Faceoff: Consolidated reporting

Participants:

Kathryn Del Greco, vice-president, Private Investment Advice, TD Waterhouse

David Christianson, fee-only financial planner and investment counsel, Wellington West Total Wealth Management Inc.

Is it possible?

Kathryn Del Greco: Yes, it’s absolutely possible and essential. A thorough understanding of clients’ asset mix and risk tolerance would be impossible without knowing how their assets are structured. If someone wanted to give you a home inspection, you’d certainly let him or her into more than just one room of the house. The important thing about consolidated reporting is it allows you to look for inconsistencies between what clients vocalize and what they actually do. Some clients might tell you they’re very conservative and low-risk, yet when they show you investment statements from another firm, you might see a huge discrepancy between philosophy and action. That allows you to dig deeper in your conversations. Two things might have happened: The client’s risk tolerance could have changed because of the market and you need to know that, or the client doesn’t realize how much risk he or she really has at the other firm. And that’s an opportunity for you to provide explanation and guidance.

Dave Christianson: Yes, it is critically important if an advisor wants to use the terms advisor, financial planner or wealth manager. If … salesperson or stock jockey, then maybe it isn’t so important. But I haven’t heard many people use those self-descriptive terms for a while.

How can you possibly provide holistic advice without the whole picture, and how can clients really know where they stand unless they see the whole picture. And if you—their advisor—can’t provide it, who will?

It’s like going in to see a doctor and saying, “I’ll let you look at my leg but you can’t take my blood pressure or weigh me. And if you’re willing to write me a prescription based on just looking at my leg, then I’ll consider it.” That’s the approach some clients try to take. And some advisors are happy with that; they’re legmen. But that’s not what clients hire us for. They not only hire us to diagnose what might be wrong with them in a holistic way but also help them reach their goal weight and improve their fitness. To me there’s no other approach. The best way to offer wealth management is to see everything.

Kathryn: I don’t find any resistance from clients whatsoever; especially once I position myself as a holistic wealth manager. I certainly don’t give advice on assets held at another firm, but I include them in the asset mix and balance out my asset mix relative to how a client’s other investments are doing. I provide prospective clients with a list of documentation they should bring with them, even before our initial meeting. At TD, we ask clients for copies of month-end statements from all their providers, and then we use NaviPlan, a financial planning software to input assets held externally from the firm. We go into a great detail about our clients’ real estate holdings, investment holdings, employment income, pension benefits, insurance policies, estate-planning needs, philanthropic goals, children’s education, and eldercare needs. We view this data as a living, breathing document that continues over the life of the relationship. Any changes are updated on an ongoing basis. I tell clients the best job I can do for them will be based on the degree of disclosure they share with me.

Dave: In my practice, because clients have their assets at a variety of services, it’s the other way around—we report to them about what they’ve got. So I find out who their suppliers are, get permission to access that information to produce a report on what they have. I get copies of financial statements and put them together on the client’s statement of assets and liabilities. We input all this information into financial planning software for all our clients, no matter where their assets are held, so we have the access we need to prepare quarterly reports on their global assets. We provide value by educating clients as to the short- and long-term value and role each asset and liability plays. Our clients hire us to provide them total wealth management.

Changing needs

Kathryn: I’ve been an advisor for 22 years and have seen a significant change in client mentality. Back in the day, when the role an advisor played was really that of a stock picker, clients certainly held intimate information about their financial picture closer to their chest. Things have come full circle. A 2008 Canadian Securities Institute study of affluent investors—those with $1 million of investable assets, not including their principal residence—showed these investors are looking for a different type of advisor than what they’ve had in the past. They need someone who’ll provide a holistic viewpoint on their household assets, and play the role of a quarterback in pointing them in the right direction. The survey also found one out of 10 clients felt they didn’t have the right advisor for this kind of relationship.

It’s not to say the current advisor doesn’t have the qualifications, but perhaps he or she isn’t communicating the depth of their resources or their accreditation as effectively. Almost 51% of clients make a change to their advisor either in pre-retirement years or post-retirement because they’re trying to slow down the pace of their lives and want things to be simpler. So if you’ve only been focused toward managing their stocks or bonds or mutual funds and haven’t positioned yourself as a wealth advisor or expert in holistic wealth management, you’re at risk of losing that client.

Dave: I’ve seen a marked growth in my book of business over the past four to five years. Most of my clients are ahead of the boom; I focus on the parents of the baby boomers. I find growth in business isn’t because the boomers are hitting 55 or 60; it’s because the pre-war generation is turning 65 and 70. My business started really growing 10 years ago when the pre-boomers were hitting 55 and 60. My book grew fourfold from 1998 to 2008.

For clients seeking consolidated reporting, their advisors weren’t providing a consolidated picture, so they hired us. And we don’t suggest they leave behind advisors or professionals who’re doing a good job for them, we bring them into the fold and work with them.

Adapting to change

Kathryn: Advisors are adapting to the changing client needs through continued education. Designations such as the Chartered Partner of Strategic Wealth—a key designation for consolidated reporting—are much more in demand today. In the last six months there has been an almost 50% increase in the number of advisors holding this designation.

Dave: Advisors definitely need a CFP or an RFP designation. They need to be well trained and experienced generalists. Access to specialists and experts in all the different areas is also important. This model resembles the medical model with the general practitioner—he knows a lot but isn’t going to remove the gallbladder, but knows when to bring in the specialist.

And I don’t suggest the GP is better than the surgeon; their roles are different. There are financial planners who don’t handle investments; instead they delegate that to mutual fund managers or investment counselors or they help a client develop an ideal mix and then refer the client to an investment specialist. There’s a huge role for specialists and I depend on them heavily. But the client hired me to help them set their life goals and achieve them, and that requires an overall look at things.

Who needs consolidated reporting?

Kathryn: The higher-net-worth clients—those in busier and higher-demanding professions—are the ones demanding more holistic planning. They value your advice, and the role you play in helping them save time. There’s also a degree of distrust in the current market and investing in general, and investors are looking for fresh perspective making this an incredible opportunity for advisors.

Dave: It’s not just the high-net-worth clients who’re demanding this service. The picture that pops to my mind is the 30-year-olds who have busy jobs and a couple of kids, and who’d love to have somebody looking after their finances. The only group that doesn’t want consolidated reporting is either the do-it-yourselfers, or people who’ve been badly burned by their advisors and can no longer trust them.

Our clients are older, financially independent people—at or near retirement—and preserving their capital is very important to them but doing it themselves is not. They’re people who’d rather trust than do, and want consolidate reporting as well.

Is consolidated reporting easier for fee-only advisors?

Kathryn: Consolidated reporting is the new norm, the new expectation. So client needs must drive the service provided, regardless of how an advisor is compensated.

The growing demand for holistic advice might drive more advisors to the fee-based model. You’d definitely want to be compensated for that extra time and effort you’re bringing to the client.

TD has conducted a number of client surveys, which measure what makes for a positive customer experience. It’s really the basics: Clients like being treated to the highest level of customer care and knowledge that their advisor demonstrates an in-depth level of investing knowledge. They’re happiest with the service when advisors make them feel they’re looking out for their best interests, and that their investments are tailored to their financial needs. You can only provide this type of in-depth service if you have a good understanding of all their assets.

Dave: Yes, I think it is. When clients are paying a fee they’re expecting demonstrable value in return. They are expecting they’ve hired somebody to give them overall advice. Their expectation is you’ll look at the overall picture. There’s also, at the outset, a higher level of trust.

On the other hand, with commission-based advisors, there might be a higher degree of trust if an existing client refers them. However, some consumers are wary of anyone whose income is tied to the acceptance of their recommendations. You might experience a bit of hesitation, “I’ll try this person with a bit of my money first, rather than trust him with everything.”

Can certain registration categories be barriers?

Kathryn: Likely so. You need to be as fully licensed as possible. If you are only licensed for a certain section of investments you will be perceived as being a specialist only in that field. Clients want a customized solution personally tailored to them, and not limited by your registrations. The more licenses you have—and the more flexibility you have with customizing solutions—the more objectively clients will perceive your recommendations.

There’s already a big push for insurance and financial planning licenses within IIROC. It’s important to have a broad knowledge across different venues, so I’m able to identify where the risk is and bring in the specialist.

According to a TD survey, the number one reason advisors need to be perceived as holistic wealth advisors is that an advisor who’s the number one provider of wealth management to a client will automatically be the number one consolidator of assets when the client goes through the consolidation stage, and will generally be compensated by as much as four times the number two provider.

Dave: Registration categories can make it very difficult for a financial professional to be an advisor. And financial professionals have to acknowledge their limitations in the promises they make to prospects and clients. If they can only provide modular or specialized advice, they should make it clear.

However, these categories don’t have to be an absolute barrier. I could have just a life license but it’s my business model to provide comprehensive wealth management. I can overcome the barrier of my limited license if that’s what I’ve chosen to do, and in that I’ve decided to provide comprehensive wealth management to successful business owners and entrepreneurs because they need that advice and I can afford to provide it and I can do a good job of it, even though I still only make my income by placing enormous life insurance policies with them. Some of the most spectacular life producers I’ve met utilize that business model.

In some cases they charge fees to do their financial planning and comprehensive wealth management, but those fees are minute compared to the enormous commissions on life insurance placed on people with huge needs. The real benefit is the client sees them as a professional and opens the door for that advisor to provide appropriate specialized solutions for his or her situation.

Kathryn: The baby boomer generation in now reaching its peak net worth years and going into pre-retirement. This is going to be one of the most dynamic changeovers of client relationships our industry has ever seen, at a time they have the most amount of money and are looking for wealth managers who are going to simplify their lives, consolidate their reporting, and look at the big picture for them. You can’t do that for them if you’re still just a stock picker.