Maintaining good file notes will strengthen your relationships with clients, as Amanda White reports.

Lawyers and accountants charge clients for them; doctors spend hours of every day doing them. And yet, financial planners, the next great body of professionals, don’t pay much attention to them.

File notes. They might sound unglamorous, but don’t underestimate the power of file notes. They are a risk management tool, a bridge to a better client relationship, and could help jack-up the value of your business.

Regulators have been clear that providing a record of the reasons for advice is imperative. And while advisers work with templates, such as statements of advice, one component of record keeping that is less structured is the file note.

And yet, according to a paper by Kaplan, records such as file notes will provide the bulk of the evidence in resolving a dispute.

Amanda Batty, senior compliance manager at Macquarie Wealth Management, who co-authored the paper with Christina Kalantzis, principal at Alexis Compliance and Risk Solution, says file notes act as a risk management tool but, importantly, they also act to build client relationships and the advice process.

‘To be honest, the meeting is probably more memorable to the client than the adviser’

If an adviser with about 60 clients talks with two clients every day, then over a two-year period that’s more than 900 conversations. It would take a pretty good memory to recall Mrs Smith’s preferences for movies, her grandson’s travel plans, or her favourite emerging market.

“File notes prompt the adviser not to miss things, and they are useful for building the relationship with the client. The client thinks they are important to the adviser, and it shows the adviser is caring enough about the client to remember,” Batty says.

“The more you know the more you can help – it opens opportunities and there are more ways to assist them.”

An adviser might typically contact a client four or five times over a two-year period, and each time is memorable and relevant to the client’s situation. And, to be honest, it is probably more memorable to the client than the adviser. But with the use of file notes, the previous conversations can be recalled, vividly, instantly.

In fact, in the Kaplan paper, Batty and Kalantzis recommend recording a client’s demeanour during a meeting or conversation. File notes are one way an adviser can demonstrate they know the client. Knowledge is the essence of the advice-based business, and this is documentation of that knowledge. In this way, good file notes can also help build the value of a business; there is something to sell.

“No one is going to buy an empty file,” Batty says.

In addition, if advisers generate revenue by charging a fee for service, detailed file notes can provide evidence of the amount of time and effort that has gone into advice, and be used as a guide for remuneration that is due.

While all advisers will have different ways of documenting file notes, it will become second nature if it is built into the business process. Technology can help. There are transcription services, or you can buy software to install in-house – an Australian company, NCH Software, has one called Express Scribe Transcription Playback Software, which allows for voice files of various file types to be opened and allows the playback to be controlled via a foot pedal. Or, of course, there is the old-fashioned way, with a dicta phone and a 100-plus-words-a-minute secretary who knows your idiosyncrasies and will translate your “uummms” and “aahhs”. Individual advisers will approach it differently and different licensees will have different expectations.

The difference between financial planners and other similarly situated financial advisory professionals is the process of financial planning itself, together with the resultant documents identifying the client’s investment objectives, tolerance for risk and, most importantly, the meeting of the minds between professional and client.

According to Bayard Bigelow III, president and chief executive officer of The Cambridge Alliance, and contributor to the FPA Journal in the US, these three elements of documentation are all important when something goes wrong, as it surely always will.

“In defending a claim, the documents crucial to the providing of a defence include: assessment of investment objectives; assessment of client tolerance for risk; and file notes made contemporaneous to the alleged wrongful act. The existence of these documents, and, in fact, the financial planning process itself, already distinguish the financial planning professional from other financial advisory professionals. These standards serve to reflect practices already widely applied by many practitioners,” he says.

Lawyers, doctors, accountants – all professionals – have good documentation, and Batty believes if Australian financial advisers are serious about getting professional then they need to look at good documentation too.

“If this industry wants to be professional, good documentation is the next step,” she says.

“A professional standard is necessary.”

Bigelow argues there is a very clear benefit to the implementation of standards; namely, the public will have more confidence in both the profession and the processes it employs to discharge its professional responsibilities. This, in turn, should have the effect of increasing the demand for the services of those that are qualified. Of course, taking file notes is not all about touchy-feely client relationship stuff. It is an important part of the smooth running of your business, and potentially the key to its continued existence.

In January 2007 the Administrative Appeals Tribunal (AAT) upheld, with a lessened period of prohibition of one year, an Australian Securities and Investments Commission (ASIC) decision to ban Julian Hayes, a private client adviser with Macquarie Equities, from providing financial services. ASIC found that from September to November 2004, Hayes had, in the course of switching nine clients between superannuation funds, failed to provide a Statement of Advice (SoA) to his clients in a timely manner. While the ban was reduced from three years to one year, it was his lack of care and time taken in writing file notes that led to the ban.

The AAT found that Hayes had failed to properly discharge his duties in respect of the Corporations Act and that he should have known the substance of the statutory requirements. Further, the AAT found that Hayes’ failure to comply with the fundamentals of financial services advice amounted to a dereliction of his responsibilities to his employer and to his clients (which included friends and fellow Macquarie Bankers). ASIC’s review of client files also indicated he had failed to make adequate enquiries concerning clients’ personal circumstances and demonstrate regard for the information obtained through such enquiries.

An ASIC expert witness in that case, Beverly Houterman, said Hayes’ deficiencies were “not reflective of ignorance, but rather of haste and a lack of care and professional consideration”.

According to Rodney Purvis, QC, deputy president of the AAT, it is the financial planner who is responsible for the giving of advice who will, or should, improve the financial position of the client. “But in this context, the adviser is to know the client, know the product, how it works and what it provides, and then match the product to the needs of the client.

The written material in the files did not [provide] evidence that the applicant did any research on the products the clients already had, or the nature of those that they might acquire. There is no indication of how a product might meet their needs. This research may have been done, but there was no indication to this effect.” Good file notes may have saved him.

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