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Part 3: Driving Business Capital Value

Posted on 28 July 2021   

In our previous newsletter, Driving Success in Challenging Times – Part 2: Driving business capital value, we provided examples of processes that demonstrate TCF (Treating Customers Fairly) Outcomes 1 and 2 and how these principles can be embedded into the business to demonstrate to your clients that they are placed at the heart of your business. Implementing business practices that evidence the principles of TCF, contributes to driving business capital value by contributing to both client and income retention.

When providing a service to a client, we always make the client our priority. However, at times when things do not go as the client expects e.g. a claim is rejected or an investment does not perform as initially hoped, the client feels aggrieved, blames you and, even worse, lodges a complaint with the FAIS Ombud. In such instances it is sometimes difficult to prove that the required processes were in place, consistently followed, that you were acting in the client’s best interest and, ultimately, that you treated the client fairly.

Consider the following:

  1. How do you assess the clarity, appropriateness and fairness of product information provided to clients?
  2. Is there a process in place to make the necessary adjustments when it becomes clear that product information that is being used, is inaccurate, unclear, unfair or misleading?
  3. Do you maintain up to date, retrievable, and secure records of all product information that has been provided to clients and any other material interactions with clients?
  4. Do all advisors consistently follow a documented Advice Process?

In this newsletter we will provide examples of processes to demonstrate that your business disclosed the correct information to the client to make an informed decision. We also look at processes that demonstrate that the advice provided to clients suits their specific situation, their needs and objectives. In doing so, your business is able to show how the principles of TCF Outcomes 3 and 4 have been incorporated into your business processes.

TCF Outcome 3 – Customers are provided with clear information and kept appropriately informed before, during and after point of sale

In order to implement this outcome, there needs to be a clear understanding of your target market and which product solutions are most suitable to their financial needs. Once this has been established, it requires a framework. This framework should provide for clear and effective communication with prospective and existing clients before, during and after a suitable product solution is recommended, based on their financial needs. As mentioned in our previous newsletter, after identifying the client’s needs it is important to immediately set up a Service Level Agreement (SLA) and discuss the services you will provide. This discussion and agreement should include the relevant fee structure and the value the client received as a result of doing this work e.g. ensuring the appropriate retirement and estate planning is in place, and as a result, providing peace of mind for the future. Tangibilising how your professional services help clients meet their financial needs and goals, is a key factor to educating clients regarding the value that is received for the fee that is charged.

A key aspect of clear and effective communication is an advisor’s ability to fully and properly disclose any information that the client would need to make an informed decision as per the requirements in the FAIS General Code of Conduct (GCoC). The information provides the client with valuable insight required to make an informed decision. On the other hand, the business needs to adhere to the FAIS requirements, as, not only is this your license to operate, it also directly contributes to driving business capital value. Having a sound and consistent regulatory process that is designed to meet the client’s financial needs, contributes to client and income retention.

The advice that is provided to your clients has a significant impact on their lives. It is the vehicle through which they can achieve their goals, protect themselves and their family and provide for their children’s education. Clear and effective communication also contributes to building solid relationships, as clients come to rely on their advisor, especially during a wide variety of significant developments – for example, when going through a divorce, during times of joy, or for educational planning when there is a new addition to the family. They trust you to disclose and alert them of all necessary information related to the product solution which may impact their chances of achieving their financial goals.

Meeting clients’ expectations, and as a result financial needs, directly contributes to driving business capital value. As mentioned in our previous newsletter product specific training on new products and on changes to existing products forms part of the competence requirements set out in Board Notice 194 of 2017. Respondents from the CFAI Trust Report 2020 said they would expect advisors to be able to manage their portfolio better if they showed that they undertake relevant continuous professional development each year. Part and parcel of clear and effective communication is ensuring that your knowledge and understanding of product solutions provided by your business, are up to date. Therefore, your client receives clear and accurate information about the proposed product solution before and during the process of it being implemented. It is important to have regular review meetings with clients based on your business’s SLA with them.

Having the types of processes in place as discussed here, embeds TCF Outcome 3 in your business.

A further important point about effective client communication is understanding a client’s behavioural preference. Clients have different behavioural styles, and how you interact and deliver to them will be more successful if you are tuned into their preferences. They are as follows:

  • Before meeting with a client, consider whether they prefer the detail of facts and figures? These clients are concerned about the how and the planning. They are cautious and thorough and want to be sure before a decision is made which is why the detail is important.
  • There are other clients who want a short summary of the most significant points. These clients are more concerned about the results and outcomes which is why they simply want to know what must happen and by when.
  • Alternatively, you may have a client who prefers to talk about family and friends, wanting to connect first. These clients’ main focus is on the relationship and therefore they are more open with their emotions and personal information.
  • You might also have a client where it is more important for them to see the ‘big picture’ and where the solution fits into their overall needs. These clients are more focused on their vision of the future, they are creative and display energy and enthusiasm.

A more individualistic approach would contribute to the client feeling that they are truly understood and are working with what could be perceived as a mentor. This creates a feeling that their advisor truly acts in their best interests.

In the CFAI Trust Report, retail investors rated having an advisor who acted in their best interest as the most important criterion when hiring an advisor. The first things they look for, which shows them that the advisors’ interests are aligned with theirs, is if the advisor acts as a mentor to help them make better decisions (65%) versus an expert that makes decisions on their behalf (35%). Second, investment professionals should provide transparency around products and fees. 83% of the retail investors want their advisor to offer products from different businesses, not just those that on which they get a commission.

Providing clear and accurate information impacts the client relationship positively, which directly affects client retention, and as a result business profitability. A good client-advisor relationship impacts business growth as clients are more likely to refer advisors who they trust. 56% of respondents in a Vanguard report found their advisor through a referral and 94% were extremely likely or likely to refer an advisor they trusted highly. As mentioned earlier, when clients have a solid relationship with their advisor, they rely on them and share personal information because they trust their advisor to provide the advice they need. To maintain this relationship requires trust. Trust to not share this information, judge them, or mislead them and take advantage of their personal situation but instead, be their mentor and their guide. Show them that you are there for them by communicating clearly and effectively before, during and after the point of sale.

Clear and effective communication with clients before, during and after point of sale, is a critical step in laying the foundation for long-term client relationships, which is a key factor in driving business capital value.

TCF Outcome 4 – Where advice is given, it is suitable and takes account of customer circumstances

In Part 1 of this series, we referred to the fact that a documented and repeatable Advice Process to provide clients with initial and ongoing advice, drives business capital value. Having such a process in place, combined with identified suitable product solutions for your target market, will contribute to mitigating risks relating to unsuitable product solutions and advice.

The FAIS GCoC has specific requirements regarding the process to ensure that advice is suitable to the client’s needs and objectives.

In order to implement this outcome from a client perspective, advisors need to show that they understand the client’s current financial position and financial needs. To do this, you need to gather as much information as necessary about the client. For example, their income, expenses, liabilities, family history, dependents, retirement plans, financial objectives and financial concerns.

Key aspects of providing suitable advice is both clear and effective communication and having a client orientated approach. This approach has at its essence, designing the business processes and educating all employees to ensure the client’s best interest is placed at the heart of the business. Ultimately by doing this, the business consciously plans to consistently build and retain long term relationships based on clients’ trust and have the benefit of being able to demonstrate the two TCF Outcomes discussed in this newsletter. Some of the benefits of having this approach are:

  • Satisfied clients who are loyal for longer
  • Long-term relationships with clients create a constant revenue stream
  • Engaged clients will provide referrals
  • Respect from the community as a professional
  • A flourishing, ethical business
  • Being able to leave a legacy
  • Satisfaction from doing the right thing

A business which instils the practices mentioned above, creates both a client-focussed business and at the same time, contributes to driving business capital value. For example, spend enough time on getting to know your clients’ needs and objectives. Record important information which is necessary to the advice being provided and provide clear evidence to back up your recommendations. Ensure that the questions you ask are tailored to the specific client. Every client is different, and their financial needs vary. Provide the client with a detailed Record of Advice which covers all the areas discussed, this is not only a regulatory requirement, but it also helps to remind the client of all the details discussed and why the required solutions were recommended. This process, further, confirms that the client is dealing with an expert they can trust.

Good practice includes reviewing Product Suppliers, product solutions and the Advice Process from time to time. Are you comfortable that you are on the right track? During your advice monitoring process, have any risks jumped out? For example, where a documented and repeatable Advice Process has been implemented as the consistent standard to adhere to, have you identified any inconsistencies in the application thereof between advisors? Or did you fail to alert clients about the impact and risks of certain decisions they might make e.g. early termination of a product, non-payment of premiums, reducing benefits e.g. life cover or income replacement? Were clients advised of the associated risks, and the possible impact of reaching their required financial goals?

Documenting and keeping detailed records of the Advice Process and other key client interactions, is in the best interest of both the business and the clients and is critical to evidence when things go wrong, and to ensure that promises made are delivered on. Not only are these actions necessary to protect your business in the event of a client complaint lodged with the FAIS Ombud, but they help to continue building client trust, and as a result help to retain clients and income streams.

At the same time as reviewing Product Suppliers, product solutions and the Advice Process, it might be worthwhile to review the business processes in the Operations Manual and retrain employees. This action will contribute to mitigating the risk of negligent behaviour as much as possible or following a process which is outdated e.g. a Product Supplier might have changed their process and the client has to recomplete a form, or incorrect information was provided to the client regarding the time it takes to pay out a claim as it had changed.

When last have you reviewed your Professional Indemnity (PI) Cover? Is the cover you have in place enough to protect you in the event of negligence or cater for the possibility of receiving an advice-related or other complaint?

Masthead PI Cover Scheme: The Masthead Professional Indemnity Cover Scheme has been custom designed to suit the needs of independent financial advisors. It offers the right combination of benefits, price and flexibility to suit the needs of our members. More than 50% of Masthead members are already on the scheme, enjoying the benefits and competitive pricing. For more information, please contact your Compliance Officer.

As we can see, the overarching theme in this newsletter is clear and effective communication. It is also important to provide clients with decluttered information, saying things in a way that clients clearly understand. These principles will ensure that the client has the necessary information before, during and after the point of sale to make an informed decision. But it also ensures that the client has a clear understanding of why a specific product was selected in order to suit their specific financial needs.

In this series on TCF principles and Driving business capital value, we have now discussed the first four outcomes. The last two TCF principles will be discussed in the next newsletter.

Treating Customers Fairly – Webinar and Online Course
Masthead offers a
Treating Customers Fairly webinar and a TCF Overview Online Course to ensure you have a good understanding of the six TCF outcomes, the areas within your FSP that require TCF implementation, how to implement the outcomes, and the types of Management Information needed to demonstrate integration in your FSP.

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