Advisor Forum update: Paper trail, know-your-client keys to winning in court

Current: out-of-date client information clouds your understanding of their goals Current: out-of-date client information clouds your understanding of their goals Correct: even the slightest error can call your reliability into question Complete: make sure you have a full understanding Consistent: make sure there are no discrepancies between the notes for separate meetings Contemporaneous: put everything […]

By Steven Lamb | November 20, 2003 | Last updated on November 20, 2003

4 min read

Current: out-of-date client information clouds your understanding of their goals

Correct: even the slightest error can call your reliability into question

Complete: make sure you have a full understanding

Consistent: make sure there are no discrepancies between the notes for separate meetings

Contemporaneous: put everything in context to make the image of the meeting more vivid.

Related News Stories

The write stuff: How to protect yourself with a proper paper trail

“The version of events that you get from a client will be different from the version of events that you get from the advisor,” she says. “If you have notes that support what you say, then you’re going to be believed.”

Make sure all trades made are backed up by a documented request. Bessner recommends avoiding discretionary trading in clients’ accounts, since this “favour” is likely to get the advisor in trouble at some point down the road.

Bessner says it may be necessary to identify potential “rogue clients” and confront the problem before it develops, even if they might be one of the bigger clients in your book.

“Stop hoping and start thinking,” she says. “And use your professional judgment.”

• • •

Advisor.ca can also help you put proper systems and paper trails in place to protect your clients and yourself. For a guide examining the importance of written engagement and disclosure and a customizable “starting-point” template to help you produce your own engagement and disclosure document, please click here. For our customizable investment policy statement (IPS), please click here.

• • •

For details on the last Advisor Forum of 2003 in Halifax, please visit the Advisor Forum Web site by clicking here.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(11/20/03)

Steven Lamb

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Current: out-of-date client information clouds your understanding of their goals
Correct: even the slightest error can call your reliability into question
Complete: make sure you have a full understanding
Consistent: make sure there are no discrepancies between the notes for separate meetings
Contemporaneous: put everything in context to make the image of the meeting more vivid.

Related News Stories

The write stuff: How to protect yourself with a proper paper trail

“The version of events that you get from a client will be different from the version of events that you get from the advisor,” she says. “If you have notes that support what you say, then you’re going to be believed.”

Make sure all trades made are backed up by a documented request. Bessner recommends avoiding discretionary trading in clients’ accounts, since this “favour” is likely to get the advisor in trouble at some point down the road.

Bessner says it may be necessary to identify potential “rogue clients” and confront the problem before it develops, even if they might be one of the bigger clients in your book.

“Stop hoping and start thinking,” she says. “And use your professional judgment.”

• • •

Advisor.ca can also help you put proper systems and paper trails in place to protect your clients and yourself. For a guide examining the importance of written engagement and disclosure and a customizable “starting-point” template to help you produce your own engagement and disclosure document, please click here. For our customizable investment policy statement (IPS), please click here.

• • •

For details on the last Advisor Forum of 2003 in Halifax, please visit the Advisor Forum Web site by clicking here.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(11/20/03)

Current: out-of-date client information clouds your understanding of their goals
Correct: even the slightest error can call your reliability into question
Complete: make sure you have a full understanding
Consistent: make sure there are no discrepancies between the notes for separate meetings
Contemporaneous: put everything in context to make the image of the meeting more vivid.

Related News Stories

The write stuff: How to protect yourself with a proper paper trail

“The version of events that you get from a client will be different from the version of events that you get from the advisor,” she says. “If you have notes that support what you say, then you’re going to be believed.”

Make sure all trades made are backed up by a documented request. Bessner recommends avoiding discretionary trading in clients’ accounts, since this “favour” is likely to get the advisor in trouble at some point down the road.

Bessner says it may be necessary to identify potential “rogue clients” and confront the problem before it develops, even if they might be one of the bigger clients in your book.

“Stop hoping and start thinking,” she says. “And use your professional judgment.”

• • •

Advisor.ca can also help you put proper systems and paper trails in place to protect your clients and yourself. For a guide examining the importance of written engagement and disclosure and a customizable “starting-point” template to help you produce your own engagement and disclosure document, please click here. For our customizable investment policy statement (IPS), please click here.

• • •

For details on the last Advisor Forum of 2003 in Halifax, please visit the Advisor Forum Web site by clicking here.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(11/20/03)

(November 20, 2003) It is remarkable what an advisor can overlook, but even the slightest oversight can land you in court, according to Ellen Bessner, a partner at Gowling, Lafleur, Henderson. There might not be any way to avoid a lawsuit from a client, but you can certainly prepare for the worst.

Lawyer’s fees are not the only cost associated with a client lawsuit. The advisor’s reputation can suffer greatly, their name can appear on regulators’ Web sites and they can even lose their license.

“The newspapers love you guys,” Bessner said yesterday at the Toronto Advisor Forum. “They love when you get in trouble. They smear you guys all over the paper. Do they ever smear a client, when the client has been found by a judge to have been lying, and the advisor gets off the hook? No!”

Bessner specializes in defending advisors and branch managers against their clients and regulators. She and her partner offer a training course to teach advisors how to minimize the risks to their business. She says she realizes that this cuts down on the clients she will earn litigation fees from, but that it makes her feel like she is serving a purpose.

She offers “10 Commandments for managing your business to protect yourself,” which detail how best to defend yourself against a lawsuit. These commandments can be boiled down further into the following very general rules: know your client, create a paper trail and follow your client’s instructions as laid out in that paper trail.

She explains that “know-your-client” (KYC) is not a document or a form, but a process which should be ongoing for as long as you have the client. The client you took on 15 years ago is not likely to be the same person today. Their risk-tolerance, their goals, their entire financial situation should evolve over that period and your understanding of the client’s needs must remain up to date.

The most important aspect of KYC is understanding their risk tolerance. But this understanding must be followed up by explaining the risks of a given investment to the client. There’s little point to knowing your client if you don’t use that knowledge to provide the proper advice.

Make sure all trades are suitable and that your actions follow and respect your clients’ stated objectives, Bessner says.

“You guys are sitting pigeons on suitability,” she warns. “The mutual funds all have there prospectus and in this prospectus, it explains the risk. Do you ever open that prospectus and explain the risks to that client?”

She uses the example of a balanced mutual fund, which many advisors may consider a conservative investment, but the prospectus describes the fund as suitable for investors with a medium risk tolerance. It’s better to err on the side of conservatism.

“Just because [the KYC] says 5% speculative, it doesn’t mean you have to put that full 5% into speculative,” she says. “You won’t get sued for not being speculative enough.”

The advisor is the professional in the relationship, not the client. It’s up to the advisor to keep an accurate record of every meeting, phone call, letter and e-mail.

“The best ally of the advisor is complete and updated documentation,” Bessner says. “When there’s a credibility battle between a client and an advisor, the advisor is the professional. Who is expected to take notes?”

She says proper documentation should comply with “5 Cs.” It should be:

Current: out-of-date client information clouds your understanding of their goals
Correct: even the slightest error can call your reliability into question
Complete: make sure you have a full understanding
Consistent: make sure there are no discrepancies between the notes for separate meetings
Contemporaneous: put everything in context to make the image of the meeting more vivid.

Related News Stories

The write stuff: How to protect yourself with a proper paper trail

“The version of events that you get from a client will be different from the version of events that you get from the advisor,” she says. “If you have notes that support what you say, then you’re going to be believed.”

Make sure all trades made are backed up by a documented request. Bessner recommends avoiding discretionary trading in clients’ accounts, since this “favour” is likely to get the advisor in trouble at some point down the road.

Bessner says it may be necessary to identify potential “rogue clients” and confront the problem before it develops, even if they might be one of the bigger clients in your book.

“Stop hoping and start thinking,” she says. “And use your professional judgment.”

• • •

Advisor.ca can also help you put proper systems and paper trails in place to protect your clients and yourself. For a guide examining the importance of written engagement and disclosure and a customizable “starting-point” template to help you produce your own engagement and disclosure document, please click here. For our customizable investment policy statement (IPS), please click here.

• • •

For details on the last Advisor Forum of 2003 in Halifax, please visit the Advisor Forum Web site by clicking here.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(11/20/03)

(November 20, 2003) It is remarkable what an advisor can overlook, but even the slightest oversight can land you in court, according to Ellen Bessner, a partner at Gowling, Lafleur, Henderson. There might not be any way to avoid a lawsuit from a client, but you can certainly prepare for the worst.

Lawyer’s fees are not the only cost associated with a client lawsuit. The advisor’s reputation can suffer greatly, their name can appear on regulators’ Web sites and they can even lose their license.

“The newspapers love you guys,” Bessner said yesterday at the Toronto Advisor Forum. “They love when you get in trouble. They smear you guys all over the paper. Do they ever smear a client, when the client has been found by a judge to have been lying, and the advisor gets off the hook? No!”

Bessner specializes in defending advisors and branch managers against their clients and regulators. She and her partner offer a training course to teach advisors how to minimize the risks to their business. She says she realizes that this cuts down on the clients she will earn litigation fees from, but that it makes her feel like she is serving a purpose.

She offers “10 Commandments for managing your business to protect yourself,” which detail how best to defend yourself against a lawsuit. These commandments can be boiled down further into the following very general rules: know your client, create a paper trail and follow your client’s instructions as laid out in that paper trail.

She explains that “know-your-client” (KYC) is not a document or a form, but a process which should be ongoing for as long as you have the client. The client you took on 15 years ago is not likely to be the same person today. Their risk-tolerance, their goals, their entire financial situation should evolve over that period and your understanding of the client’s needs must remain up to date.

The most important aspect of KYC is understanding their risk tolerance. But this understanding must be followed up by explaining the risks of a given investment to the client. There’s little point to knowing your client if you don’t use that knowledge to provide the proper advice.

Make sure all trades are suitable and that your actions follow and respect your clients’ stated objectives, Bessner says.

“You guys are sitting pigeons on suitability,” she warns. “The mutual funds all have there prospectus and in this prospectus, it explains the risk. Do you ever open that prospectus and explain the risks to that client?”

She uses the example of a balanced mutual fund, which many advisors may consider a conservative investment, but the prospectus describes the fund as suitable for investors with a medium risk tolerance. It’s better to err on the side of conservatism.

“Just because [the KYC] says 5% speculative, it doesn’t mean you have to put that full 5% into speculative,” she says. “You won’t get sued for not being speculative enough.”

The advisor is the professional in the relationship, not the client. It’s up to the advisor to keep an accurate record of every meeting, phone call, letter and e-mail.

“The best ally of the advisor is complete and updated documentation,” Bessner says. “When there’s a credibility battle between a client and an advisor, the advisor is the professional. Who is expected to take notes?”

She says proper documentation should comply with “5 Cs.” It should be:

Current: out-of-date client information clouds your understanding of their goals
Correct: even the slightest error can call your reliability into question
Complete: make sure you have a full understanding
Consistent: make sure there are no discrepancies between the notes for separate meetings
Contemporaneous: put everything in context to make the image of the meeting more vivid.

Related News Stories

The write stuff: How to protect yourself with a proper paper trail

“The version of events that you get from a client will be different from the version of events that you get from the advisor,” she says. “If you have notes that support what you say, then you’re going to be believed.”

Make sure all trades made are backed up by a documented request. Bessner recommends avoiding discretionary trading in clients’ accounts, since this “favour” is likely to get the advisor in trouble at some point down the road.

Bessner says it may be necessary to identify potential “rogue clients” and confront the problem before it develops, even if they might be one of the bigger clients in your book.

“Stop hoping and start thinking,” she says. “And use your professional judgment.”

• • •

Advisor.ca can also help you put proper systems and paper trails in place to protect your clients and yourself. For a guide examining the importance of written engagement and disclosure and a customizable “starting-point” template to help you produce your own engagement and disclosure document, please click here. For our customizable investment policy statement (IPS), please click here.

• • •

For details on the last Advisor Forum of 2003 in Halifax, please visit the Advisor Forum Web site by clicking here.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(11/20/03)

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