Know Your Client?
By Patricia M. Angus – Originally published in Private Wealth Management in 2011
It is hard to discuss private wealth management, especially in the international context, without using the term “KYC’; the acronym for Know Your Client. Since 9/11, and for a decade or more before then, KYC requirements have been increasing in complexity and force in the USA and around the world. Laws and regulations now impose strict duties on private wealth management professionals and, in response, training sessions, software programs and administrative support systems have been created to help the industry meet the new requirements.
After years of focus, it is now safe to say that most firms and professionals feel better equipped to handle KYC. However, a fundamental question remains: do private wealth management professionals today actually know their clients any better than they did a decade ago?
Marketing materials and advertising campaigns give the impression that the answer is yes – images of financial advisors attending a client’s intimate family moments, such as a family wedding, connote deep personal relationships. Beyond marketing, there is a marked shift across the industry toward focusing on human, intellectual and social capital. The question remains, though, as to whether this translates into deeper knowledge and understanding.
Further, if advisors do know their clients better, what are the implications for the development and delivery of services?
The multidisciplinary nature of private wealth management today has outpaced the training and expertise of even the most experienced professionals. There are few standards to help guide professionals in the areas in which they are now finding themselves with clients.
KYC – in its fullest sense – is at a watershed moment for the future welfare of the industry and clients alike. Over the next few years, the industry must openly face and hopefully begin to address the duties, responsibilities and opportunities for professionals wading in these new waters.
This is a very complicated area with few, if any, simple answers. Indeed, there is a real danger that harm may be done, though well intentioned, and the industry must work hard to prevent that from happening. As a start, it would be helpful to at least clarify the questions. To this end, set out below are some of the key questions that professionals and the industry as a whole must begin to consider.
Who is the client?
As a starting point, it is critical to clarify who is the client – legally and practically speaking. Traditionally, the industry has assumed, rightfully or not, that there is a single client who is being served at any one time.
In the USA, the legal profession supports this notion through its code of professional responsibility, which prohibits representation of parties with potential conflicts of interest.
The financial industry often acts in the same way as it tends to serve the current owner of financial assets, some times overlooking future interest holders. At the same time, there is increasing awareness that wealth is rarely held by, or for, a single individual alone. Trusts create at least three categories of “interested” parties (using the term in its practical, if not legal, sense) – grantor, trustee, beneficiary.
On a more intangible level, professionals often find themselves blindsided in implementing decisions when they learn that they have not been dealing with the real decision-maker in a family. The industry must grapple with the complexities of family wealth rather than individual wealth.
What does the client seek from you?
It is not uncommon for a lawyer to be asked for financial advice or for a financial advisor to be asked to act as a mediator in a family dispute.
The lines between disciplines are blurring rapidly, and clients do not always match the help they need with the expertise of the person from whom they seek it. Each professional must consider the questions – how best can I serve my client? Am I qualified to assist with the issue they have posed?
When a client is seeking help with complex family dynamics, or if there is a problem with addiction in the family, or if the client owns assets in a complicated structure, often the best help that a professional can offer is to make a referral to someone with expertise in that area.
This means that the resources with which profession als must be familiar go beyond their technical realm and include networks of professionals in other areas.
What do you need to know about the client?
Too often, advisors make assumptions about their clients that do not take into account the client’s own cultural and personal identity. Sensitivity to different definitions of family, individuality, family relationships, money and wealth is critical.
Starting with a detailed inventory of a family’s assets, and what is unique about the client, is the best practice for any kind of legal, tax or· investment planning process.
What is your client not telling you?
It is only natural for clients to be selective in what they share with you about their needs and wants. Clients harbour a whole set of fears, hopes and dreams for themselves and their families, many of which remain unspoken. Their goals for investing may be impacted by their own upbringing and experience of wealth.
It is important to know what “wealth” means to them, and how that intersects with real and imagined opportunities for fulfillment. If asked, most clients will admit that they are more worried than they let on about what will happen when they are gone, whether their children will be financially capable, and how can they support their family’s dreams.
The family’s dreams are often placed in the hands of their advisors without articulating them. As an industry, the time has come for serous training programmes in areas such as trusts, fiduciary duties, family dynamics and facilitation skills.
What can you do?
In this environment of ever-increasing complexity and increased expectations falling upon advisors in all professions, the starting point for any advisor – lawyer, account ant, investment or wealth advisor – is to know yourself. Start with an honest assessment of your skills, strengths and weaknesses and focus on what you can do – and should not do – for your clients.
Next, professionals must develop ways to learn more about their clients – through general information and through a process that brings out the information that lies beneath the surface.
Cross-training and developing networks with professionals beyond your area of expertise is critical. The world has become so complex that it is too easy to go beyond one’s expertise these days. Knowing when to handle an issue, and when to hand it off, is going to be increasingly important.
It is easy to understand responsibility and liability in the context of traditional KYC. Not only are the parameters clear, the resources for compliance are more readily available.
The time has come for the industry to really get to know its clients, and focus on how best to serve them in a multidisciplinary manner. Hopefully, these starting questions will help frame the process of doing so.