Return of the Invisible Client
by Ellen Bessner
Originally published in the National Post on April 16, 2007.
Invisible clients tune out while information is imparted by the advisor to the client, but
tune right in after they lose money in their account.
Many advisors can identify with this typical scenario: Jake, your client, introduces you to
his mother, who is the invisible client.
Jake is in his mid- to late thirties, earns a substantial annual income and has been
investing with you for years. Jake's returns have been substantial. His risk tolerance is
medium-high and his account is rated as "growth."
He is moving his mother's account to you as her returns have been 3% to 5% per
annum. His mother is in her early sixties, is employed as an executive assistant and
intends to retire in five years but needs better returns to retire comfortably.
Jake attends your office with his mother. You meet with them for 45 minutes and collect
the necessary personal information. Jake tells you he will arrange for his mother's
account to be transferred to you, but that she wants the same investments as his own
and that she will sign to ensure Jake has the power of attorney or trading authorization
so he can instruct you for her account at the same time as he instructs you on his own.
You are pleased because you will spend half the time for twice the commission.
You proceed to prepare the documentation and Jake's mother signs each document
obediently and as instructed, including your dealer's trading authorization or power of
attorney form, as most dealers require their own firm's form to be signed.
She has not asked a single question and has hardly uttered a single word. She
passively nods, as required, to indicate her agreement and acceptance with all that is
discussed between you and Jake.
The existing investments are transferred from her previous advisor and you call Jake
and receive instructions to liquidate her GICs and conservative mutual funds, some of
which trigger DSC fees, and invest the proceeds in more aggressive funds and stocks.
For the first year the account does well so the client has made back what she lost in
DSC fees. However, the market takes a tumble--no fault of yours--and Jake's mother
loses a chunk of change, as does Jake.
Jake's mother is the typical invisible client: She is passive; that is, until she loses
money. While Jake has the time to make back the sum lost, his mother's time horizon is
much shorter.
Having allowed Jake's mother to be invisible, she has not been engaged in the process.
She will deny having received any explanations concerning the risk associated with her
account or the planned investment categories, types and strategy to be employed.
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Unless you have taken notes of the fact that explanations were provided and followed
up in writing to her, her word that no such explanations were provided will likely be
believed, over your attestations that long, detailed explanations were provided.
Furthermore, if all communication and instructions came from Jake, how can the advisor
prove he explained the investment risks, and that Jake's mother understood them?
Even if a letter was delivered, can the advisor prove the investments were suitable?
Even if KYC (know-your-client) information is consistent with the investments, does this
not automatically protect the advisor, even though it doesn't reflect Jake's mother's
profile?
With the population growing older, this type of scenario is becoming common. So what
are advisors to do? Here are a few suggestions:
1.
Do everything possible to engage invisible clients and compel them to be
involved in the process. Remind these clients it is their money and responsibility
to work with the advisors to develop strategies and pick suitable investments.
Power of attorney or trading authorization should be relied on only when invisible
clients are incapacitated or otherwise unavailable (when they are travelling, for
instance).
2.
Manage both Jake's and his mother's expectations. Discuss with Jake up front
that you would be pleased to help his mother and she should definitely sign a
power of attorney or trading authorization, but that his risk tolerance is likely
different from hers.
3.
You then want to be certain that his mother is engaged in the process and that
you collect evidence of her involvement and understanding of the types of
investments and the associated risks.
4.
Finally, if she signs a power of attorney or trading authorization in favour of Jake,
do not confuse Jake's risk tolerance with that of his mother. You must be
committed to serving Jake's mother, regardless of who instructs you, and that
means every investment must be consistent with her risk tolerance, time horizon
and financial needs.
Clear communication and paper trails make a big difference when managing client
complaints. Yet with invisible clients, advisors must also engage and involve them in the
process. Otherwise, advisors, branch managers or supervisors and dealers risk the
inevitable when invisible clients lose money ...they become visible!