Knowing your client means probing the values that matter to them, and how that affects investment decisions.Ridofranz
For investment advisors, getting a deeper look at client priorities can be a big driver in building relationships and business. That’s why many have paid close attention to last December’s updated guidance from the Investment Industry Regulatory Organization of Canada (IIROC) on collecting information during the know-your-client (KYC) process.
Advisors must now collect information in the KYC on investor preferences and objectives regarding environmental, social and governance (ESG) criteria or clients’ other personal values. While that could require more ESG education among advisors, it can also boost their practices at a time when interest in responsible investing is rising.
“The IIROC provisions create an opportunity for those who’ve been holding back. It removes any doubt as to whether it’s okay to ask clients about their values or sustainability preferences,” says Dustyn Lanz, senior advisor with ESG Global Advisors in Toronto. “I’ve spoken with many advisors over the years who wanted to engage their clients on sustainability issues but felt it was crossing a line into personal matters.”
Mr. Lanz was previously the chief executive officer of the Responsible Investment Association and led the engagement with IIROC to amend its KYC guidance. He says that while advisors have always been obligated to understand their client’s investment objectives, IIROC has now positioned ESG inclinations and individual values explicitly within the scope of those objectives.
That’s a welcome change, says Bill Ladyman, portfolio manager with iA Private Wealth Inc. in Winnipeg. Previously, some of his clients talked about companies they wanted to avoid in their portfolios. Now, he’s experiencing even more robust conversations with clients, who are considering “how their feelings surrounding ESG relate to their investment portfolio” more thoughtfully.
“That has helped me as an advisor gain a better understanding of what’s important to my clients,” Mr. Ladyman says.
Clients want to speak about how they feel
Bringing up personal values and ESG during the KYC process can help advisors foster a trusting bond with clients early on, says Tom Gilman, senior wealth advisor and senior portfolio manager at Harbourfront Wealth Management Inc. in West Vancouver. KYC information like a target retirement date or risk tolerance is basic; that’s not what makes people feel heard.
“Clients need to be able to speak about how they feel, and in turn, we can take that information and digest it,” Mr. Gilman says. “It’s a win-win situation.”
Starting these conversations isn’t always easy, especially if ESG and values haven’t come up a lot in the past. So, advisors say it’s important to come at it from a positive angle.
“We find that the best approach is to probe with open-ended questions because they offer clients an opportunity to think out loud,” Mr. Gilman says.
He offers some examples: What personal preferences do you have about how your money is invested? What values would you like to see reflected in your portfolio? What do you know about ESG?
Another way to get a conversation going is by talking about ESG-related risks from the daily headlines, Mr. Lanz says.
“Extreme weather events like droughts, wildfires and floods are happening all over the world,” he says. “Clients know this stuff, but might not understand how they connect to their investments. Advisors can help with that and recommend investments that mitigate or manage exposure to these risks.”
Just asking clients if they’re interested in responsible investing and ESG doesn’t necessarily work, as they may not yet know enough about the topic. Advisors themselves need to feel comfortable with these topics to have more thorough KYC conversations. That requires self-reflection and possibly additional education, says Fred Pinto, an asset management executive in Oakville, Ont., and a member of the Research Advisory Council at the Institute for Sustainable Finance.
“When you start talking about ESG, it can open up issues with respect to knowledge for an advisor who’s newer to the space,” Mr. Pinto says.
ESG is complex, involving detailed metrics. Mr. Pinto notes that the CFA Institute offers a rigorous ESG certificate that could help those who wish to take a deeper dive into the material.
“These [KYC] changes are good because it allows people to get into these concepts and a richer dialogue,” he says. “That also means there’s an accountability here to really understand the concepts.”
Knowing your client’s personal values could become even more widespread. IIROC is the licensing body for more than 28,000 investment professionals across Canada. With a merger of the self-regulatory organizations coming into place soon, the KYC guidance could well apply to the approximately 80,000 advisors licensed by the Mutual Fund Dealers Association of Canada.
“If the new SRO extends this provision to mutual fund advisors, I think we’d see strong growth in ESG mutual funds over the next couple of years. I also think we’d see strong growth in ESG education,” Mr. Lanz says.