Key principles for a successful client-advisor relationship
Our mission statement is to help our clients make well-informed financial decisions. This means we need to understand where they are today, what they are aiming towards in the future and how to prioritise these objectives.
Being a personal financial planner for expatriates and international executives is a vocation rather than a job for a couple of years on an overseas stint. It’s a way of life – let’s be really clear about that!
We have enjoyed successful relationships with many of our clients for over a decade and these relationships have been seamless even when our clients have moved to other countries.
We recommend these 6 key principles in the advice process:
Conduct a meaningful fact-find
Discuss risk and return
Challenge the client (and welcome challenges!)
Explain the fee components
Discuss tax implications
1. Conduct a meaningful fact-find
After an introductory call or meeting, the next step would normally be to conduct a robust and meaningful fact-find to discuss the financial circumstances and objectives of the client.
A ‘meaningful’ fact-find is not a personal audit in which the advisor merely records facts and figures. A good advisor builds a clear financial picture of the client based on her family situation and dependents – and if appropriate, advises the family together. What are her income sources from employment and investments e.g. rental income and how is a potential surplus being allocated?
We require an understanding of her assets and liabilities to calculate any shortfalls in retirement or children’s education planning. What is the worst-case scenario if the client passes away or were unable to work due to illness or injury? These are tough conversations but we are in the business of providing security and peace of mind! A good advisor seeks to understand all key risks facing the client and how to address them.
“Our interactive fact-find is a solid foundation for understanding our clients’ objectives and defining their priorities.” – Maria Fernanda Cordoba, Consultant
2. Discuss risk and return
Some of us have completed multiple-choice risk questionnaires, which can be rather mundane, knowing that you will receive a computer-generated score which in turn, determines a ‘model portfolio’, suitable for your risk tolerance.
This is a useful opportunity to discuss the questions in more detail and understand a little more about the psychology of your client. In theory, an investor in their 30s should adopt a higher risk strategy whilst accumulating capital. But what’s the point if she is risk-averse and loses sleep during periods of higher market volatility?
On the other side of the risk spectrum, if an older client, approaching retirement, is overexposed to emerging markets and commodities, it would be prudent to manage the client’s expectations and explain why such an asset allocation may not be suitable. However, if the client is comfortable with the associated volatility and potential for capital loss in the short-term, our job as advisor is to keep a record of the dialogue and revisit it in future reviews.
The client should also be advised to ensure sufficient liquidity is held in near-cash to serve as an emergency fund instead of being forced to make partial withdrawals, from an investment during a downturn thus crystallising losses
Allow the conversation to flow and ask open questions without judging your client or pushing the theory of risk and return! Adjustments can be made over the course of the relationship based on changing circumstances and personal views on risk and return.
“It is important for advisors to develop an understanding of their clients’ risk profiles and manage their expectations accordingly” – Martin Fuchs, Advisor
3. Challenge the client (and welcome challenges!)
A financial advisor should understand the reasoning behind a client’s objectives and challenge her if they believe that these financial planning goals should be adjusted or reprioritised.
Is her desire to retire early at say, 55 realistic or based on her perception of what her peers have achieved or even partly influenced by social media? What if she is aiming for an arbitrary level of capital and is prepared to invest most surplus income towards achieving this – when in fact, she has young children hence a greater priority would be insuring her life to protect the financial well-being of her children and partner.
We have met several clients who have started the meeting with a pre-conceived idea about the level of capital they require to achieve financial independence and often, the figure substantially falls short or is excessive and unattainable. Capital targets should be sensible and indeed, they can be aspirational without being unrealistic.
A good advisor should never appease his client i.e. taking the convenient path of least resistance to offer a particular product to his client. Our job is to provide holistic advice and deliver solutions in an ethical manner and logical order to increase the financial security and well-being of our clients.
4. Explain the fee components
When advising clients of different nationalities across several jurisdictions, there is no standardised package of financial advice. Some cases are more complex than others involving financial and tax advice in say, Brazil and the UK.
Some clients only seek advice on one specific issue without the need for ongoing advice. Some enquiries can be answered fully in-house whilst others may need to be referred to our network of international and domestic partners.
Therefore, it is important for advisors to discuss each component of pricing whether it is a time-based fee, an all-inclusive fee for a package of services or an ongoing % charge based on assets under advice. It may be a combination of nominal time-based fees and % based fees.
In the US and EU, advisors are required to disclose the components of AUM-based charging i.e. the custodian, the funds and the advisor charges. We expect such disclosure rules to eventually be applied in the Mercosul/Latam region.
5. Communicate regularly
This is a two-way street between client and advisor to enhance timely and efficient decision-making. Is it any wonder that our happiest clients are those who reply to our calls/emails promptly and communicate with us proactively whenever they have a question or concern?
Indeed, it the advisor’s responsibility to provide the client with timely information and service, however, we encourage clients to keep us informed of events in the horizon, for example, relocation, a possible redundancy or receipt of a bonus.
Relocation means that the client will need to prepare for reporting in a new tax regime and we may recommend alternative asset structures in advance of a move including the full or partial realisation of gains.
In Brazil, many oil expats were made redundant between 2014 and 2016 and we advised several clients on managing this transition which was challenging both financially and emotionally given family upheaval. Many oil expats were offered local contracts whereby some benefits were withdrawn and they started earning in local currency (BRL), having to meet accommodation and schooling costs from their lower take-home pay. We advised some clients on budgeting and cashflow management to ensure a smooth transition.
If a client wishes to invest her bonus, advance notice would allow the advisor to prepare the paperwork, KYC (know your customer) and asset allocation to enable efficient processing instead of cash sitting in a current account for longer than necessary.
“A successful client-adviser relationship requires frequent and open dialogue between both parties.” – Amit Ramnani, Advisor
6. Discuss tax implications
Many expat advisors gloss over the T-word by saying something along the lines of “the investment offers tax-free growth”. That may be the case for the taxation of the investment within its jurisdiction – but how will the client be taxed in her country of residence and for some nationalities, their countries of citizenship regardless of their current residency status? This means understanding the impact of income tax, gains tax and estate tax.
In some cases, it is a simple answer and in other cases, the client should be referred to an accountant in her country of citizenship especially in the case of American nationals who are required to file tax returns on global income/assets even when living overseas.
Succession/estate planning is very important and should not just be an agenda item for middle-aged and older families. The sooner the client starts considering her estate planning strategy, the earlier provisions can be made. Death taxes in Brazil are much lower than most western European countries but these are likely to increase over the next two decades which is exactly the kind of financial planning horizon that would apply to a young or middle-aged client especially in a cross-border scenario with assets and family members (including dependents) located in two or more countries.
More to follow on taxation for specific nationalities in future articles.
This is not an exhaustive list of guidelines but we hope they provide some tips for successful and lasting relationships between clients and advisors.
To book a meeting or an introductory call, please contact ushere.
Disclaimer: Ipanema Wealth provides an advisory service and does not engage in capital markets or the selection of financial instruments.
Dividend appreciation concept by Jack Moreh at Stockvault
Bull versus Bear by Jack Moreh at Stockvault
Big Data Analytics by Jack Moreh at Stockvault