How to Achieve a Happy Client-Adviser Relationship

09/27/2010 4:18 pm EST

Focus: MARKETS

Rob Carrick

Columnist, The Globe and Mail

By Rob Carrick, columnist for The Globe and Mail.

You and your investment adviser are a team. So act like it. Put some effort into the relationship you have with your adviser. Don’t just nod your head and think about what’s for supper when your adviser talks about things like risk.

Be frank, ask questions and, above all, resist any thoughts you might have that your adviser is the enemy.

That’s an attitude that lawyer Ellen Bessner sees a lot these days—from clients, as well as from regulators and the media. She says advisers have no control over the stock market, and they suffer along with clients in a bear market.

“Advisers don’t want to shock their clients,” said Ms. Bessner, a senior litigator with Cassels Brock. “When clients are shocked, they complain to regulators, they sue, they’re unhappy. It’s all bad.”

Happy clients, happy advisers. How do we get there? Through teamwork that requires clients to put some effort into building a relationship with their adviser, Ms. Bessner argues.

We’ll look at some ways of making this happen, particularly on the matter of defining the client’s risk tolerance. But first let’s consider the ways that advisers and clients are on the same side.

Ms. Bessner said advisers gauge their success by the size of their “book” of business, which is the total value of all accounts they manage. The way advisers build their book is by having happy clients who not only bring more of their own money over, but also provide referrals to friends and family. In one way or another, most advisers also get paid more in fees when a client’s account increases in value, Ms. Bessner added.

True, advisers get paid regardless of whether the client makes money. But Ms. Bessner’s view is that success as an adviser requires good results for clients.

The early stages are crucial in building the client-adviser relationship. This is where the adviser goes about satisfying the regulatory know-your-client requirement, which means understanding a person’s risk tolerance, time horizon, and experience as an investor. Ultimately, a know-your-client form is filled out by the adviser and signed by the client, who receives a copy.

Ms. Bessner said there are times when not enough time is spent on the KYC process, and advisers are sometimes at fault.

“But part of it is the fault of the client,” she said. “The client doesn’t trust his adviser to really open up to them.”

So open up, people. Tell your adviser about your full financial picture—not just how much you make and have in your registered retirement savings plan, but how much you owe and whether your weekly spending is bigger or smaller than your take-home pay. Then, tell your adviser how you feel about the stock markets, the market crash in 2008, and the lingering feeling that things could go all to hell again.

“Relax—approach the adviser like a doctor or a lawyer or any other professional,” Ms. Bessner said. “It’s in your interest to be crystal clear about how you feel and what you think.”

The KYC form is the definitive record of someone’s risk tolerance and investing background. But in her book, Advisor At Risk, A Roadmap to Protecting Your Business, Ms. Bessner says advisers have to do more to get to know their clients than simply complete a form.

She suggests some additional questions for advisers that clients may want to raise to make sure they’re presenting a complete picture of themselves. Among the matters to raise are past and present jobs and earnings, past and present marital status, and the way in which wealth has been accumulated (steady saving, inheritance, etc.).

In the investment industry, the matter of risk tolerance is sometimes handled with questionnaires that ask people to consider both the gains they hope to make and the losses they’re willing to bear along the way. The bottom line is whether you prefer lower overall returns but less volatility, or more volatility but the potential for higher returns.

Ms. Bessner said the discussion of risk should be more a dialogue between client and adviser than a series of perfunctory questions. An objective of this conversation should be to go beyond basic emotional reactions to the stock market.

“People feel afraid when the market falls, and greedy when the market rises,” she said. “But those emotions are actually irrelevant to your risk tolerance. It’s not about what the market is doing. It’s about how you value your money, whether you can take a risk or whether you can’t.”

A complicating factor in translating risk tolerance into an actual portfolio of investments is that advisers usually get paid more for selling products based on stocks as opposed to bonds. Example: Advisers and their firms share in an ongoing trailing commission that is paid by mutual fund companies and amounts to as much as 1 percent annually of an investment in most equity funds and up to 0.5 percent for bond funds.

A risk-averse investor might be best off primarily in bonds or guaranteed investment certificates. If that’s you, make sure your adviser understands this during your KYC talk and then verify it by taking a look at the investments that are recommended for you.

Reasonable expectations are also part of what it takes for clients to work well with advisers. Safe investments today may offer returns of 2 percent or less and, thanks to the bear market, stocks have averaged just 5 percent in the past five years (that’s share price gains plus dividends).

Expectations are a particular problem with retirees who haven’t saved enough money for retirement and have been kicked around in the stock market, Ms. Bessner said. They’re asking their advisers for higher returns, when what they really need is a portfolio of safe investments to preserve what they have and to curb their spending.

Maybe the harshest reality for people working with advisers, and one causing some of whatever enmity there is between advisers and everyone else, is that losing money is a possibility when investing in the stock market.

“I don’t think any client gives their money to an adviser thinking it’s within the realm of possibility to lose their capital, or any part of it,” Ms Bessner said. “But the way the market has performed, that’s a very real possibility.”

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A team approach

Good communications are essential to the adviser-client relationship. In her book Advisor At Risk, A Roadmap to Protecting Your Business, lawyer Ellen Bessner suggests some questions for advisers to ask clients to get to know them better. For clients, these questions are a good starting point for helping their advisers get to know them better.

Attitude about money:

What do you like to spend money on?

What do you hate spending money on?

What future financial obligations do you expect that concern you?

What, if anything, have you planned to do about these obligations?

What motivates or excites you in your job?

What do you dream about and look forward to?

What are your biggest regrets?

What, if anything, holds you back?

What, if anything, causes you stress and/or disturbs your sleep?

On plans for retirement:

What do you want to do when you retire?

What current or future obligations, if any, do you have to take care of your parents and your spouse's parents?

Until what age do you want to work in your current job?

What work or hobbies will you have in retirement?

What are your children's plans for education after high school?

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