There is no such thing as a risk-free business. There are some risks inherent in the financial services industry, such as the risk of regulatory reviews and market downturns. However, there is one type of risk that presents unique challenges at an individual level: risk in customer relationships.
When it comes to risk management in customer relationships, your strategy will vary depending on the person. However, there are some practical steps to keep this risk to a minimum:
Target your customer base: Think about the customers who work well with you and those you can best serve.
Set the parameters of each relationship: Be clear about what customers can expect from you and what you can expect from them.
Document all contacts You do with customers: This should include any recommendations or investment decisions you have discussed.
These steps are effective in protecting your practice from it known risks. But despite the best precautions, unexpected risks are always possible. To prepare for potential customer interaction challenges, here are four scenarios that pose risks to your business—and what you can do to mitigate them.
1. Actions contrary to the client’s investment objective
Some customers crave a “hot stock” and are always looking for the next big thing. Against your own advice, they may insist on investing portions of their account in penny stocks or similarly risky investments. You run the risk of customers coming back when the investment goes badly and asking why you didn’t talk them out of it.
At the same time, customers don’t necessarily have to be interested in particularly risky investments to raise concerns about their account activity. Some clients may buy and sell based on emotion and be easily influenced by news or fluctuations in the markets. Others may be living outside their means and withdrawing assets to an extent that could adversely affect their financial future.
What can you do? An important part of risk management in customer relationships is the documentation of your discussions with your customers and their advice. Send a follow-up email or letter to customers who are stubbornly stuck on a particular move that goes against their long-term goals to remind them of their goals. This can also serve as documentation of your consistent advice.
Regardless of your method of communication (in person, over the phone, or in writing), use these follow-up opportunities to strengthen your role as an advisor and the goals of the account. During this process, you may find that your management is only appropriate for a portion of client assets. It may be better for them to trade some of their wealth in a brokerage account than in an advisory account. Or perhaps the client’s suitability and overall financial picture have changed.
For a client who consistently refuses to heed your advice, it may be time to consider breaking up. A one-off, unsolicited, or speculative transaction may not necessarily be a cause for concern, particularly if your client’s risk tolerance and investment objective are more risk oriented. But clients who continue to act against your advice can pose an intolerable risk to your practice.
2. Clients not responding
Most clients regularly respond to emails, calls, and meeting requests from their financial advisors. However, every now and then you may come across a client who is missing. This person may miss an account eligibility review meeting or not return your call about a planned RMD this year. These scenarios can put you in a difficult position and put your practice at undue risk.
What can you do? Documenting your communications is vital, even if you aren’t able to actually engage with customers. Be sure to log your attempts to contact an unresponsive customer and keep copies of those efforts.
To prevent a customer unresponsive scenario, set reasonable expectations for communicating with the customer from the start. Determine the customer’s preferred level and type of contact from the earliest stages of the relationship. Depending on your organization’s policies, you may be required to conduct regular — even annual — advisory account review meetings. Your ability to manage the account effectively will be compromised if you do not have current eligibility and investment objective information for your client.
Also, you should set up a process for any customers who become unresponsive over time. It should include the use and documentation of multiple contact methods. You could start by emailing and calling. If the customer is on site, you can also visit personally after a certain time. You may also decide that another account type would be more appropriate for the customer.
3. Complicated customer relationships
Customer relationship management can be challenging. Adding to this complexity is the fact that there are many people and other trusted advisors who are important to your client. This gives you more interaction options during the relationship and after the customer’s death. Knowing how to safely navigate these relationships is important.
Here are some potential risk scenarios:
What can you do? For each customer, request and maintain a list of key relationships. It is important to obtain clearly documented permission to speak to anyone not associated with the account in question. This may include family members with whom the client may wish to communicate and other professionals such as the client’s attorney, accountant or tax specialist.
In the event of a strained family relationship, set clear boundaries from the start by getting to know your customer and who they don’t want to talk to. An estranged family member or a household in the midst of divorce can often complicate the status quo.
With an older customer or a customer with diminished capacity, you might suspect that after several unexplained withdrawals, there might be an exploit at play. This scenario can be further complicated when an agent or trustee is giving the instructions. Make sure you understand your customers’ financial needs and capabilities. If you notice a change in a customer’s behavior or spending habits, contact your compliance team to discuss the potential risk or exploitation.
Managing risk in customer relationships is vital to the success of your business, but you don’t have to do it alone. Learn more about Commonwealths collaborative approach to compliance and how our team works with you to create solutions – no obstacles.
4. Time to reevaluate the relationship
Clients can ask a lot from their financial advisors. You are expected to provide investment advice, but depending on market conditions, clients may also need their fears calmed. During times of health issues or life changes, they may just need someone to talk to. With many consultants, friends become customers or customers become close friends. But if you know your business and follow your instincts, you can recognize when some tasks may be outside of your remit.
Clients may want private investment advice that is not available on your company’s platform. They may ask for legal or tax advice even though you are not a lawyer or accountant. Or they might request that you be named as their POA, executor, or some other controlling role beyond your comfort level.
What can you do? Discuss your role early in the client relationship and be ready to make referrals if necessary. This keeps your relationship between you and your customer equally understandable – you know your customers and their needs best. Tips to assist you in your customer relationship management efforts include:
trust your judgement
Assess the relationship continuously and make sure you are on the same page
Maintaining open and continuous communication
Document your interactions
Do you know the signs
If you see signs of risk in your customer relationships, it’s always best to confront them sooner rather than later—in the interest of both your customers and your business. And remember to start a conversation about any concerns that come up, as this can be extremely helpful in clarifying potential issues.
Editor’s note: This post was originally published in March 2015, but we have updated it to provide you with more relevant and updated information.