Suitability Drives Annual Client Reviews

Suitability Drives Annual Client Reviews

“What’s been happening in your world this past year?” is probably the most important question an advisor can ask in an annual review with a client. And it is all about suitability.

Ask them if they need to review or change their investments, insurances, estate planning or financial goals and they’ll almost certainly say no. Because they often won’t recognise the importance of changes in their lives.

But ask an open-ended question, like “What’s been going on for you?”, and all sorts of ‘stuff’ will tumble out. They’re helping a child buy a home; they hate their work and want to retire early; they’re facing medical issues, or they just want to move somewhere warmer.

The annual review is a fact of life for almost all financial advisors around the world, who have ongoing advice-relationships with their clients.

But until recently, most annual reviews were simply reporting investment performance without really re-examining the suitability of the financial structures, investments, and goals. In some cases, the annual reviews never even happened, leading to fee-for-no-service scandals such as the one recently uncovered in Australia.

Clients often don’t recognise suitability shifts

Often people don’t draw that line between their life events and their financial plans because they won’t see the connections that will be obvious to a financial advisor. And making those connections is a critical part of maintaining suitability.

Your clients have busy lives, where their financial focus is often just on their immediate spending and savings. Some won’t have the financial literacy to recognise shifts in the life that affect suitability, but many simply won’t care to spend the time pondering it — that is what they expect their financial advisor to do for them!

Suitability provides a framework and methodology for approaching annual reviews in a meaningful, thorough manner. Suitability brings the goals and needs of the client to the forefront and tests that the investments, insurances, and estate plans are still relevant, appropriate, and effective.

Goals are central to suitability

Annual reviews that focus just on investment performance are not very useful for anyone. The number – 3%, 8%, whatever – is presented, but then what? It’s just a number so the discussion will, naturally, revolve around how to make it ‘better’. But then it will just be a different number, without any context.

Annual reviews that focus on progress toward goals are very different. These reviews give that ‘performance number’ relevance and context, by looking at it through the prism of suitability.

Goals are both a roadmap and a unique, personal performance indicator. For example, what does it mean for us if this year we only saw half of the investment returns we expected? We won’t have progressed toward our goals as much as anticipated, so how do we respond? Do we hold our course, or make some changes?

This is where questions about suitability come into play.

Reviewing the elements of suitability

When a financial plan is made on suitability principles it is built on four foundations:

  1. Knowing the client
  2. Knowing the financial products
  3. Understanding why and how the client connects with products
  4. Obtaining the client’s informed consent

Each of these elements requires annual review but, importantly, this does not mean an annual ‘reinvention’ of the plan. Rather, we are probing and testing that the arrangements we have in place remain relevant, useful, and appropriate for the client. We are looking for changes that might have made our plan unsuitable.

Most advisors will have their fingers on the pulse of the financial products with which they deal, with regular updates about their performance and management. But the client is a closed book when they walk in the door, which is why the “What’s been happening …?” question is so critical.

Much of the annual review is, in fact, updating your knowledge of the client’s circumstances and goals — then testing that the previous recommendations still hold as ‘suitable’ given what you have just learned.

It’s explained to the client, in terms they understand, why the existing arrangements are suitable — or why they are not suitable, and what needs to be done to fix them. The client can then renew their consent in an informed manner.

The review cements the relationship

Annual reviews will throw out tasks to be performed, such as rebalancing portfolios or adjusting to estate planning. But those mechanical tasks are quickly forgotten by clients.

Clients remember that you treated them as a person. You inquired into their life; found out things about them that impacted on their financial life and adjusted their affairs accordingly. They see suitability in action, being tailored for them.

The relationship between this client and their advisor is deep and rich. Whereas a client’s relationship with a presenter of a ‘performance number’ is very shallow, where anyone promising a better ‘number’ can steal the client away.

I have been using FinaMetrica for over 17 years for onboarding new clients. They like the extensive value of the reports; but what we appreciate is the innovations in technology, the value of the client-facing materials and the development of the life-long client relationships as I get to really know their behavioral tendencies. FinaMetrica has assisted me in building a very successful practice and we highly recommend it for any advisor who wants to enhance the overall value of their client relationships.

Ron Wilkinson - Portland, Oregon, USA
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