Leading advisors and an investor advocate weigh in on the key advisor takeaways from Jason Garrison’s lawsuit against his former planners
Jason Garrison’s lawsuit against his former financial advisors, RJ Financial Group, has the advisor community buzzing. That unique combination of pro sports and allegations of impropriety will certainly grab headlines. It raises some deeper issues for advisors to consider, too.
Garrison’s alleged woes - they have not been proven -offer a chance for advisors to reflect on how they treat their clients’ risk tolerance, how they educate clients, and some of the risks and responsibilities that come with serving suddenly wealthy clients. At least that’s what Faisal Karmali thinks.
“Don’t assume you understand [a client’s] risk tolerance,” Karmali told WP. The first vice-president, portfolio manager and investment advisor at Popowich Karmali Advisory Group at CIBC Wood Gundy, believes that advisors need to slowly acclimatize clients to risky or confusing investments. He sees Garrison’s story as a cautionary tale of what can go wrong when things move too fast without the client’s understanding.
“A trainer wouldn’t have you bench press 500 pounds on the get go,” Karmali said “Because you've never done that. You don't know how to do it and you could really hurt yourself. So why are we not doing the same thing with investments?”
Karmali believes that advisors need to educate clients, first and foremost, to avoid situations like this. Asking clients the right questions to understand their means, goals, and fears, is absolutely key. He noted that so many Canadians have never invested in the stock market. Throwing them in the deep end might scare them off investing entirely and cost an advisor a client.
“You have to ask the client, ‘how many times have you lost money? How did it make you feel?’,” Karmali explained. “If they’ve never lost money in the past, why are we putting them into investments where they could lose money? We should slowly give them experience of investing, without taking a big capital risk. That’s prudence.”
Education is Chris Karram’s watchword, too. The founder and chief strategy officer at SafeBridge Financial Group insisted that clients need to be given an in-depth education, especially when advisors are selling complex investments like the life insurance policies Garrison was allegedly oversold by RJ Financial.
“When it comes to insurance there's lots of vehicles that exist that take a lot more handholding and a lot more education,” Karram told WP. “That being said…there's only so much you can do. At some point, you've got to be able to step back and say ‘I did everything I could educate this client. This was the absolute best decision for the client. Here's why. Here's what our documentation suggests.’”
Karram thinks that education needs to be stressed even more when an advisor takes on a suddenly wealthy client. After a young athlete signs a $26 million contract, or someone wins a $400 million lotto jackpot, an advisor needs to be extra careful. Suddenly wealthy clients often played less of a role in creating their wealth and might not be familiar with the mechanism and tax conditions surrounding their newfound means. A smart advisor will sit that client down, explain exactly what forces they’re now subject to, and build a trusting relationship.
Karmali agrees. In a situation like Garrison’s, where a suddenly wealthy athlete turns to an advisor to turn their big-money contract into a nest egg they can retire on, advisors need to work out exactly what situation their client is in, and work out what kind of lifestyle they can afford long-term. Karmali thinks a few tough conversations might be necessary.
“$26 million for a person sounds like a lot. But you have to look at how long this person will be living for, and their lifestyle, understanding what their income needs are,” Karmali said. “Sometimes you have to tell people what they need to hear, not what they want to hear.”
To Ken Kivenko, president of Kenmar Associates, Garrison’s case shows that advisors need to do a better job building know your client questionnaires (KYCs) and regulators need to better enforce risk assessments. The investor advocate sees regular complaints about the KYCs and how advisors read their clients’ risk tolerance.
“The KYCs are not very well done,” Kivenko told WP, lamenting the simple “check the box” format many of the surveys take. He cited a report by PlanPlus which found a majority of the risk assessment methodologies used were unfit for purpose.
Kivenko believes that risk assessments don’t take enough account of a client’s actual need to take risks, and their capacity to deal with them. He also insists that even more comprehensive KYCs aren’t always properly scored, as they require a complex weighting to produce accurate results. Even if all those factors are accurate, Kivenko thinks that the categories a client ends up in can be very loosely defined.
He cites some “medium-risk” designations that put a client’s asset allocation between 30% and 80% in equities. An 80-20 allocation, in his mind, is high risk.
“I think the regulators need to start defining what the hell they mean by the KYC risk element,” Kivenko said. “They should define the boundaries standards to be used for the methodology.”