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How does your advisor make sure to understand your needs? - DFSIN - SFL

How does your advisor make sure to understand your needs?

The Financial Needs Analysis and the “Know Your Client” process: two essential tools for your advisor. 

February 27, 2023

Whether it be for life and health or investment insurance, the number one thing you almost certainly expect from your advisor is that he or she has a thorough understanding of your situation, needs and objectives. So, you’ll be glad to hear that the advisor’s role is governed by a framework designed specifically to take these elements into account. 

Outlined below are two tools central to this framework. 

Financial Needs Analysis  

In Canada, the provision of life and health insurance products are regulated by the provinces and territories. Under this regulation, all advisors are required to conduct a Financial Needs Analysis (FNA) for their clients, and to document the information gathered in a Reason Why document. 

What exactly is an FNA? It’s a formal process whereby advisors use a questionnaire to identify the most suitable solution for their client. The comprehensiveness of the analysis depends on the individual’s situation and the product being considered. 

The questionnaire typically consists of two components: an objective component based on “factual” data and a subjective component that seeks to shed light on certain less-quantifiable elements such as emotions, behaviours or personal opinions.  

A two-column table showing both components of a financial needs analysis.The left-hand column lists the “factual” data, i.e., static information, income, expenses, insurance coverage, assets and liabilities, budget, etc. The right-hand column contains non‑quantifiable data, i.e., the more subjective and emotional factors, covered by a series of specific questions in a set order.

This information will help paint an accurate picture of your situation (age, marital status, health, income, investments, etc.), your priorities (goals, particular interests, life projects, concerns), the solutions already in place (notably existing insurance contracts) and the road ahead. Your advisor can then use this in-depth analysis to recommend one or more truly tailored solutions. 

Note that advisors must complete an FNA each time they sell a life and health insurance product. 

“Know Your Client” 

There is an equivalent process in the investment industry called “Know Your Client” (KYC).  

This process also aims to clarify your situation and investment needs by virtue of a detailed questionnaire, which covers aspects such as your identity, creditworthiness, personal and professional circumstances, financial circumstances (liquidity needs, financial assets, net worth, loans, etc.), needs and objectives. The process also assesses your investment knowledge. 

A key component of the KYC is the establishment of your investor profile, which specifies your investment time horizon and risk profile. The latter takes into account your risk tolerance, the level of risk that would be needed to achieve your objectives, and your risk capacity regarding your personal situation. 

Note that a client’s file must be updated no less than once every 36 months, or when there is a significant change in the individual’s situation, a transfer of assets or a change of advisor. Also note that in addition to this Know Your Client process, the advisor is subject to “suitability” determination obligations. This regulatory requirement states that before taking or recommending an investment action for a client, the advisor must determine that the investment action is suitable for the client based on certain specific factors and puts the client’s interests first.  

As you can see, whether we’re talking life and health or investment insurance, there are industrywide measures in place that allow your advisor to draw on strict standards and best practices to make recommendations based on a solid understanding of your needs. So, if you were wondering why your advisor often asks a bunch of questions, the answer lies in two acronyms that are key to your relationship: “FNA” and “KYC.” 

The following sources were used to prepare this article. 
Chambre de la sécurité financière, “The FNA: your advisor’s diagnostic tool.”, “La lettre explicative protège le client.” 
IIROC, “Know-your-client and suitability determination for retail clients.”