It seems that complete financial plans are getting longer and more complex for most clients. In the push to provide the most information possible, they are continually increasing the volume. This topic came to light when we were meeting a prospective client for the first time. They had a bee in their bonnet. One of those lit fuses that easily comes out in the conversation.
This now client had had a financial plan drawn up by their past advisor, which was about 100 pages. Of this, fewer than 10 were of use to me about strategy and the investment choices. Some of the rest was about fees and who got what. His comparison was to that of an appliance salesman at the fridge who doesn’t have to tell me how much of the fee goes to the manufacturer, the courier, the retailer, and so on. He said there were pages explaining risk and return, which he already knew, and then some talking about styles of managers and how sometimes growth does better than value, and other times the opposite.
This is a thought I have had in the last while. The requirement to explain and include information, in the client’s best interest so says the government regulators. Sure much of this information is critical to explain to the client but, as we realize, many clients do not read this. They rely on their professional advisor to be aware of it and ensure the client’s interests are considered.
Compliance
Our client was concerned that he’s wasting money paying for compliance. It was an earful of wasted pages that left him confused. The adviser said it was for compliance and that he didn’t particularly want to produce it but he’s required to by the government. Why should I pay for 100 pages when all I need is 10? Those other 90 pages he felt like ripping them up and giving them back to this advisor and only paying for the useful stuff. He wondered if it was normal to pay for things you don’t need. He questioned whether it was smart to continue with this relationship or whether he should assess other avenues.
Perspective
Our response was that it’s normal to get a lot of paperwork but that doesn’t mean you shouldn’t ditch this adviser and get a new one. He had already made that decision. Much of [the paperwork is required by the government and some of it is the firm and the adviser covering themselves. Basically, advisers want to disclose anything that could be used against them to ensure they’re not found liable for withholding information or not providing a client with necessary details.
Indeed, disclosures are commonplace. Every product you use provides terms of service that you probably ignore and click next on. That does not undermine the service or product. In fact, the inclusion of the disclosure language solidifies the rationale behind the recommendations.
Compliance is a fixed cost. The 90 pages produced are the same for every report produced by your adviser and all the advisers at that firm. The real cost of this boilerplate will be way less than 90% of the fee being paid. The reason is because the government require it for your protection. The pages of compliance are just the tip of the iceberg and of course, no one ever reads it and it appears useless. The real value is in the processes that the firm has in place to ensure that the advice given complies with legal guidelines.
The paperwork you’d receive with any adviser is likely going to be more than you would like. A flat-fee adviser who doesn’t hold your assets but only advises on what to invest in and provides financial planning will most often provide less paperwork, but the custodian you use will probably make up for it. In fact, when firms provide financial plans, they provide detailed reports, 90% of which the clients will not look at initially but most will look at more in the future.
Understanding the plan
For our clients, to help them understand and implement the financial plan, we provide an executive summary highlighting the major points and action items of major concern for the client and adviser. This is a very reasonable request to ask your adviser to save you time.
While the disclosures are the majority of your financial plan, they’re probably not the majority of the financial planner’s work. Usually, an advisor will learn them once and then apply the speech to every client. They spend most of their time crafting and discussing the plan’s client relevant pages. From the planner’s perspective, those pages are there for the regulators rather than the client.
Compare it to the little plaques that say elevator’s inspection records are available at XYZ. People don’t want to read those inspection reports but want to be sure that somebody is looking at it. Those pages ensure your advisor isn’t saying one thing to you and a different thing to your regulator. We don’t need these protections most of the time, but when things go wrong, you’ll be glad they exist. Most of these regulations exist because someone lost their life savings.
The bottomline
Should our client have sought out a new advisor?
Maybe. In this respect, the communication with our client’s past advisor seems to be lacking. By the sound of things, the advisor may have been a salesperson who may be more interested in covering his and his firm’s potential liability than addressing our client’s concerns. Indeed, he expressed to the old adviser what he didn’t like and seemingly got a compliance response.
It would have been much better had their prior adviser given him more of his time to explain everything. Most clients don’t ask and simply file their plan. Most also trust their advisor’s advice. This client’s issue was more about the deterioration between them and the old advisor which leads to a break down in trust. This is the critical issue and important to Keeping Life Current.
