Dealing with Nonresponsive Clients in Financial Planning Services
One of the primary challenges for financial planners stems from the fact that regulators remain unable (or unwilling) to create regulations specific to financial planning arrangements. As a result, financial advisers are often tasked with creating boundaries for financial planning engagements, based on individualized interpretations of regulations that were created for investment management services. What’s more, each regulatory jurisdiction adopts their own interpretation, adding to the confusion and complexity of maintaining compliance while offering financial planning services. The regulatory landscape for financial planning services is murky at best.
The Custody Conundrum
When clients do not respond to an adviser’s attempts to engage, this creates multiple layers of potential regulatory issues. The first category of compliance to consider is custody. State registered firms are not permitted to receive more than $500 in payment, 6 months or more in advance of services rendered, without potentially running afoul of custody regulations. For SEC registered firms, this payment amount is increased to $1,200. At its core, this concept is fairly straightforward. Based on a literal interpretation of the rule, if an adviser receives an upfront payment for services, and is unable to establish sufficient contact with the client to deliver the services within a 6-month period, the adviser should promptly terminate the engagement and refund the client. As simple as this concept may seem, there are other considerations that create the need for a more in-depth process. Commonly communicated in light of the aforementioned circumstances, is the concern that the adviser is not being compensated for the work that was done that did not require the client’s active participation. For example, the time spent attempting to schedule meetings and gather client data, the client prospecting process, establishing the client contract and facilitating the payment, and other onboarding tasks for which the adviser, if a full refund is issued after 6 months, will not be compensated.
In order to address this type of scenario, many advisers will clearly state that the upfront portion of the fee is for client onboarding, and subsequent fee payments (made monthly or quarterly) will be for the ongoing financial planning process. Once the adviser has established the amount of time spent on client onboarding, then that fee is “due” from the client, whether or not the client adequately participated in the process. So, best practice is to design an onboarding process that streamlines client document collection, and minimizes the amount of time clients need to spend during the onboarding phase of the engagement.
Inconsistency in Regulatory Guidelines
Regulators generally prefer to evaluate the “facts and circumstances'' surrounding adviser financial planning services during regulatory examinations. This is both good, and bad for the adviser. On the positive side, this allows the financial planner the opportunity to engage in dialogue with their regulator, and make the case that the service model not only provides value, but is in the client’s best interest. On the negative side however, in the absence of specific regulatory guidelines pursuant to financial planning services, regulators can unilaterally disagree with the adviser’s determinations, citing regulatory guidelines that only tangentially address the deficiency. Therefore, on a case-by-case basis, State and SEC regulators will impose their opinions upon the firm based on the way they view the firm’s service offering. To be best equipped, advisers are wise to maintain meticulous records regarding financial planning services. This includes, but may not be limited to, itemized invoices sent to clients, working and completed financial plans, documentation used to establish client net worth, income, household budgeting, cash flow needs, retirement planning needs, statements from custodians on held-away assets, and notes of conversations and attempted points of contact with the client. A valid concern from the regulator’s perspective is that the firm is providing the client with no services in exchange for the fee that they are charging. So, every chance the adviser has to prove services are being rendered, presents a risk minimization opportunity to capitalize on.
Establishing the Value of the Service
In the absence of written guidelines, regulators tend to struggle to determine what constitutes a “reasonable fee” for financial planning services. These services can’t be calculated as a percentage of assets under management, so this removes a key quantifiable metric that has been traditionally used to determine what constitutes an unreasonable fee. The result is a determination that’s made based on the subjective opinion of the individual regulator that’s executing the examination or reviewing the application for registration. To play devil’s advocate, it stands to reason that without an established “market” for financial planning services that operates like an exchange, creating prices based on bid and ask (supply and demand), then there is a fair amount of subjectivity to the value of financial planning services.
How then, do advisers establish the value of financial planning services, both for clients, and as a benchmark for regulators to use during their reviews?
In my opinion, there are three views that matter.
- The Client’s view - As long as the client can feel the positive impact of the financial planning engagement in their lives, then the client will perceive the value of the service. What the client is willing to pay for the service, directly corresponds with the value they realize and perceive.
- The Adviser’s view – From a business owner’s perspective, advisers will consider the cost of production, and focus on building in a reasonable profit margin that contributes to the goals of the firm. If the adviser is concerned about invoicing the client due to “sticker shock”, then this is a key indicator that the service model and fee structure may not be positioned to optimize the client’s perceived value.
- The Regulator’s view – This is the key: The regulator is encumbered by the inability to gain access into the client’s realized and perceived value for the service. Without interviewing clients, requesting access to their personal financial records, and tracing back through the entire financial planning process, the regulator has no idea how valuable the service is to the client. As a result, regulators must only use their evaluation of the firm’s business practices, and books and records to make their determination.
When these three views are managed effectively, the adviser will have established a financial planning service that clients appreciate. The service will be priced to create sufficient profitability for the firm, and the regulator will have documentation of the financial planning engagements, as well as fee-transparency, that is sufficient to allow the adviser to continue standard operations.
When to Refund a Nonresponsive Client
As a general rule, advisers that bill clients on a monthly basis should, at minimum, evaluate the services provided to clients on a monthly basis. Some regulatory jurisdictions may require monthly deliverables. For advisers operating in such jurisdictions, monthly billing events should be conducted in arrears, and clients should be refunded for any month in which there are no deliverables. In less stringent jurisdictions, advisers would be wise to review client files and deliverables to determine the levels of engagement for clients payment on a monthly basis, and make adjustments as needed. The same principles apply to clients that are billed quarterly. As previously stated, if the client’s nonresponsiveness is the primary reason that deliverables are not being met, then the adviser should document attempts to reach out to the client, and the same 6 month custody rule may apply. When all else fails and it becomes a “judgment.”
These materials have not been reviewed or approved by any regulatory agency, and represent solely the interpretative opinions of Synergy Compliance Education (“Synergy”). To the fullest extent permissible pursuant to applicable laws, Synergy disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. In no event shall Synergy have any liability for damages, losses, and causes of action for accessing these materials.
