Investment Executive senior editor Patricia Chisholm spoke with Erez Blumberger, president at financial services specialists AUM Law Professional Corp., about educating clients on the CRM2 reports and your role as a valued advisor in their financial decisions

Q: What is the biggest single challenge for advisors when implementing the CRM2 rules?

A: I think it is going to be effective communication between the advisor and the client relating to some of the concepts that arise in the performance report and the cost report. When clients receive these two new annual reports, there is going to be information that is new to the clients. And they will most certainly have questions about those pieces of information. So, the biggest challenge for advisors, in my view, is not waiting for those pieces of information to land on the client’s desk, surprising the client for the first time with that information. [Advisors should] get out in front of the anticipated questions and educate their clients to the extent possible about what is coming.

On the cost report, there are going to be several items for where [clients] need to see disclosure and different types of fees. Clients will have questions about what those fees mean, and some of those questions will require the advisor to explain how the distribution regime works. That is going to be a challenge.

Q: How should an advisor respond to an angry client?

A: We have to give some credit to advisors. They have been through some of those discussions in the past. The [best] approach is to explain to the client exactly what the advisor’s role is and how the advisor has added value.

During the 2008 [financial] crisis, many investors’ portfolios suffered a significant decline. But there were advisors who were able to explain to their clients that they did much better than the declines in benchmarks. That helped clients appreciate the value that the advisor was adding.

[Responding to clients] is really about clear and open communication, and trying to listen to what the client’s source of frustration is and then targeting and addressing that with facts.

Q: How can advisors deal with the increased demands on their time that these conversations will mean?

A: It’s like people who say they don’t have the time to exercise and then they wonder why they are overweight. You have to make time. It’s really not an option. If the clients are valued clients, you have to make the time to speak with them. If you don’t make the time, those clients may feel that they are not getting good service and they may go elsewhere – not because of CRM2, but because they feel they are not getting your attention.

I don’t see any other options to having candid conversations well in advance, to the extent possible, of the new information hitting the clients’ desks.

Q: What are your thoughts on practical training for advisors to deal with CRM2?

A: Any structured training involving mock interviews, scripts, back and forth with advisors, things such as lunch-and-learn that involves people brainstorming with potential questions – these techniques are all very helpful. Like anything else, advisors need to be comfortable in talking about these concepts. And the only way [to do that] is to practise talking about them. And as you practice, you get more familiar with the concepts; elements of the concepts come up and you can flesh them out and get clarity from your colleagues and from the compliance department.

And you can polish your response and tailor it so it’s clear to the client.

So, structured training is very important.

[It’s helpful] for firms to be able to generate a list of Q&As and tailor the message for advisors and lay out the bullet points that advisors should be mindful of covering when speaking with clients. [This strategy] is obvious and intuitive, but it’s the way to go.

Q: Is there anything in particular in the fee reports that clients may have trouble understanding?

A: Fee disclosure is not new. It’s just that the format in which it’s being disclosed is perhaps new and the fact that there are dollars associated with it is new. There will be some concepts that are new to clients, and not all clients will be proactive about asking; but for those who are proactive about asking, advisors have to be ready to provide a clear and pithy answer.

Q: Will fee-based firms have a greater advantage in the future?

A: In my mind, fee-based firms do have a head start because their clients already appreciate and understand what they are paying: they are cutting a cheque to the firm. But that’s all it is: perhaps a head start. The reality is that all firms are going to have to hone their value message and make very clear to clients what the fees are for and the value that the client is receiving for their fees.

Especially in the face of the burgeoning robo-advisor industry, clients are already asking, “What is the value I’m receiving from my non-robo advisor?”

Many advisors provide excellent value, because they give their clients “soup to nuts” advice – financial planning, insurance, securities, all the way across – advice that the robo systems aren’t designed to cover.

Q: Do you think we will see advisors leaving the investment industry?

A: In my experience, whenever there are structural changes in the industry, such as the introduction of more online advisors, there is always going to be a shift. CRM2 will give clients more information to make more informed investment decisions and to ask more informed questions. And, as a result of having that additional information, maybe advisors who can’t explain and justify their value proposition will have to exit as a byproduct of competition, if nothing else.

Q: Do you have any advice about working with the compliance department?

A: The compliance group and the client-facing advisor group have to work as a team. [Advisors’ interaction] shouldn’t be a one-time thing with the compliance group, after the advisor is trained. It should be a kind of fluid, ongoing relationship in which there are constant touchpoints for the advisor and a feedback loop to the compliance group. Are there areas in the reports that are constantly coming up as problem areas for clients? Maybe there is a graph that’s unclear and it’s causing issues? So, I think that feedback, from the client to the advisor and back through the compliance group, is very important.

Q: Any final words of advice?

A: [The strategy] really is about trying to avoid client surprise when clients receive these new statements. So, getting out in front of clients, explaining to clients what’s coming; explaining what the advisor’s role is; how the advisor has benefited the client over the term of the relationship; explaining to clients that there are going to be new concepts; running through those concepts; getting the client familiar with those concepts. And really just trying to walk very slowly with clients through some of the concepts that are going to be in the performance and costs reports.

It’s not easy, but I think it will pay off in terms of avoiding surprise. And clients may well appreciate the time taken by the advisor to help the client better understand how the client’s fees are being paid and how the client is doing. That is what the advisor is there to do.

And it doesn’t have to be a doom and gloom scenario; many industry participants have been nervous about having these discussions, but they don’t have to be that way. It can be an opportunity for a broad-ranging discussion with a client that also includes educating the client about the way the firm works and the way the advisor works.

My personal view is that clients will appreciate getting a clear picture of the fees they pay because fee disclosure is not an easy area.

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