In communicating with clients in the world of Phase 2 of the new client relationship model (CRM2), Daryl Charanduk, financial advisor and principal with Charanduk Financial Services in Mississauga, Ont., is keeping his mind on the power of “why.”
If clients can understand the reasons – the why – behind the construction of their financial plans, the selection of investment products and the imposition of advisory and fund-management fees, Charanduk says, their recognition of the value of their advisor will be clearer and the bond will be strengthened rather than weakened by CRM2-mandated disclosures.
“I’m thinking about what it takes to be important to clients,” Charanduk says. “It can’t be just about fees or you won’t stand a chance. You’ll lose out to [robo-advisors] and they’re coming out fast and furious. As financial advisors, we must justify and earn what we charge.”
Charanduk, who has been a financial advisor for 25 years, says he probably knows more about his clients’ financial situation than any other single person in their lives. He helps them plan for significant events and, in many cases, has watched their children grow up. This kind of knowledge and perspective makes a financial advisor a valuable co-ordinator of the various elements involved in wealth management, and clients are more likely to recognize this value when decisions and strategies that pertain to their portfolios are clearly articulated. Explaining the rationale behind decisions and the research that goes into them, and doing this often, helps clients appreciate your value.
“It’s not just about determining a target rate of return for a retirement portfolio,” Charanduk says. “It’s about why the client needs that return, why the portfolio is constructed the way it is and why particular fund managers have been chosen.”
Often, returns are enhanced by tax strategies, such as contributing to a tax-free savings account instead of building an RRSP to the level at which clawbacks will kick in and reduce government benefits. These and other tax savings resulting from advice are another good way to convince clients that you are earning your fees.
Charanduk is in the process of putting together a written document explaining the services that he offers, which include retirement planning, investment management, tax and estate planning, insurance and mortgages, as well as his qualifications. Often, a client will retain only part of this information from a conversation, while a written document can cover all the points and reinforce your message when the client is able to read it later.
Charanduk, who manages almost $50 million in client assets, says his accounts range in size from $100,000 to $1 million, and there is no minimum amount required. He has an “eclectic” client base, running the gamut from government workers to professionals.
“If we can sit down and talk to each other, the relationship will work,” Charanduk says. “That’s more important than taking on people when I know we will clash, even if they represent large accounts.”
Charanduk is converting his clients to a fee-based structure gradually, and estimates that about one-third of his clients are fee-based. These clients are invested in F-class mutual funds, which have a lower management fee and no trailer fee. Licensed by the Mutual Fund Dealers Association of Canada, Charanduk does not sell exchange-traded funds (ETFs).
Although there is no imbedded trailer fee in the products Charanduk sells to his fee-based clients, the annual advisory fee that he charges does need to be explained. He is relieved that CRM2 disclosure requirements are being introduced when markets have experienced strong, positive returns, but he knows financial markets are cyclical and there could be losses in the years ahead.
“I’ve always had the conversation that I was paid a fee, and my clients understood that I did not work for free,” Charanduk says. “My fear is that when we hit a ‘down’ market and clients clearly see a fee coming off, that your value could be diminished in the clients’ eyes and the conversation will become more difficult. A $1,000 annual fee is harder to swallow when the account is down by $3,000 – and that’s when things might get ugly.”
His solution is to reinforce continually what he does for his clients as an advisor, and to direct attention to their financial plans and the necessary long-term returns that previously have been obtained. When disclosing fees, commissions and other required information under CRM2, Charanduk is diligent about documentation and filing. He makes notes on what was disclosed and discussed at every appointment, and requests clients’ signatures to indicate the disclosures were made and understood.
“We review where we are, in terms of the plan, which could have a time frame of 10 or 20 years, and show the client that we are still on schedule,” says Charanduk. “Negative years are to be expected, but our job is to find an asset mix that meets the criteria and that clients are comfortable with.”
Charanduk is careful to set up realistic expectations when financial plans are built, emphasizing that the required returns to meet a client’s financial goals are merely averages, and that in any given year, the actual returns are likely to be more or less than the average annual return established in the financial plan to meet the desired goal. Charanduk takes time to review the plan and show each client where he or she will be if they continue to stick to it.
“There will be more of a need for conversation in difficult markets, now that fees are more visible,” Charanduk says. “Advisors must articulate their value beyond the portfolio returns. Otherwise, every advisor would lose all their clients every few years, when the stock market drops. We will have negative years, but, hopefully, not as bad as market averages, and my job is to pick the right products and the right asset mix for all clients to help mitigate risk as well as reach their financial goals.”
Charanduk also warns clients they cannot expect to beat market averages every year. One of his strategies is to pick less volatile mutual funds that may underperform in hot markets but preserve more of clients’ capital in down markets, resulting in long-term outperformance relative to market averages or to ETFs that simply reflect market performance. He keeps tabs on how fund managers are performing and if there are any management changes at funds, so he can explain his fund choices to clients.
“The plan must be flexible,” says Charanduk. “And if things change, it may sometimes be necessary to take a different road on the map.”
There is a tendency on the part of some clients, he adds, to assess any losses by measuring the magnitude of the drop as the distance from their previous high-water mark, which can be deceptive.
“If the client account moves from $100,000 to $125,000 and then drops back to $120,000, they feel like they’ve lost $5,000,” Charanduk says. “It’s not ‘Thanks for the $20,000’.
“There’s a need for continuing reminders of the progress being made on the plan, and the additional services being provided.”
“There will be more of a need for conversation in difficult markets, now that fees are more visible. Advisors must articulate their value beyond returns, otherwise they’d lose clients when markets drop”
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