfolio will look like.”

You also can remind your clients of how you have helped them in specialized areas in the past, whether attending to requests to look into a child’s registered education savings plan or meeting with a client during RRSP season, says Silma.

And there is the simple, but often crucial value of being a stabilizing force regarding your clients’ financial affairs. There is no question that automated advice platforms (a.k.a. robo-advisors) have cut a sizable swath through the businesses of many advisors, especially for less affluent clients. Responding to your clients during periods of uncertainty, such as strong market gyrations caused by passing world events or changes in the fortunes of a sector in which a client may have a significant interest, is even more critical than in the past. In these situations, you can be a calming voice of reason that helps your clients avoid hastily selling – or buying – on the basis of superficial market factors.

Overcoming emotional responses and helping your clients focus on the long term is key, Silma concludes: “It’s the advisor’s job to take clients back to the conversation they had when they set their goals.”