The Five Proofs of Suitability

PlanPlus Global has had a lifetime working in the financial services industry with some of the world's best advisors. Ours is a dynamic industry with constant change, opportunities and challenges. There is one trend, however, that we have observed occurring with increasing frequency — the mounting concerns regulators express and the demands they make of advisors and their sponsoring firms in an effort to protect investment clients.

No one we know objects to the purpose of this increased scrutiny; however, in our experience, what the regulators are proposing often falls well short of what is already occurring as professional best practice. In other words, most advisors, in their day-to-day work, exceed regulatory requirements by a long shot.

That, however, that has not deterred regulators in Australia, the UK, Canada and the US (and other jurisdictions) from continually “raising the bar”, as they see it, regarding basic planning standards, client interests, fiduciary care and the current favorite, “suitability”.

Very few professional advisors with whom we work are concerned by what some might describe as a heavy hand by regulators, because they are already delivering great advice through a collaborative, planning-based approach to addressing client needs, rather than a prescriptive, product-centric process.

With that in mind, PlanPlus Global, in collaboration with our subscribers, has identified five “suitability proofs” aimed at ensuring that clients’ needs are at the heart of every advisory business.

PROOF #1

Prove you know the client’s circumstances, needs and behavior

Advisors must have a thorough understanding of clients’ circumstances, goals, time horizon and risk profile. Client goals may go beyond financial to lifestyle and all must be considered.

Effective risk profiling is a key contributor to confidence in advice. Risk tolerance is an important factor; however, so is the financial capacity to take risk, the amount of risk required to meet objectives and the client’s composure under conditions of risk. Where couples are involved, you need to know the risk profile of each person because the financial plan impacts them both.

Psychometric risk profiling that goes well beyond traditional KYC information is the best way to gain an understanding of a client’s risk attitude and behavior.

PROOF #2

Prove you have explored alternative financial behaviours and strategies

All too often, clients cannot achieve all their goals with the financial resources that they have available. Here, advisors must explore alternatives with clients and the possibility of achieving goals through different means.

While the trade-off decisions themselves must ultimately be made by the client according to his or her values, clients are counting on you to use your experience and professional judgment to guide them.

A disciplined process for evaluating alternative strategies and products, highlighting differences and illustrating potential outcomes gives clients confidence in their choices.

PROOF #3

Prove you know the products and services being recommended to a client

Once you have decided on an investment strategy, you must be able to prove that you know the products and services being recommended to clients as part of that. You must frame clients’ investment expectations appropriately by explaining product details in language they are likely to understand.

Access to a database, with product characteristics, performance history and any associated costs is essential for applying your professional judgment to evaluating alternatives.

PROOF #4

Prove you have explained the risks in the plan and the recommended products

Advisors must show they have explained the risks in the financial plan, as well as the risks associated with individual services, investments and products to the client. You must ensure clients have a clear understanding of the expected performance of the chosen investments, with particular emphasis on the downside risk to their portfolio.

An effective way to measure and illustrate the risk-return trade-off of a selected portfolio for its suitability relative to the client’s circumstances and risk profile should mitigate any doubt regarding client best interests.

PROOF #5

Prove you received the client’s properly informed consent to accept those risks

Having illustrated the client’s balance sheet over time, and having outlined the risks involved in the plan, you must receive explicit instructions from clients to proceed with the implementation. To avoid any concern that the client did not fully understand what was being proposed, you require evidence that the risks have been fully explained; that the client has accepted those risks and given their informed consent to the plan.

A comprehensive Investment Policy Statement with client sign-off is a great basis for mutual understanding and agreement.

SUMMARY

With the five proofs in place, you are on your way to creating a standout financial advisory business, consistent with the giving of quality financial advice targeted at meeting the needs of clients.

We heartily encourage everyone to see beyond the regulatory minimum to achieve a more personal and client-focused standard.

The PlanPlus Global Value Proposition

The combination of FinaMetrica’s risk profiling application and PlanPlus’ financial planning software into a single product that can be accessed at various levels presents a unique offer to the market. To the best of our knowledge, there is no other fully integrated suite of software tools to address the issue of suitability that is so academically sound and validated through actual use by advisors.
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