Ascertaining client suitability is certainly a complex task, but an advisor’s job when doing so is made triply difficult as a result of the these three elements of suitability that are constantly changing:
People change more rapidly and significantly than ever before.
Personally, more marriages end in divorce with people getting married two or three times in their lifetime with offspring from each relationship. I attended two weddings of young people recently, each marriage lasting less than a year. Even marriages that seem to have withstood the test of time don’t seem to last a lifetime either with people having been married for decades decide to move on.
Work life is changing as well. In my parents’ generation, it was commonplace that they worked at a single place of employment for their entire careers. Today, people change jobs frequently, sometimes choosing to take the next step in their career at another institution. In other instances, the company may choose to terminate someone’s employment due to a change of course. I remember feeling like a dinosaur when I was at the same law firm for more than 20 years. Since that time, I have made two moves, hopefully now to my final destination.
Values also change frequently in most people’s lifetimes. One day they are conservative with their money, and then something happens and they take more chances, inviting more risk — or the other way around.
Markets go up and markets go down — and as this happens, clients’ emotions related to greed and fear are impacted significantly. Thus, the instructions clients provide to their advisors fluctuate according to these changes; without a crystal ball, advisors have no way to know which way the wind will blow and how to manage clients’ changing expectations. Should advisors, facing a severe market downturn, tell clients to hold or will clients complain when the market falls even further and blame the advisor? If the advisor follows the client’s instructions to sell in a market downturn, then the losses will be crystallized.
Management, especially the C-suite, changes when the company’s stock is not doing well and so senior management is forced to plan only for the short term. Products become more and less popular, affecting supply and demand. A company’s productivity can change due to an array of reasons and can also be affected by labour challenges or natural disasters.
As a result, advisors face the massive challenge of understanding and keeping an eye on all three of these moving parts so that they can ensure that changes are made to clients’ portfolios as required.
So, how do advisors manage the juggling act necessary to make sure none of the balls drop?
1. Keep in close contact with your clients and have meaningful conversations with them about changes. Update their know-your-client forms as needed to reflect their changes and adjust their portfolios as necessary.
2. Know your products intimately and make sure you keep a close eye on the changes to products — especially if you lose confidence in the company or fund manager.
3. In respect of individual companies, you need to watch the industries closely for changes, read companies’ press releases, follow the analyst reports and understand the companies’ financials.
Unfortunately, there are no shortcuts. So know your client, watch the markets, know your products and understand that this is a juggling act.