The know-your-client rule is the cornerstone of a financial advisor’s business. It stipulates that an advisor must collect all the important facts about a client including net worth, dependents and other personal obligations, short and long-term financial goals, and tolerance for risk.
Not only is the KYC rule the key to building clients’ assets, but it also protects an advisor against legal liability for making unsuitable investment decisions.
But there may be information that isn’t required on the client account document that could have a big impact on a client’s finances. Every client’s situation is different, and many pieces are sometimes needed to understand the big picture. Some clients may be less than forthcoming with personal information than others. Others may willfully withhold critical information.
Marital problems and debt are top of the list of what clients may be unwilling to disclose, according to Barry Desrosiers, financial planner, investment and retirement planning with BMO Bank of Montreal in Calgary. “The reasons are fear and pride,” he said. “They’re afraid they will be judged. I set myself up as an impartial party, something like a psychiatrist. When it becomes obvious that a client is withholding information from me, I’ll say, ‘You’ve entered a judgment-free zone. But I can’t help you if I don’t know everything that could affect your finances. It’s my job to know you well enough to give you good, solid financial advice.’”
Forthcoming clients are those who trust their advisors. But it takes time to build a client’s trust. “You need to build trust quickly, but being too familiar too quickly can turn people off,” Mr. Desrosiers noted. “Start by developing the art of listening. Too many advisors talk too much.”
Learn to ask great questions, added Larry Distillio, director, financial advisor business management at Mackenzie Investments in Toronto. “Be curious about what is going on in your clients’ lives. Your job is to listen to them, take a step backward and let them do the talking.”
The discovery process begins at the first client meeting, and a process should be in place for working with new clients. “At the first meeting,” Mr. Distillio said, “set the framework for the client’s expectations by telling him, ‘I’ll be asking questions around your values and ideals, your goals and objectives, your personal relationships, your money and how you want us to work together.’”
He suggested crafting questions that elicit an emotional response. “Rather than asking what a client’s risk tolerance is, I’ll ask, ‘Has anyone in your family lost a significant amount of money?’”
Eric Liu, a financial advisor with Edward Jones in Vancouver, added that there are strong emotions behind information that clients are reluctant to divulge, and advisors need to understand these emotions to build the client’s trust.
The client’s family situation may be an emotional hot point. “Many clients are in second marriages,” Mr. Liu said. “Most won’t bring this up immediately, but blended families often mean complicated inheritance and property-division issues. Advisors need to know the family situation in order to assemble a team within the firm or of outside specialists to ensure proper estate planning.”
Adult children do not always live in close proximity to their parents, and this may be a sensitive issue in some families. “But as the client ages, it’s important to know if the next-of-kin are close by,” Mr. Liu said.
It’s also important to know if the client owns family vacation homes for estate planning considerations. If a property is outside Canada, especially in the U.S., “this may trigger serious tax issues,” Mr. Liu added.
Mr. Desrosiers said he has learned to read between the lines in his interactions with clients, and finds that marital problems are easy to spot. “What are the spouses’ reactions to a suggestion of opening a spousal RRSP? What is the reaction to inviting the spouse to a client meeting? And anyone who chooses to not talk about a spouse has a problem.”
He often takes the role of storyteller to get clients to open up to him. “I’ll talk about a fictitious person I’ve worked with who has a lot in common with the client. I’ll describe his problem and the solution to it, and dollars to doughnuts, the client will open up and tell me what I suspected he was hiding.”
Older clients, those age 65 and older, may be fearful about disclosing personal information to a new advisor, Mr. Desrosiers said, “probably because the world seems to be moving at a much faster pace than when they were younger. They’ve accumulated sizeable assets and they’re afraid of losing what they’ve got.”
But Mr. Liu said that, while older clients tend to be more private initially, “as the relationship deepens and trust develops, they often become more open than younger people. They love to be listened to, maybe because they aren’t listened to very often.”
Advisors also need to know whether clients have health problems. “Health issues will dictate the need for life, critical illness and long-term-care insurance,” Mr. Liu said.
In Mr. Desrosiers’ experience, clients with serious health issues are pretty forthcoming about their problems. “Those who’ve been diagnosed with a terminal illness are anxious to get everything settled before they go,” he said.
Clients with debt problems may be the most resistant to disclosure, Mr. Liu said, and an advisor may have to read between the lines to determine that there is a problem with debt. “I had a client who started depleting his RRSP to cover his debt,” he said.
“The client doesn’t want a bank to know that he’s in debt,” Mr. Desrosiers added, “and I work for a bank. And simple embarrassment makes people put their heads in the sand. My job is to tell them what they can do to remedy the situation.”
Building a client’s trust is an ongoing process, Mr. Liu said. “It takes time but it is worthwhile. I send out birthday cards to my clients and a follow up with a birthday phone call. I invite established clients to birthday lunches. I take the time to listen to them. That’s the key to knowing their needs and concerns.”