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The Matchmaker: Finding Suitability through KYC & KYP

Cora Pettipas, CFPBy Cora Pettipas, CFP, Canada

A client meeting is like a traditional dance, there are mechanical steps you have to memorize and practice to the point where you can make it look graceful and easy. Within this dance, an Advisor plays matchmaker, paring clients and the best possible investment solutions to meet the client’s investment goals. The trick is that when they are purchased, the financial outcomes are usually unknown. Through KYC (know your client) and KYP (know your product) Advisors make educated guesses as to the best strategy for the client. Getting to know your products takes time and diligence, and getting to know your client is really an art. It needs to be thorough without being intrusive or disengaging for the client. Pairing the two creates suitability.

I have been across the desk as a client and have experienced getting bombarded by an Advisor asking mechanical question after question, with no flow in the interview, and with the Advisor not giving the reasons behind the questions. “Name, age, address, occupation, income…” As a client, this felt like an interrogation and a complete waste of my time. I also felt uncomfortable, and was feeling unwilling to fully disclose my situation. This painful inquisition lasted two hours, and I changed financial institutions shortly after that.

I have highlighted the process of KYC, KYP and suitability to help enhance the experience for you and your client.

1.      Demographic Information

This is the client’s backstory. There are basic demographic questions that have to be asked, but try to go beyond the obvious and really find out the client’s history. One very important area for an Advisor is the client’s occupation, as it indicates income (and future income volatility). Let the client tell their story. It is a rare thing that someone will listen to us without an agenda, but just in the spirit of understanding. The client will sense this, and be willing to disclose more important information that will help you make more accurate recommendations. Some common examples include: How did that client start out? Where is the client from? Why did the client choose their current profession? What does the family dynamic look like? Do they have any passions or hobbies? Finding out the client’s backstory is a lengthy process, but it is the best investment in time you can make, and is the foundation of the suitability process.

2.      Financial Situation & Net Worth

This is the stage an Advisor can apply the numbers to the backstory. As an extension of the client’s demographics, you can attain the needed data to quantify the client’s financial situation and net worth. This will go under the KYC as the client’s financial ability to take risks and suffer losses with investments. From my experience, clients love drawing up their net worth, it is a very intuitive and visual exercise for them, and it can be used every annual review to quantify progress.

When creating a net worth statement for clients, it is a good time to have a conversation about the difference between lifestyle and financial assets. A lifestyle asset is an asset you use for personal purposes and tends to cost the client money. It generally does not produce extra income and generally creates additional expenses (like a car or primary residence). Lifestyle assets generally enrich the client’s lifestyle and not their net worth. A financial asset is an asset that the client does not generally use personally. A financial asset generally brings additional income to the client and generally does not bring additional expenses. It generally reduces the client’s lifestyle in the shorter term while enriching their net worth. The lines can be blurred, with a cottage that is also a vacation rental, or a client that has a home based business, for example.

3.      Life Values & Financial Goals

It is important to discuss your client’s values before discussing their goals. This may sound touchy-feely, but values motivate goals, and the goals should drive the decisions clients make with their money. Once you establish the client values and their current situation, you have determined point A. Then, you can more easily attain their goals, point B. The goals then determine the timelines (and rate expectations) you need for your recommendations. Once you have the rate expectations, then you are ready to have the risk and return conversation and determine the client’s risk tolerance. The clients risk tolerance is their psychological willingness as well as their financial ability to accept great variance in financial outcomes for great potential returns.

I would ask a client what their investment goals were, and they would respond, ‘to get as rich as possible’ or ‘to retire as soon as possible.’ As these answers would apply to almost anybody, they do not give any insights into the client or how to accurately determine their risk tolerance. If you feel like you are hearing the same thing over and over again from clients, it may be time to focus on deriving more meaning from the answers. The questions you use depend on your communication style, but following  up with questions about their bucket list, or what they would do once they reach this goal of accumulated wealth will help you get insight into their values and goals.

One caveat to this is that experienced Advisors will already know well over time that points A and B are fluid. Where the client is will change, point A, even from year to year. Where they want to go, point B, will also change, the speed of change depends on the client and their life stage. This is why it is important to offer to meet with your clients on an annual basis (nervous clients may need more, independent clients may want less). If you need to update the KYC, you may have more of a chance with the client if you reframe it as a financial checkup, or an update of the net worth statement. Clients love to see their net worth, and how it changes from year to year, as it is the ultimate personal litmus test if they are building wealth (or in the case of retirees, depleting it at a good rate).  The net worth statement can vary for independent reasons other than the client’s efforts, such as stock market volatility from one year to the next, and the inability to accurately value shares in private investments. However, the exercise is still valuable to you and the client, and is a referral opportunity.

4.      Financial Sophistication & Risk Tolerance

Once you have completed the goals conversation you can then discuss how the client can quantify them and develop an investment plan to accomplish the goals based on the limitations and opportunities of their situation. This is what product is for, to get the client from point A, where they are, to point B, where they would like to go. So the KYC conversation precedes suitability conversations.

Financial Sophistication is another area that merits attention. Regulation implies that wealthy clients are sophisticated and poorer ones are not, which can be inaccurate. Like asking about the client’s backstory, you can ask about their experiences investing. What have they invested in? How did they react to the global financial crisis in 2008? Experience and investment acumen are a better measure of sophistication than net worth and income, and can only be determined through speaking with the client.

Investment experience can lead back into the conversation of risk and return, and risk tolerance. One thing you have to be aware of is risk tolerance creep, where a client will indicate a greater risk tolerance after a good investment run, and will indicate a more conservative risk tolerance after a bad one. One pattern I also noticed was men tended to have greater risk tolerance than their wives. In this case, they have to decide as a couple which risk tolerance to go with, or separate ones for their separate accounts. I recommend them discussing it, as it is usually one spouse that ‘does the finances.’

5. Recommending the Solution: KYP & Suitability

Once you have these four areas covered you can start educating the client on solutions to meet their value based financial goals with the products you have available as tools. An advisor is an educator (KYP) and matchmaker (suitability). Advisors, not just their Dealers, have a responsibility to know the risks, potential rewards, and business structures of what they sell. They need to be able to communicate them effectively with clients. Management Risk, structural risk, and liquidity risk are prevalent risks in our industry. Ask your clients questions to check their understanding. Sometimes, clients will smile and nod and have no idea what you are trying to communicate to them, they may feel too intimidated to ask questions. It is ideal to make them as comfortable with the potential products as possible.

Even though the majority of an Advisor’s time and focus is on KYC and KYP, Advisors are assessed on their matchmaking ability to recommend the right products for the right client at the right time. Financial products are the transportation that takes clients from point A, where they are now, to point B, where they want to be. Products can fail, and sometimes will fail, that is why diversification is a best practice. However, certain clients are not suited for certain products and portfolios. Your ability to justify these recommendations comes from your due diligence on the products and your assessment on the clients risk tolerance, derived from the client’s financial ability and their willingness to tolerate a lesser or greater dispersion of possible outcomes.

Final Thoughts

I am not suggesting there is one right way of getting to know your client and reaching recommendations – it is a highly personalized technique. However, there is definitely a wrong way. If you see the KYC, KYP, suitability process as a step that you must ‘get through’ to get to the real business at hand (building the clients wealth) you are missing an opportunity – even if your firm’s paperwork is onerous and you just want to ‘check the boxes’ to get it completed. To learn more in relatively plain language what is expected in our industry regarding KYC, KYP and suitability, I encourage you to read CSA staff notice 31-336.

Cora is currently the Vice President of NEMA. Cora is also the editor of Exempt Edge Magazine, the industry trade publication on the exempt market/private equity. She is also currently representing Canada on the editorial team of Financial Planet, for the Financial Planners Standards Board. She holds a Bachelor’s degree from McGill University, a Master’s Degree (Finance and Controlling) from Swiss Management Center University, as well as the following designations: CFP, FMA, CIM, and FCSI. Cora has had tenures with several financial institutions in the capacity of financial advisor, wealth management, and financial planning. Her most recent previous position was as a Professor at Mount Royal University, where she taught Finance and Financial Planning. Cora is also the founder and Co-Owner of Melodic Twilight, a successful business venture which is internet based and sells in 19 countries. She has her work published and presented internationally.

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1 comment to The Matchmaker: Finding Suitability through KYC & KYP

  • Hi.. Cora

    Great article,if you google my website you might understand me better. After reading your article if have few questions pertaining to VALUES BASED APPROACH IN FINANCIAL PLANNING, as such i would like to speak to you via skpe to make the session more engaging for both of us.

    Hope we can work out something for the meeting. Thank You

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