Don’t admit liability before the facts are in

In my car’s glovebox, along with a stash of Rolaids and fast food restaurant napkins (real men don’t carry Kleenex), I have a card from my insurance company, which explains what to do if I’m involved in a traffic accident.

You probably have one too. Assuming you survive the crash, and have the presence of mind to remember and locate this valuable resource tucked away behind your owner’s manual and gas pump receipts, you’ll find this excellent piece of advice: In Case of Accident: Do Not Admit Liability.

Now, as markets are crashing and clients are assessing the damage to their retirement vehicles, this guidance is particularly prudent and timely for advisors.

Client complaints are rising faster than inverse ETFs. Investors are angry as they watch years of contributions and returns vanish. The plans they made years ago are up in smoke. Many of them are now looking at their investment advisors and their firms for compensation.

If you work for an IIROC firm, you can count on your employer to be your first line of defence. They’ll investigate, negotiate and ultimately, they’ll likely settle. And you will pay the bill.

Frankly, the onus is on you to protect yourself. You’re the one at the wheel.

That little card from the insurance company has three pearls of roadside wisdom that are particularly helpful for advisors when handling complaints, and can help to keep them in business.

1. STAY CALM. Receiving a complaint is emotionally troubling. You are being told you’ve failed in some aspect of your work. It hurts.

But get over it—fast. This is a business. If you did screw up, it’ll come out while we’re investigating the complaint. But it’s not your fault portfolios are down during this bear market—the worst we’ve seen in over a generation. So do not admit liability, especially before the facts are in.

In almost every complaint I’ve seen, the client is unsophisticated, risk averse, financially illiterate and completely at the mercy of the advisor’s unscrupulous behaviour. It’s in the clients’ best interests to present themselves as helpless victims. My personal favourite was a complaint from a client who, as we discovered after some investigation, was previously registered as an advisor. Some people have no shame.

2. CALL 911. Under no circumstances should you attempt to resolve the complaint yourself. If possible, get help from your branch manager. Most complaints are of a service nature, and can often be resolved by the branch manager, quickly and with minimal cost. In this case, the branch manager acts as a referee and can usually fix the problem amicably for both sides.

Attempting to address the situation on your own can have dire consequences.

Recently, one of my advisors was hit with a $50,000 settlement because she did not address a client’s concerns quickly enough and the problem became tangly. Her client was concerned about an investment that had declined and wanted to sell it. The advisor, believing that the market’s decline was temporary, continued to advise her to hold the investment.

Unfortunately, the client required income from the portfolio and began selling off other securities to cover the losing position. As a result, her risk profile increased as her risk tolerance fell.

By the time I became involved, a bulk of the portfolio was gone, and the remaining investments were clearly unsuitable. Worse still, the client was furious with the advisor for not giving her an honest assessment of her financial condition and options.

3. RECORD DETAILS OF THE ACCIDENT. In our business, paper is everywhere. Except, sadly, in your files. It continues to amaze me how few advisors keep notes on their client relationships. Take notes of every client meeting, conversation and, most importantly, every trade. Keep your documentation and notes up-to-date.

If your KYC information is more than three years old, you’re at high risk. If you don’t have notes from every client conversation, you’re cooked. “He said, she said” isn’t good enough. We need evidence. If you aren’t taking notes, you’ll be writing cheques.

The complaints process is becoming biased toward the client’s recollection—not yours. Your notes are your only defence.

Lately, we have received a number of complaints around principal-protected notes. In one case, the client thought he was buying a GIC with growth potential and had no awareness it could be locked in for more than five years with no return.

The advisor stated he had explained the product in detail and the client was aware of the risks. When I asked him precisely when this conversation took place, he could only name the month. As he had no notes to back up his version of events, we arrived at a settlement with the client.

The advisor covered the redemption fees on the product and a notional interest amount for the client. He was lucky— the process cost him less than $10,000. I suggested he consider this tuition. He now takes notes of every client interaction.

There is no way to protect yourself against all client complaints. Even good drivers have accidents. The key is: If one happens, you and your business survive with minimal damage.

Harper Fraze is a pseudonym. He is an investment advisor with a large Canada-based financial services firm he cannot name. editor@advisorsedgereport.ca