PRAXIS MAKES PERFECT

 
How to communicate effectively with clients while remaining compliant

By Linda Leitz

Financial planners know that effective communication with clients is key to building a trusting relationship and motivating them to act, but at the same time communications must be compliant. Compliance affects how we communicate with clients and how we manage our practices. It requires documentation and proper storage of that information, whether our communication is by text or phone call, through our client relationship management software, or some other means. Academic research offers some ideas for how to reconcile the demands of communication and compliance.

Research meets practice

Academics such as Derek T. Tharp have tackled the topic of financial advisors’ client communications. As an assistant professor of finance at the University of Southern Maine who also founded the financial planning practice of Conscious Capital, Tharp appreciates technical aspects of communication that are both effective and compliant as well as the practicalities of these issues with clients.

Tharp’s article, “Potential Consumer Harm Due to Regulation on Financial Advisory Communication in the FinTech Age,” got me thinking about texting. He discusses a survey in which he asked 90 financial advisors how they would communicate with clients in different scenarios. One group of the advisors was asked without any reference to regulatory and other professional requirements. The other group of advisors was asked to answer the same questions, but with the assumption that “… NO RESTRICTIONS are in place and that you can compliantly communicate with clients however you prefer.” The responses of the two groups indicated that existing regulations provide disincentives to communicate with clients via text messages.

Fear of texting

It’s too bad that many advisors are afraid to send texts. We know from academic research that clients of financial advisors are generally more satisfied when they receive frequent communication to educate them (Cheng, Browning, and Gibson, 2017). Texting enables frequent, timely communication, and most people are now relatively comfortable using it—seemingly an excellent solution for clients’ needs. But how do you do it in a compliant manner?

While texts to clients are not forbidden, compliance attorney John T. Carr of Carr Butterfield pointed out in a phone interview that texts are client communication, so they need to be captured and documented. The problem is that only some applications—like message archiving apps—provide this capability.

Compliance requirements—including the need to archive texts for six years for the SEC and for most state regulators—can make texting onerous for planners. Carr stresses that state-registered advisors need to review the regulations they operate under, as those regulations may deviate from the SEC’s rules.

In addition, Carr warns against using abbreviations and lack of punctuation that is common in texting if the clarity of the information might be compromised. And he adds that sometimes the amount of information the client needs can’t be conveyed using the brevity of a text.

Even if you don’t archive your texts, they could hurt you in a legal dispute because your clients may retain the messages. Former advisor Charles A. Banks pleaded guilty in 2017 to wire fraud in a case in which texts to his client, retired basketball star Tim Duncan, were evidence that bolstered the case against Banks.

How about just talking to your client?

In many situations, replying to client questions by text wouldn’t be the best response, even if it were stress-free from a compliance angle. Tharp suggests making a phone call, which allows for follow-up questions and clarifying any confusing issues. The personal touch of a phone call can also address the stress a client may feel about finances.

Carr is also a fan of meetings, and he recommends a written follow-up (a best practice for all advisors). These written communications, which are also subject to regulatory retention requirements, give clients a reference if they need to revisit information. They also protect the advisor if the client later falsely alleges the planner didn’t provide information or gave inaccurate information.

Plain English

Another way that advisors can improve the quality of client communications while remaining compliant is to use plain English. Providing both legal disclosures and plain English explanations for the client is important. However, legalese tends to protect the planner, not the consumer. Brenda J. Cude, professor emeritus at the University of Georgia, recommends you separate them. Use consumer language first, explaining professional terms. Then reference the legal items and where they can be found.

Cude suggests that eighth grade is the optimal level for consumer communications. Your clients can read at a harder level, but there’s no reason to force them to, especially when the eighth-grade level makes it more likely that clients will read and understand those communications. You can measure your document’s grade level using Microsoft Word’s readability statistics.

Process as protection

Our compliance manuals should include a section about how we communicate with clients, mandating actions such as taking contemporaneous notes during all client meetings and calls. If shown to be standard operating procedure throughout the firm, these records can offer protection from client complaints. These notes are also helpful backup to your memory of a client’s situation and what discussions were held. A process that includes meeting notes and written follow-up can help avoid misunderstandings and armchair quarterbacking from the client. Software like Hubly can help make this a simple process.

A counterintuitive pitfall

When asked about common pitfalls that cause advisors problems, Carr said one is working with clients who aren’t a fit with our planning approach. If the client is driving the ship in a direction you don’t endorse, you can’t act as a fiduciary.

That may seem harsh, but let’s look at a situation many of us have seen. Let’s say that your approach is to use only index mutual funds and ETFs. You’re clear about that with your client, Joe. But at each meeting, no matter what the topic, Joe insists that he wants a big position in a single stock that he believes is hot and can’t fail. He’d also like some crypto holdings, which aren’t included in his investment policy statement. You remind him that it isn’t your approach to include either of those, but he insists and you ultimately agree to follow his instructions. While CFP Board’s Code of Ethics and Standards of Conduct direct us to follow a client’s reasonable instructions, those standards also tell us to operate within our area of competency. If you’re not able to regularly monitor these investments or implement a strategy that addresses them, you’re not serving your client’s best interests and may be putting yourself in line for a potential client complaint down the road.

One solution is to terminate client relationships like this, just to reduce the annoyance factor in our practice. But it’s an area where documentation can enable you to continue to serve the client while remaining true to your practice model. Written correspondence to the client summarizing why you do not deem their request to be in their best interest or something that your firm can effectively implement gives them food for thought. And if you ultimately need to terminate the client relationship, you might include these differences in philosophy in your notice to the client, to communicate the need for them to find an advisor who is more line with their desires.

We live to comply

It’s probably reasonable to assume that most of us did not get into this profession because we love regulatory constraints. But we do appreciate the reason for regulation. We want to do good things for our clients. And we don’t want them to be harmed by a lack of understanding of their situation or by bad actors in the industry. We wear seatbelts and put kids in child-safe car seats, even though we don’t anticipate an accident.

It’s always the unanticipated accident that makes us grateful for safety precautions—or makes us wish we’d taken them. Having compliant client communications can help us avoid the time and expense of client misunderstanding and the negative impacts on our professional lives. 

 

Articles

Campbell, J. (2016). “Restoring rational choice: the challenge of consumer financial regulation.” National Bureau of Economic Research. 

Cheng, Y., Browning, C., and Gibson, P. (2017). “The value of communication in the client-planner relationship.” Journal of Financial Planning, August, 2017. 36–44. 

Contreras, G. (2017, April 4). “Ex-adviser admits defrauding Tim Duncan.” San Antonio Express-News. 

Tharp, D. T. (2020). “Potential consumer harm due to regulation on financial advisor communication in the FinTech age.” Journal of Financial Planning, 31 (1), 2020, 146 –161.

 

Linda Y. Leitz, Ph.D., CFP®, EA, is a NAPFA-Registered Financial Advisor in Colorado Springs, CO.

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