“I’ll never be your beast of burden, my back is broad but it’s a hurting”
— The Rolling Stones “Beast of Burden” (or a well written engagement letter)
One small step for advisers
The trouble with most engagement letters, is that they’re not very engaging.
They are usually generic templates filled with equivocation, disclosures, disclaimers and legal jargon. There’s little that speaks to the client directly and with minimal changes, that same letter could be passed on to another client without too much fuss. The agreement gets signed, but many clients feel disengaged and apprehensive as a result.
Some will contain an outline of the cost of the advice and confirm that (insert client name) engages (insert adviser name) to execute (insert services), but the responsibility for (insert other stuff) lies on (insert client name) and you can’t blame (insert adviser name) if it all goes sour.
We get it. It’s what we’re used to, and this is the way that things are sometimes done in financial services (but disclosures alone are not sufficient).
What if we move beyond pre-empting legal action to reimagine the role and purpose of this document?
Could we transform this risk-management device into a meaningful and – you guessed it – engaging client experience?
The Engagement Letter
An engagement letter is, at least in theory, a useful tool for defining services (and costs), helping to manage expectations (and risk), and minimising inefficient discovery processes; in theory, it’s a step that helps advisers save time (but more on this later).
Surprisingly, the popularity of engagement letters has not grown significantly since the introduction of FASEA, despite FASEA’s increased focus on client engagement, consent and transparency.
In reality, verbal agreements can be unreliable and problematic. Adopting a more formal approach can help remove some of the he said/she said arguments, and control the scope of the advice relationship in an unambiguous form.
In our experience, some advisers have found that as the advice relationship matures, the scope and number of services provided increase, but the ongoing fees don’t seem to change. The engagement letter is a useful reference in these situations, an agreed starting point from which the parties can confirm what is/isn’t being advised upon at each review, but also what services are being paid for and whether there are significant changes.
Both adviser and client(s) are clear on what the arrangements are and everyone wins.
Admittedly, some view engagement letters as an extra step in the process that requires too much effort for the anticipated benefit. For others, it’s “another bullshit compliance document” that a client simply has to sign.
Our view is that your Engagement Letters could be the most important documents your client may sign; it sets the scene and will govern important elements of the advice process from the outset, for both client and adviser.
Why use Engagement Letters?
“One letter to rule them all
One letter to find them
One letter to bring them all
And in advice combine them”
— J.R.R Tolkien, or a really cool and hip financial adviser who uses a highly personalised and transparent engagement letter to assist in meeting their duties and obligations
I won’t deep dive into Best Interest Duty, but I’ll highlight that FASEA, despite its short-life, has made its presence felt. We believe the FASEA Standards acknowledge a deeper regulatory shift – from disclosure to consent and engagement – and a shift from minimum statutory provisions to norms of professional conduct. In particular, we’d direct your attention to Standards 4 and 7.
FASEA Standard 4 requires that you obtain your client’s free, informed and prior consent prior to acting on their behalf.
The following must be explained to the client, clearly:
- Services being provided;
- Terms of the services being provided;
- How the services will be recorded; and
- Confidentiality and privacy arrangements.
FASEA Standard 7 requires you to obtain your client’s free, prior and informed consent about all benefits you may receive in the course of acting for them. This includes fees charged, commissions and non-monetary benefits.
An engagement letter is, in my view, the easiest way to demonstrate your client’s free, informed and prior consent.
What’s in an Engagement Letter?
“It’s what’s inside that counts”
— Hannibal Lecter, Consulting Psychiatrist
Before we address what needs to be included in a Letter of Engagement, we’d encourage you to edit it mercilessly.
I would suggest that as much of the legal terminology is removed from the document as possible. For instance, publicly available documents such as terms and conditions and privacy policies can be incorporated by reference rather than repeated, in detail, in the Letter. Alternatively, these can be provided in a separate document.
Redact without mercy. Cut out anything that is not client centric, or user friendly.
Short engagement letters are good engagement letters.
Research confirms that consumers are prone to retain less of the information when confronted by lengthy warnings and disclaimers so, instead focus on the client as much possible and include nothing unnecessary.
Aside from personal details, we suggest your LOE should address and contain:
- Subject matter and reasons for seeking advice
- Objectives and needs which were uncovered during the process
- Scope of the advice
- Relevant circumstances that the advice will be based upon
- Length of the engagement
We think this can be done in a couple of pages.
A good Letter of Engagement (LOE) could save you time, and it can, but please appreciate that this is a secondary benefit; the primary benefit of the LOE is engaging clients and obtaining free, prior and informed consent.
We’ve previously discussed how incorporation by reference (IBR) can be used to make the advice processes exponentially better (more accessible and more affordable). Think about whether, and to what extent, the engagement letter can be incorporated within the Statement of Advice to streamline the advice process and deliver shorter advice documents and a simpler process.
It’s worth thinking about but remember to exercise caution.
Although you can IBR any document previously provided to your client, here are some non-negotiable elements which must be included within a Statement of Advice (which can be found here 947B). Further, anything that is being incorporated by reference must be current and accurate. For example, don’t remove statutory warnings from the SOA because they were made in the LOE, the law requires warnings (such as incomplete and inaccurate information warning (961H)) to be included in the SOA as a consumer protection mechanism, so removing it may create a reportable instance. Likewise, don’t skip over benefits lost due to a replacement of product, or conflicts and remuneration which would be seen as being in the same category as above.
A well-drafted LOE allows for the provision of a simplified document that omits information that is recorded or provided elsewhere.
A small step for advisers, but in the right direction.
Engagement letters are an effective tool that will increase the engagement of clients, minimise risk, help grow businesses, increase transparency and, when done correctly, smash FASEA requirements.
If you would like help with constructing an engagement letter, or a review of your existing LOE, please get in contact with us, we’d be happy to help.