On-boarding: Best Practices and Beyond

Abstract

This paper explores key best practices in the on-boarding process for investment advisory relationships. It emphasizes effective communication, thorough disclosure, goal-setting, and regular plan reviews. Additionally, it addresses crucial considerations like risk management, ethical investing, technology integration, and tax implications. The document also delves into the significance of the Know Your Customer (KYC) process in wealth management, offering insights into typical forms and best practices for investors. By covering these aspects comprehensively, the paper aims to enhance the quality of investor-adviser partnerships.

Time to read: 4 to 5 minutes.

Level: Fundamental.

Category: Education Note.

The on-boarding process for an investment advisory relationship is the initial and crucial step in establishing a successful and long-term partnership between an investor and an adviser. It involves gathering information, completing paperwork, setting expectations, and creating a customized plan to help the investor achieve their financial goals. Here are some best practices and tips for both investors and advisers to optimize the on-boarding process:

1. Communication:

   • Clearly and openly communicate needs, preferences, objectives, and concerns.

   • Establish the preferred mode, frequency, and content of communication.

   • Build trust, rapport, and understanding between the investor and the adviser.

2. Disclosure of Information:

   • Investor provides accurate and complete financial information, risk tolerance, time horizon, and expectations.

   • Adviser discloses qualifications, services, fees, conflicts of interest, and fiduciary duty.

   • Review and sign required documents: investment advisory agreement, client questionnaire, and disclosure brochure.

3. Setting Realistic and Measurable Goals:

   • Collaborate to define specific, measurable, attainable, relevant, and time-bound (SMART) financial goals.

   • Adviser explains rationale and assumptions behind recommendations aligning with the investor’s goals.

4. Regular Plan Review and Update:

   • Periodically review the plan, making adjustments reflecting changes in the investor’s circumstances, preferences, or market conditions.

   • Adviser provides regular reports and feedback on portfolio performance and value.

   • Investors inform advisers of any questions, concerns, or feedback.

Furthermore, alongside the outlined best practices, addressing risk management during the on-boarding process is critical. Beyond discussing risk tolerance, a nuanced understanding of various risks involved in investment strategies is essential.

1. Risk Management:

   • Investors communicate not only risk tolerance but also risk preferences (e.g., capital preservation vs. aggressive growth).

   • Advisers explain various risks associated with proposed strategies, including market risk, credit risk, and liquidity risk.

2. Ethical and Socially Responsible Investing:

   • Include a discussion about specific values, beliefs, or ethical considerations the investor wants in their strategy.

   • Advisers must be aware of the trend towards socially responsible investing and ensure alignment with the investor's ethical guidelines.

3. Technology Integration:

   • Discuss and agree upon the use of technology tools, platforms, and communication channels.

   • Considerations for digital account access, secure communication methods, and financial planning software integration enhance efficiency.

4. Tax Implications:

   • Thoroughly discuss potential tax implications of proposed investment strategies.

   • Investors need an understanding of tax consequences, and advisers provide clear explanations, collaborating with tax professionals if necessary.

Know Your Customer Process and Forms

In the realm of wealth management, Know Your Customer (KYC) forms serve as foundational documents provided by banks to gather essential information about clients. These forms are integral in complying with regulatory requirements and ensuring a thorough understanding of the client's financial profile. Here, we discuss the typical KYC forms issued by private banks and outline best practices for investors to facilitate a seamless and compliant KYC process.

Typical KYC Forms:

Private banks typically distribute KYC forms that encompass a comprehensive set of inquiries. These forms are designed to collect details such as personal information, financial status, investment experience, risk tolerance, and source of funds. They aim to create a holistic view of the client, enabling the bank to tailor its services and recommendations in alignment with the client's unique financial objectives.

Best Practices for Investor Cooperation:

1. Provide Accurate and Complete Information:

   • Investors should meticulously fill out KYC forms, ensuring accuracy and completeness in every detail.

   • Accuracy is crucial for the bank to develop a precise understanding of the client's financial situation and objectives.

2. Transparent Communication:

   • Maintain transparent communication with the wealth management bank. If there are changes in financial circumstances or investment goals, promptly inform the bank to update the records.

   • Transparency fosters a collaborative relationship and helps the bank offer more relevant and timely financial advice.

3. Understand Risk Tolerance:

   • Investors should thoroughly evaluate and express their risk tolerance. This involves an honest self-assessment of their comfort level with potential investment volatility.

   • A clear understanding of risk tolerance aids the bank in crafting an investment strategy that aligns with the investor's preferences.

4. Compliance with Documentation:

   • Ensure all required supporting documents are provided along with the KYC form. This may include proof of identity, address, and income.

   • Promptly submit any additional documentation requested by the bank to facilitate a smooth KYC process.

5. Review and Confirm Information:

   • Before submission, investors should review the completed KYC forms for accuracy. Confirm that all details are current and reflective of the investor's financial standing and objectives.

   • Regularly review and update information, especially in the case of significant life events or changes in financial circumstances.

6. Seek Clarification when Needed:

   • If any aspect of the KYC form is unclear, investors should seek clarification from the wealth management bank. It's essential to have a comprehensive understanding of the information being requested.

   • Clarity ensures that the submitted information accurately represents the investor's financial profile.

7. Timely Response to Queries:

   • Respond promptly to any queries or requests for additional information from the wealth management bank. Timely cooperation facilitates a quicker completion of the KYC process.

   • Proactive engagement demonstrates commitment to compliance and a willingness to work collaboratively with the bank.

In conclusion, while the on-boarding process is critical, expanding the focus beyond traditional aspects is imperative. Addressing issues like nuanced risk management, ethical considerations, technological integration, and tax implications significantly contributes to a comprehensive and mutually beneficial partnership between investors and advisers.

References:

• Sahoo, R.K. KYC & Anti-Money Laundering for Banks/FIs. Skylark, 2015.