The widespread move to e-signatures during the pandemic was one of the few positive developments of 2020. The convenience and ease of e-sigs meant slightly less disruption to business that year. More generally, e-sigs offer gains in time and productivity — for both advisors and clients. E-sigs also help address the problem of pre-signed forms infractions.
But while e-sigs provide efficiencies, what trade-offs should advisors be aware of?
One trade-off is the fallout if e-sigs result in less in-person contact.
For example, as the population ages, advisors “need to be wary about signs that their clients may have diminished capacity,” said John Fabello, a partner with Torys LLP in Toronto. “It’s very hard to assess that properly or accurately if you are never meeting your client in person.”
Meeting in person can also more readily facilitate relationship building, providing a foundation for positive outcomes. Based on his litigation experience, Fabello said a meaningful client-advisor relationship “can have a mitigating effect on a client’s inclination to complain about their account or investment losses” — a particularly important consideration during periods of market volatility.
More broadly, in-person contact is important for effectively discharging your know-your-client obligations. Regulators and courts typically require evidence that you explained key concepts on KYC forms (e.g., notes detailing a conversation about investment experience), Fabello said.
“It’s not that you can’t do that [explaining] remotely,” he said, but it will be more readily understood by the client if done in person.
Another trade-off is the risk of someone other than the client applying the client’s e-signature. Fabello gave the example of a busy executive who gets their assistant to sign the document with the executive’s e-signature.
“Having a client do that on an important document, like a KYC document, defeats the purpose,” Fabello said. “If they’re actually putting pen to paper, it’s more likely that they’re going to read at least some of that document.”
Mitigating the trade-offs is a matter of continuing to make meetings a priority.
“If you rely upon e-signatures, make sure you have a live conversation with your client to confirm that, if it’s an important document, they have read it and understood it, or give them the opportunity to ask questions,” Fabello said. “And make sure you document that.”
Whether a conversation takes place in person or not will be a judgment call, factoring in client needs and concerns, and whether the document in question represents a relationship-building opportunity.
In particular, he recommended that KYC forms and portfolio manager agreements be filled and signed in person when possible. These two forms “set the foundation for the whole relationship,” he said. “There is nothing more important than those.”
He also reminded advisors not to pre-populate a KYC form (the exception is biographical data such as name and address) before interacting with the client.
Natasa Morfesis, chief compliance officer with Worldsource Wealth Management in Markham, Ont., said the use of e-sigs doesn’t replace client discussions; rather, it’s “followup to ensure you receive proper execution of documents.”
She had little concern about e-sigs negatively affecting the client-advisor relationship, given that advisors understand that relationships must be maintained and are sensitive to client needs. “If a client prefers face-to-face meetings, advisors certainly try to please the client in that manner,” she said, just as they phone or videoconference with clients who have Covid-19 concerns.
Perhaps counterintuitively, a pitfall she’s observed with e-sigs is the potential for pre-signed or altered forms infractions. Mutual fund advisors who serve a combination of name accounts and nominee accounts may default to getting a client signature on a trading form for a nominee account. E-sigs make doing that easy, and the signature provides the advisor with comfort that they’ve protected themselves against regulatory scrutiny.
But when, for example, the advisor subsequently alters the form with a fund-code change without the client initializing the change, the result is an altered form, which could turn up in a branch audit and be reported to the regulator.
Morfesis said she explains to advisors that, instead of asking for a signature on a transaction form when one isn’t needed, they should consistently write detailed notes of their client conversations. “In the case of nominee, we’ve encouraged them to summarize their [client] conversation in an email, and maintain that email in the client file,” she said.
If the conversation includes disclosures — about fees, for example — she encourages advisors to ask for client confirmation or acknowledgement of the email.
She also offered the requisite reminder about pre-signed forms infractions: advisors must complete forms in full before clients sign them. E-sigs encourage advisors to “do it right the first time and capture all the information,” she said.
E-sigs also help advisors avoid dating a form because the client forgot to do so, which results in a pre-signed form. “In the case of dating a document, the e-signature system does that on behalf of all parties,” Morfesis said. “That’s a benefit.”
Daniel Kratochvil, chief compliance officer with Mississauga, Ont.–based Agora Dealer Services, said dealers he’s spoken with have positive feedback about advisors’ use of e-sigs. Any challenges with certain older clients who may not have smartphones or internet access were temporary, driven by lockdowns.
From an audit perspective, a couple of dealers that underwent business-conduct exams said regulators wanted evidence that they conducted a proper approval of their signature provider, Kratochvil said. He suggested that dealers may also want to be prepared during an audit to provide the digital certificate for each individual e-signature. “It’s a further layer of protection for the dealer,” he said.