It's not always the financial planner's fault

When clients fail to do their bit in the client-financial adviser relationship, planners are often blamed for unfavourable outcomes. Col Fullagar proposes a way to avoid such situations.

When an financial adviser was asked recently why an insurance application had been in new business suspense for more than 120 days, the reply was, “The client is really slack about having the medical tests required by the insurer but he is an important client so I can’t say too much.”

And another financial adviser, when asked how often her clients’ insurance portfolios are reviewed, replied, “I try to do it every year but it is difficult with some clients as they are not always easy to tie down.”

In a less than ideal world, these and similar examples might be seen as an unfortunate but normal part of the financial advice business. In an ideal world they would be examples of a professional firm being hampered in its ability to operate effectively and profitably.

Recent reforms have mooted the placing of an increased responsibility on the financial adviser to act in the best interest of the client.

This reform has focused on the interest of the client over the interest of the financial adviser; however, perhaps there is a supplementary responsibility, ie the effective management of the adviser’s business such that the generic best interests of all clients are not compromised by the actions of a small number of clients.

The aim of this article is to consider some business risks associated with situations such as those set out above. These business risks are real.

In an endeavour to offer solutions, a proposed way forward is suggested. It is recognised, however, that any proposed solution may work for some businesses but not others; it may work for some clients but not others; or a derivation of it might be more appropriate.

How a business addresses issues that arise – if in fact it does address them – is ultimately up to each individual business.

The business risks

The business risks associated with situations typified by the above are numerous.

Delays in the provision of new business requirements by a client can lead to:

• The financial adviser’s administration staff needing to spend additional time following up the client and updating the insurer;
• Delays in the conversion of interim cover into the full cover deemed necessary in line with the financial adviser’s recommendation;
• The insurer calling for additional but otherwise unnecessary requirements, for example a declaration of continued good health or fresh application form.
• Service standards for the financial adviser’s other clients who ‘do the right thing’ may be put under pressure;
• The payment of new business remuneration or the invoicing of a financial advice fee being delayed, compromising the cash flow and profitability of the financial adviser’s business.

An unwillingness of a client to undertake a regular portfolio review can lead to:

• An increased potential for a deficient claim payment from an out-of-date insurance portfolio, with obvious adverse consequences for the client or their estate, and poor publicity or rumour for the financial adviser which could damage their personal and business reputation;
• Problems arising out of any of the above may in turn lead to the loss of the client in question or other clients; and importantly
• When a client acts in a way that is potentially detrimental to the financial adviser and the adviser’s business, it may reflect a lack of, or lead to a reduction in, the respect the client holds for the adviser.

The sum total of all the above might well lead to a heightened frustration on the part of the financial adviser who is forced to work in an environment where control over their financial future is being eroded.

These are only some of the problems that can arise in the situations cited. There are of course other problems, in other situations.

As serious as some of these problems are, however, they are not necessarily the major concern.

Case study

Janet is a well-established financial adviser.

She meets with two new clients, Karesh and Margaret, who run a successful IT company. As part of her standard approach, Janet sets out the various commitments she makes to all her clients, ie her value proposition.

These commitments include:

• To gather the necessary information such that a comprehensive financial needs analysis can be undertaken;
• To recommend a solution comprising both wealth creation and protection; and
• To ensure that the solution is implemented in a timely manner.

Karesh and Margaret are impressed and agree to proceed.

Janet undertakes the necessary fact find and analysis and in turn recommends a comprehensive investment and risk insurance package. The recommendation is accepted and risk insurance applications are completed and submitted. Because of the level of cover, Karesh is required to undergo various medical tests.

Janet makes an appointment for Karesh to have the tests but unfortunately he gets caught up in his business commitments and fails to attend.

Meanwhile the investment package is implemented including various gearing strategies.

Weeks and then months go by and despite several follow-ups by Janet and her staff, the insurance applications remain uncompleted.

Rather than run the risk of irritating and losing her important but busy client, Janet decides to let the applications stay in suspense and simply wait until Karesh has time to attend for the tests.

A short time later, while driving home, Karesh is killed in a motor vehicle accident. Unfortunately, as the insurance was not in force and interim cover had expired, no benefit was payable.

The investment strategy that was implemented is not backed up by the insurance, and as a result it collapses at considerable financial loss to Karesh’s estate.

Janet is understandably concerned for her client’s family but she reconciles herself as she feels she did as much as she could in trying to get Karesh to undertake the necessary tests so that his insurances could be finalised.

Margaret sees things differently and commences an action against Janet, citing that Janet had put in place an investment strategy that was exposed to risk; and that despite making written and verbal commitments that insurance protection would be put in place, Janet had not met those commitments.

This is a fictional case study so there is no actual outcome, but the scenario was posed to a solicitor who specialises in financial services matters. The question was asked as to whether Margaret might have a reasonable chance of success. The answer was "yes”.

The same response was received when the solicitor was asked to comment on a scenario where a client suffered a material loss because their financial position had changed and their risk insurance portfolio had not been updated despite written assurances from the financial adviser that it would be done on a regular basis.

There may be a temptation to brush the above off as ‘no way’. However, there may in fact be a way to mitigate the above exposure and potentially achieve a solution for the issues set out previously as well.

A business solution

In the case study, when Janet provided Karesh and Margaret with her value proposition she gave a number of one-way undertakings without any conditions or restrictions on the commitments being made. The only time this can be done is if the person making the commitment has total control over all the factors necessary to meet the commitment.

This was not the case with Janet because, as it turned out, she had minimal control over the actions of Karesh.

While not making any commitments at all may seem a possible alternative, it is hardly going to excite the client.

The solution lies in acceptance by the financial adviser and the client that achieving the desired outcome in many situations is not just a matter of the financial adviser making and meeting commitments – but also the client.

For example, the financial adviser cannot gather the information necessary to undertake a proper risk analysis if the client refuses to provide that information; client engagement and co-operation is needed.

If the financial adviser is to achieve a commitment of having policies completed in a timely manner, the client in turn must commit to attending to the necessary medical requirements.

It may be that a client is quite unaware of the necessity to assist the financial adviser in these ways or it may be that they see the priorities of their situation as greater than those of the adviser.

Either way, there is merit in the financial adviser not only setting out their value proposition but also setting out details of the assistance needed from the client so the proposition can become a reality.

For some clients, a verbal briefing, as it were, may be all that is required. For others something more tangible might be preferred.

Verbal or in writing, the concept of setting up two-way, agreed commitments can be a valuable tool in facilitating greater business certainty for the financial adviser.

Agreed client commitments

An ideal time to discuss the concept of two-way commitments with a client would be either before or after the presentation of the financial adviser’s value proposition.

The ideal place to set out the commitments would be the statement of advice.

One way of presenting them might be:

“I have set out and explained what we will commit to do for you now and going forward but in order to deliver on these things we need the support of our clients, so we ask them to assist us in a number of areas. We call this our Client Commitment Agreement and it goes like this:

We ask you, as one of our clients to support us:

(i) By taking an active part in the fact-finding process – without this we may not be able to obtain the necessary information to undertake an appropriate analysis;

(ii) By making a decision on our recommendations in a timely manner but no longer than XX days after the recommendation is presented – delays can be costly;

(iii) By fully complying with the duty of disclosure when completing the insurance application form – without this the insurance may be invalidated;

(iv) By undertaking to attend to any insurance assessment requirements in a timely manner but no longer than XX days after the request is received – again, delays can be costly;

(v) If necessary, by contacting the medical practitioner if an insurance report is required but delayed;

(vi) By meeting with me or a representative of my organisation on a regular basis to have your financial plan and insurances reviewed, but no longer than once every XX months – this helps us to keep your plans on track;

(vii) By immediately contacting me or a representative of my organisation if a material change occurs in your personal or business life – this may impact on the insurance we have in place, for example:

- A change of occupation or level of earnings;

- A change in work hours;

- Extended leave – long service, maternity, paternity, sabbatical, unpaid, etc;

- Living, working or travelling overseas;

- The expected birth or adoption of a child, grandchild, etc;

- A material change in your level of debt;

- A change in marital status;

- A change in educational status of dependants; or

- You becoming a carer;

(viii) By immediately contacting me or a representative of my organisation if you or a member of your family needs something in an area where I can assist;

(ix) If you are comfortable to do so, by contacting me or passing on my contact details if a personal or business associate of yours needs something in an area where I can assist – we may be able to assist them in the same way we assisted you;

(x) By settling invoices in a timely manner, ie within XX days unless other arrangements are agreed to – it is important that my business is maintained so that it can continue to support you; and

(xi) By ensuring that we work together in such a way as to engender a professional respect and courtesy for each other – it’s important that we maintain a professional division between our friendship and our business association.

If regulations change such that clients are required to opt-in to a business relationship, the agreement could be amended accordingly:

(xii) By meeting every X years to review and, if both parties agree, to recommit to our professional relationship.

The “X” above could in fact be a period of time less than any required by regulation, ie a period that tied in with the previously agreed regular review.

Agreed client commitments should as much as possible be objective rather than fluffy, mothering statements.

The above list is an example only and obviously a reasonably lengthy one. An actual list could be developed based on generic, client-related issues faced by financial advisers, plus any specific issues faced by the particular financial adviser drawing up the agreement. The list can be as short or as long as the adviser feels necessary.

Client commitments do not have to be the same for all clients; the list could be made client-specific based on the financial adviser’s previous experiences with different clients, or knowledge of what will be needed in a specific business situation, for example:

• If the financial adviser was setting up a complex business insurance arrangement, a client commitment might include assistance in gaining access to the necessary financial information from the accountant such that a business analysis can be undertaken; or
• If the client was the gatekeeper in a multi-life insurance arrangement, the commitment might be to ensure the other clients similarly commit to support the financial adviser in the ways set out.

The list of commitments can be reviewed from time to time to ensure it remains fresh and relevant.

If issues are identified, the financial adviser simply decides what client action needs to occur in order to overcome the issue and this becomes the basis of the commitment.

So, for example, if the issue is clients disengaging during the fact find process, and the necessary action is for clients to be actively involved in the fact find process, this becomes the particular client commitment.

And, of course, the financial adviser can call the commitment agreement whatever they wish.

The business outcome

The effective introduction of some form of agreed client commitments would have provided Janet with a number of opportunities:

• There would have been greater certainty of client response time, which would have enabled better structuring and resourcing of her business;
• The business relationship between Janet, Karesh and Margaret would have been positioned as one based on sound business principles, between professional equals, a positioning that is particularly important if the client is or becomes a personal friend of the financial adviser;
• Janet would have had improved leverage in dealing with issues such as the delay in Karesh undertaking the necessary new business requirements, the leverage coming of course by way of referral back to the commitments previously made and agreed to; and
• If Karesh had been unwilling to agree to a list of reasonable commitments, it may have rung warning bells for Janet as to whether Karesh was in fact a good match for her business.

There has been much talk lately about whether risk insurance advice will go down a similar path to investment advice, with fees rather than commission being the basis of remuneration.

If fees do become more of a reality, the financial adviser’s value proposition will become a key element in whether or not sustainable fees can be charged. The ability to be able to deliver on that value proposition will be pivotal.

Business success for the financial adviser in this environment may in part rest on how well they can manage the client risk as well as the client’s risk.