Chapter 8: Client advising skills Flashcards
8.1: Adviser communications with clients
NUMBER OF QUESTIONS 4/100
Written and spoken communications with clients must be fair, clear and not misleading.
Clients should be left in no doubt about the services that will be provided to them, and the cost of those services.
8.1.1: Information versus advice
We’ve mentioned this several times, but there is a great deal of difference between giving the client facts and explanations and making a recommendation.
If a client simply asks an adviser to explain a product, service, or concept and then makes a buying decision, they are not receiving financial advice.
Also, if a firm asks clients questions with a view to narrowing down the type of products that might be suitable and then provides details of those products, that’s not financial advice either.
8.1.2: Financial Advice
If we take an overview of the advice process it covers a minimum of two client meetings (dependent on the
complexity of the client’s situation) through which the adviser will:
Gather Information (fact find)↓
Assess a clients circumstances↓
Make a (written) recommendation
The client must provide good information for the recommendations to be appropriate.
One key thing about advice is the written recommendation. The suitability report will be part of this, but it also includes other written documents relating to the firm and the product(s) recommended.
8.1.3: Company information
All authorised persons must give customers information about the firm, type of service and advice given and their costs.
This can encourage competition and customer choice, two positives in the eyes of the FCA. As we discussed in the previous chapter, this is usually done as part of ‘initial client disclosure’, using a document such as the Services and Costs Disclosure Document (SCDD).
8.1.4: Product information
Also, as we saw in the previous chapter, clients who are recommended products will receive their recommendations in writing to allow them to decide whether or not to proceed.
Investments
• A Key Features Document (KFD) or Key Investor Information Document (KIID)
• Including a personalised illustration
- Outlining the main points e.g. ARCTIC (aims, risks, commitments, tax implications and cancellation rights)
- Covering costs/fees plus an explanation of how any costs and fees impact on investment performance and returns
General Insurance
• What the insurance covers and its major exclusions (what it doesn’t cover)
• Any limits or restrictions
• Any ancillary benefits
Mortgages
• A Key Features Illustration (KFI)
- Presents personalised costs and features in a standard provider format
- Allows clients to make direct like-for-like comparisons
Adviser communications with clients SUMMARY
- All adviser/client communications must be fair, clear and not misleading
- Advice means guiding a client as to the most suitable products for their personal situation
- The advice process usually spans a minimum of two client meetings
- A suitability report contains written information about an adviser’s client recommendations
- Certain types of information must be disclosed, including company and product information
8.2: Fact finding
Establish all the relevant information required to assess customer needs and make suitable recommendation to meet those needs.
8.2.1: Fact find sections
A fact find is made up of different sections as previously covered.
How many can you remember from chapter 7?
Personal Details
• This is likely to include basic information about the customer, e.g. their dates of birth, address and marital status
• It also extends to less-obvious information like smoker status, employment status, number of dependants, residence, and domicile, as these allow an early insight into potential needs the customer may have, e.g. life or income protection
Financial Details
• Existing assets and liabilities come under scrutiny in this section.
• This will include an income/expenditure analysis that allows an adviser to establish a budget to meet any potential needs, and also to consider the client’s overall net worth
•Details of existing policies should also be captured, to establish the customer’s experience, and also any shortcomings in their plans, e.g. pension or life cover gaps
Plans and Objectives
• Whereas the previous two sections deal with factual information which can be precisely stated, these sections of a fact find tend to be less rigid
• Here, an adviser can test the suitability of existing plans and link them to any stated financial objectives the customers has informed them about
• This will probably lead to a discussion about advice the customer has taken in the past, again building an understanding of the customers mind-set
8.2.2: Principles of fact finding
Fact finds should be a collaborative discussion, offering benefit to advisers and client alike, not an interrogation. There are often supplementary questionnaires to complete, dependent upon the financial advice being provided, e.g. a separate section with specific questions about retirement planning or family protection. These are designed to streamline the fact find, thereby retaining client engagement throughout.
The end result should be the commencement of a financial strategy that will:
• answer the client’s demands and needs in the most efficient and affordable way, and
• provide the appropriate level of remuneration for the adviser
Different question styles will be required to elicit different types of information. If the adviser wants more
hard facts, he/she should use closed questions such as:
• How old are you?
• How many children do you have?
• What is your marital status?
If soft facts are required, open questions should be used such as:
• What would you like to do in retirement?
Fact Finding SUMMARY
- A fact find documents all the key information relating to a client’s circumstances
- It is made up of several different sections
- Affordability must be established
- Client objectives must be discussed and prioritised
- It is a written record of the first adviser meeting with the client
- Different question styles can be used to elicit different types of client information
- 3: Assessment and analysis of client information
- 3.1: Assessing client demands and needs
Now that all relevant information has been gathered, it’s time for the adviser to analyse potential needs and formulate options for addressing those needs.
This is usually done ‘back in the office’ between the first and the second client meeting.
Each need area should be:
• Identified: from the fact find
• Discussed: with the customer to gain their views
• Quantified: shortfalls must be articulated and identified
• Prioritised: customers rarely have the budget to meet all needs, so prioritisation is likely to be required
It is also important that any identified needs are personalised so that the customers can see the issue and
impact specific to their circumstances.
In the event of a customer insisting that an adviser follows their priority as opposed to the advisers, it is
important that this is fully documented on the fact find.
Client attitude to risk
One of the most important things to establish with a customer is their attitude to risk (ATR). It is not unusual
for a client to have more than one ATR, so different ATRs relating to their different need areas.
It is quite common for clients to be more cautious in some areas such as mortgages and house purchase but
a touch more adventurous in areas they perceive are a long way away, such as retirement planning
It is important to establish these parameters clearly. Advisers need to use the fact find to clarify the client’s:
• understanding of investment risk
• ability and willingness to take risk
• understanding, knowledge and previous experiences
• capacity for loss. Can they take the hit? Do they need to?
Customers have been proven to be more concerned by losses than they are excited by gains, so their views must be recorded, and they must recognise the potential for loss as well as gain.
An advantage of a questionnaire approach is consistency both for the adviser and the customer.
Ethical views
Some clients may not approve of investing in companies that don’t meet the client’s ethical values. Any such preferences need to be documented and honoured in any recommendation.
This may involve:
• ‘negative screening’; avoiding certain practices, such as any firm that is involved in the arms trade
• ‘positive screening’; actively seeking out firms that make an effort to be as ethical as possible.
• ‘neutral approach’; choosing firms that are considered ‘socially responsible’
8.3.2: Affordability and Suitability
Affordability
Assessing affordability and suitability extends beyond the initial recommendation. It is important to consider the long-term relevance of the plan and whether it will continue to be affordable without causing undue strains on the client.
The income and expenditure analysis that should have been undertaken within the fact find will demonstrate the customers’ ability to pay the premium, and questions can be asked to confirm the customers’ willingness to fund them in the future.
If a client is committing to a long-term product, the fact find must show that it is affordable both at the point of sale and during the proposed product term.
KEYFACT
For single premium recommendations, affordability must be shown at point advice is given.
Regular premium affordability must also be shown throughout any product term.
What different types of client expenditure is there?
This is usually split into essential and non-essential.
• Essential: Mortgage repayments, utility bills, school fees, food and drink costs
• Non-essential: Holidays, socialising, social media
Suitability
When we say that a product is ‘suitable’ we can mean many things. What may be suitable from a personal
objectives perspective may not be from a financial objectives view.
Assessment and analysis of client information SUMMARY
- The financial adviser must consider all options in relation to client needs
- The standard priority order is: PIPSI: Protection, Income protection, Pensions, Saving & Investment
- Affordability is a key consideration
- Single premium products must be affordable at point of sale
- Regular premium products must be affordable throughout the term
- Client attitude to risk is another key consideration
- This may be the same for all need areas, or vary for different need areas
- There may be ethical considerations to take into account
- A client may have different priorities from the adviser
- The adviser can still transact the business, but this must be clearly documented
8.4: Adviser recommendations
A recommendation can be in any form. It can be presented orally, in written format or both.
Either way, there are fixed rules about what a suitability report must contain.
8.4.1: Reports
• An oral presentation should involve two-way dialogue, fully involving the client
- Any advantages and disadvantages should be discussed
- Strong presentation skills are required to ‘paint a picture of the recommendation
- A combination of closed and open questions should be asked to elicit hard and soft facts
- A written report can be more comprehensive and allows the client to ‘re-visit the recommendation
- The language should be simple and jargon-free
- The report should present the recommendations in an easy to follow format, avoiding long paragraphs
- Again, advantages and disadvantages should be presented in a balanced way
- A balanced view must be given
8.4.2: The Suitability Report
The suitability report is an FCA requirement for most products and should document the recommendation made. It is not required for products not viewed as regulated activities. NS&l and stakeholder products are two examples of products that use a simplified advice process.
Most reports follow a set format: 1. Summary of the current situation • Key facts considered • Long term aims ↓ 2. Demands and needs • Articulates the identified needs from the fact find • Confirms that the adviser understands the client ↓ 3. Needs not addressed •Specifies any identified needs not addressed by the current advice recommendations ↓ 4. Formal recommendation •The solution: at a high level •Outlines the costs involved • Any fees or commissions payable • Highlights the tax situation ↓ 5. Provider chosen •Clear reasoning as to why a particular product provider has been chosen ↓ 6. Risks •What risks are in the recommendation • How do these align with the client's risk profile ↓ 7. Summary •Summarises the whole recommendation • Final comments •Suggestions for any further actions
In summary, the report should give all relevant details of the recommendation succinctly, and in an easy to read format. It needs to be a reference document for the customer in years to come.