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Get to know your client 

Knowing your client is one of the fundamental responsibilities the advisor must uphold as a professional selling financial products and services.

 

This obligation aims to protect consumers working with an advisor by letting them take advantage of advice tailored to their situation. The advisor must therefore uphold this obligation not only for ethical reasons, but also because it means acting in the client’s best interest. Further, this allows the advisor to determine their client’s current and future needs.

Naturally, after fully learning about the client’s personal and financial situation (their objectives and, when they have an investment objective, their investment time horizon, their risk tolerance, and their investment knowledge), the advisor is in a position to offer them an optimal strategy and products that suit them.

The intensity of the obligation of knowing your client is also higher when clients…

  • are vulnerable due to their age
  • have limited investment knowledge
  • have granted a significant mandate to the advisor
  • have taken out a leveraged loan for investment purposes

The CSF created a Survival guide for productive discussions, which can support the advisor in their approach and enrich their conversations with clients. Included is information on steps in people’s life cycles, ways to check a client’s financial literacy, some behavioural finance concepts, and tips to help the advisor fully understand their client.

Client information

The advisor must first and foremost confirm the identity of the client for whom they have received a mandate. In a timely manner after collecting information about the client, the advisor must confirm their identity with a government issued document. This document must:

  • be valid and not be expired
  • be issued by a federal, provincial, or territorial government (or from a foreign government if the document is equivalent to a Canadian document)
  • include the name of the person
  • include a photo of the person
  • include a unique identification number
  • correspond to the name and appearance of the person who is the subject of this validation

To confirm the identity of a legal person, a corporation, or trust, the advisor must ascertain the following:

  • the nature of their activity
  • the identity of any natural person who meets the following criteria:
    • in the case of a legal person, the real owner of more than 25% of the outstanding voting securities or the person who has direct or indirect control over these securities
    • in the case of a corporation or trust, the person who controls the business

In the case where a meeting with a client takes place by videoconference (over Teams, FaceTime, ZOOM, Skype, or other platform), the advisor must still meet their ethical obligations and confirm the identity of their client before moving on to the next step of the process.

The advisor can refer to the Using information technology section for more information when technological solutions are used to “meet” a client in order to offer them financial services or products.

The second step in the process of knowing your client is determining their objectives. This allows the advisor to properly outline their mandate. To do so, they must be informed of the client’s aspirations, plans, and dreams, as well as their more down-to-earth intentions, whether it’s paying off debt or saving. The advisor is equipped to help the client clearly formulate their objectives by asking targeted, concrete questions that will help them define their true objectives stemming from their current situation.                    

Not clearly defining the client’s objectives constitutes an ethical violation with potentially significant consequences, which could become very serious if multiple years have passed since the client purchased a product.

Once the objectives are set, the advisor must make sure they fully understand them and completes the following tasks, with the help of their client if necessary, in order to specify these objectives:

  • Distribute them over time
  • Sort them in order of priority
  • Evaluate the amounts needed to achieve them
  • Convert each of them into an insurance goal or an investment goal

After specifying the client’s objectives, the advisor will be able to obtain the appropriate information on their situation for their analysis before recommending a strategy or products that suit them within the goal of achieving these objectives.

In order to fulfil their obligation to know their client, the advisor must first ask questions about their personal and financial situation. This will be known after collecting data from the client, which can be done by the advisor, an uncertified person, or even via an online platform. However, it is the advisor’s responsibility to ensure they possess all the information necessary for them to proceed with the client’s needs analysis. If the information obtained during data collection is not sufficient to achieve their mandate, they must complete it themselves or have it completed by the person who originally collected the data.

The Survival guide for productive discussions is a very useful tool for the advisor at this stage.

Open-ended questions are therefore often effective, because they encourage the development of a relationship in which the client feels comfortable discussing their needs and objectives with their advisor.

Among other things, a good evaluation relies on the way in which questions are asked, explained, and put into context. The advisor must ensure that their client understands the meaning and scope of questions being asked, and provide them with additional explanations if necessary.

The information to obtain varies depending on the client’s situation, the type of need expressed (such as insurance or savings), and the services obtained. The CSF designed the tool Know your client, which offers appropriate questions to ask in order to develop a good understanding of your client and specify the scope of their needs.       

The advisor can suggest that their client bring documents that will help them evaluate the client’s overall financial situation in more detail, or send them a form where they can provide data about themselves after their meeting.

A thorough understanding of the client requires a proactive and comprehensive approach, professional curiosity, and regular follow-ups.

Forms

Failing to ask the necessary questions or limiting oneself to completing the account opening forms or other questionnaires is not wise, because the client would risk finding themselves with a product or a strategy that does not suit them, which could lead to disastrous consequences for them or their family.

In reality, even though forms are useful, they are not enough to ensure the fulfilment of ethical obligations. The advisor must push their investigation further, adapting their questions to the client and ensuring they obtain precise, complete answers.

Client’s Concealment

A client may hesitate to answer personal or financial questions or even not see the point of them, based on the type of needs to be covered. In this case, the advisor must explain that the overall information collection is an obligation from which they cannot be exempt, even with the client’s agreement. The advisor can emphasize the legitimacy of their questions and the advantages of providing as much information as possible to best take advantage of their expertise, using the doctor analogy if needed. They can also emphasize that the information is kept confidential, and that the profession requires full discretion.

To uncover the client’s concealments, the advisor can, at the beginning of the procedure, explain to them that they must take the time to answer the questions and provide the required information so they can make recommendations tailored to them.

Information Held by Other Professionals

If the information is in the hands of other professionals with whom the client does business (such as attorneys, notaries, or accountants), the advisor must obtain the client’s written permission if they want to collect this information from them personally.

The advisor is the professional who must evaluate the client’s insurance needs based on their own observations, not others’, whether or not they are professionals.

This doesn’t mean, of course, that the other professionals are incapable of understanding the client’s needs, but rather that the advisor must themselves ensure that a strategy or product suits their situation and come to their own conclusions before making a recommendation, as any mindful advisor would.

What if a client comes forward with a specific need? It’s important to know that the advisor must still collect from the client all the information allowing them to fully understand them. They could, for example, discover needs that the client isn’t aware of. They shouldn’t risk missing out on opportunities to better meet the client’s need due to not having a clear perspective of their situation.

If the client has investment objectives, the advisor must ensure they obtain additional information to establish their investor profile, meaning they must determine their investment time horizon and their risk tolerance level for each of their objectives, as well as their investment knowledge and experience. The section Investor profile provides specifics on these items.

Once they have all the pertinent information in hand, the advisor can conduct their analysis, and their recommendations will help the client cover their needs.

Overall, the advisor must take an interest in their client and listen to them to detect, beyond their words, what is not expressed outwardly. Only then can they help the client take full advantage of their expertise.

Knowing one’s client takes time, but it’s a necessary investment that promotes the establishment of a trusting relationship and lasting partnership with them.

Updating your understanding of the client

The obligation to know one’s client is continuous, because the client’s situation and needs change over the course of their life. Even when an advisor has been working with a client for years, they absolutely must maintain their understanding of this client. This involves re-evaluating the existing strategy and products held by the client to ensure that they still meet their needs and, if necessary, making the necessary adjustments. This is all part of the obligation to know your client.

To meet their obligations, the mutual funds and scholarship plans representatives must make sure their client’s file contains the most accurate and updated information at least once every 36 months, or more often if the account is subject to changes. Keep in mind that it is a good practice to validate the client’s file once a year because their situation might have changed in 12 months.

In the insurance industry, even though the law does not stipulate the frequency at which a client’s file should be updated by the advisor and follow-up needs can vary from one client to the next, it’s a good idea to do so on an annual basis. No matter what, the advisor should take every opportunity presented to them to verify their understanding of the client, as various changes in a client’s situation may have an impact on their needs, especially at each major milestone in their lifetime (marriage, birth of a child, beginning of retirement, new job, etc.). It should be noted that this update remains just as important once the client retires and starts cashing out their assets.

The advisor must also verify whether the client’s situation or objectives have changed before each transaction, except in the case of automatic investment plans, for which an annual update is sufficient. Further, during significant and prolonged market decreases, it is a good idea to re-balance the client’s investment portfolio and enquire about their mindset to confirm their risk tolerance. Effectively, all these changes may have repercussions on, for example:

  • their needs
  • their net worth
  • their income
  • their financial or tax obligations
  • their savings capacity
  • their investment objectives
  • their investment time horizons
  • their risk tolerance

An advisor who fails to update their client’s file exposes the client to many serious consequences.

The client would risk, in particular:

  • experiencing financial losses
  • having to lower their standard of living
  • having to delay their retirement
  • leaving their loved ones in a difficult financial situation in the event of their death
  • continuing to pay for insurance coverage that they no longer need
  • becoming too old to acquire critical illness or disability insurance, which is now too expensive
  • holding on to investments that do not suit them
  • paying redemption fees in the event of needing to withdraw amounts in the near future
  • experiencing unfortunate consequences on coverage in the event of withdrawals before maturity from a segregated fund
  • experiencing a large tax impact upon withdrawals
  • seeing their eligibility for the Home Buyers’ Plan (HBP) subject to conditions

It would also be wise to conduct this follow-up with the client to verify whether they need to update their protection mandate and their will.

By informing clients of the importance and advantages of keeping their file updated, the advisor will establish a proactive collaboration with them.

It should be noted that this update can be initiated by sending a questionnaire to clients. This allows the advisor to have a productive conversation with them and to make appropriate recommendations. However, if there is no answer, the advisor must not conclude that there has not been any change in the client’s situation. They must then contact the clients in question to verify.

This strategy is much more than just a formality. It’s essential to ensure that the strategy in place still suits the client’s situation and objectives, in particular as the client gets older. It is important, therefore, that the advisor include it in their practice.

Notes in the file

Finally, it is essential that the advisor take notes on all their conversations with clients and add them to their respective files. Good, plentiful and detailed notes will allow the advisor to demonstrate that they maintain a thorough understanding of their clients and their situations, in addition to staying abreast of changes that may arise and adapting their follow-up accordingly. If minor changes need to be made, a simple note in the file that documents a phone conversation would be sufficient. If a more significant change needs to be made, the file will have to be rewritten: a new form filled out or edits made to the computer records.

The section Client files – Content provides further details on the quality required of notes to be added to the client’s file.

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