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Recently a friend of mine, an experienced advisor, convinced another mutual friend to move his assets. Before the first meeting, the advisor gave our friend a standard risk-tolerance questionnaire on paper. Shortly after, the prospective client returned the blank questionnaire and made it clear that the advisor would have to do better to manage his money.
Lucky for the advisor, he emailed an interactive questionnaire. Concise yet comprehensive, the digital risk questionnaire asked easy-to-answer questions that dove into household finances and lifestyle factors such as employment, geography and health.
The client responded much more favorably to the second approach, since the more in-depth and relatable questionnaire produced a complete view of a client’s true risk capacity. It helped the advisor create a portfolio that took into consideration multiple factors such as family dynamics, changes in financial responsibilities, and location. By understanding and quantifying these unique characteristics, or “human capital factors,” the advisor applied one of his model portfolios that met how much risk was appropriate for the client.
The missing puzzle for KYC
How can we honestly counsel someone on how to invest their hard-earned money if we don’t know much about them? For years, advisors have struggled with the best way to determine a client’s capacity for risk and ability to invest in order to build a portfolio that helps them meet their financial goals.
But knowing your client is more than just good business practice. Advisors must also incorporate the know your client (KYC) concept, which ensures that financial advisors know and keep records on the essentials of each client. This not only protects consumers from unethical advisors, but also gives advisors a level of protection from lawsuits as they have a basis to defend their advice as being in the client’s best interest.
To facilitate compliance, advisors often give prospective clients a KYC questionnaire, which provides a glimpse into the clients’ assets, goals and stated risk appetite. While this questionnaire is helpful in getting to know the basics, all too often advisors find major drawbacks to relying too heavily on the KYC forms because the results are too narrow.
So what’s the missing piece of the puzzle? A more robust questionnaire that truly evaluates how the client’s life situation and financial state can work to reach their investment goals.
