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Whenever the topic of the “advice process”, or compliance, comes up most advisers imagine themselves as the plane:
Sure it is a drag for everyone involved – including clients – when compliance requires a bunch of stuff being put into writing that nobody involved in the process actually is terribly interested in. But generally (in my experience anyway) the regulators are not actually hurling missiles at good advisers. They are definitely on the hunt for the bad guys, but they aren’t trying to shoot down the good ones. They just need to check every so often to be sure who the good ones are.
Back to the client engagement however: Most clients just want to get on with making their investments, or getting their tax problem sorted, or putting the damned insurance in place! “Just get it done already” is the prevailing attitude of most clients, right?
But here is the thing: it is only true that nobody cares about the process or the paperwork when everyone is content.
As soon as there is an expression of dissatisfaction by a client then the process becomes really relevant and useful…
In amongst all the process and paperwork though there is one critical point of exposure for an adviser. To cover off this point of exposure you need to be mindful of the 3 key “best practice” principles – and actually I contend that when you get right down to it these three principles are actually the only 3 things that matter when it comes to creating a great advice process.
1. The clients interests are paramount
2. Recommended actions are suitable.
3. You can evidence these first 2 points.
It is inevitable that in the event of a complaint the fiduciary role will be challenged, as it is inevitable that every adviser will incur a risk of conflict. Even those who are selling time and expertise by the hour will be challenged at time of complaint….”the plan was so big and cumbersome because you were trying to pad up fees”….”you made it more complicated than it needed to be so you could charge more – and that is why it didn’t work!”
Understanding that the fiduciary role will be challenged every time (in practical terms), and understanding also that in the real world virtually every single piece of advice given involves compromise on the part of the client, the way to ensure there is an ironclad link between “placing the clients interests first” and “ensuring suitability” is to ensure the clients priorities and compromises are captured, and kept. Professionals generally have no problem providing comprehensive and detailed recommendations – but clients usually have a problem with either paying for all the solutions to be put in place, or fully doing the tasks required to implement the recommendations. So the advice – or recommendations – are usually compromised in some fashion by clients.
THAT is where point 3 comes in….being able to evidence that there was compromise.
To most clients most of the time disclosure doesn’t matter. Written plans don’t matter much mostly. Most of the advice process we work with doesn’t actually matter much to most clients most of the time, because clients deal with someone they trust. 40 pages of guff isn’t going to change whether they will work with you, as by the time they get the massive written report they have already decided they trust you.
Having said all that, of course we have to comply with the rules of the road when driving, and of course we have to comply with the rules of engagement when advising. While grappling with the rules of engagement and making sure you are compliant remember though that the absolutely essential parts of that engagement process are being able to demonstrate later that you placed the clients interests first, and that your advice was suitable, especially in light of any priorities or compromises introduced by the client. Frankly it shouldn’t matter whether you evidence this with a 40 page report or a 40 minute video recording of the entire recommendation discussion with the client. The format of the evidence does only matter to regulators – it wouldn’t really matter inside a courtroom I would venture to suggest. Evidence is evidence.
Evidence of suitability, however you capture and keep it, is the thing that keeps the bogeys off your tail.