4th Annual Dollars & Sense Survey: Turning up the heat

(October 27,2003) When you visit your doctor, accountant or lawyer, you see that they take notes during your meeting, which are stored in a file with your name on it. Financial planners and advisors — in fact, any financial professional — must diligently maintain files that reflect communication with clients, from the first contact through all subsequent meetings and telephone conversations. The files, whether paper or electronic, must be maintained in a chronological and organized fashion.

When training advisors, I explain what they must do and how they can incorporate these practices into their daily routine. The most important element, however, is explaining why they should maintain written records. If they don’t learn to value the exercise, they will never engage in it.

The purpose of this article is to review the importance of maintaining a paper or electronic trail and to outline how you should prepare your trail to be most beneficial to you.

Why bother to maintain a trail?

The paper or electronic trail was developed long ago by professionals to protect themselves. When your doctor sees hundreds of patients and sees you only once a year, how can he possibly remember your history? How would you judge your doctor if he didn’t take any notes and ended up prescribing a drug for you that you previously told him you were allergic to? You would likely conclude that the doctor doesn’t know how to perform his job competently and responsibly. And you would be right.

How can a doctor perform his job properly if he doesn’t take notes? If you did take the prescribed drug and had a bad reaction, the doctor would defend himself at the College of Physicians & Surgeons, asserting that you never told him about your allergy. Of course you would have a clear recollection of telling him because it’s an issue that you are concerned about and your evidence would be that you always tell doctors about this allergy on your first visit. If your doctor doesn’t have any notes from his first meeting with you, he would not be in a position to remember or challenge your evidence.

Furthermore, any third party judging your evidence would likely give you the benefit of the doubt. Why? Because it is the obligation of the professional to have a system in place whereby information imparted to him by the client is recorded for future use. And since the doctor sees several hundred (if not thousands) of patients each year and you only see a few doctors (hopefully just one or two a year), it is likely that your recollection of the meeting is clearer than the doctor’s.

The lesson for you

I’m sure that you get the picture — in the context of an advisor-client relationship, the same holds true. You, the professional, are expected to maintain notes so that you can protect yourself from clients who assert that they told you one thing and you did something else. If you took notes during the meetings that reflect concerns or instructions the client imparted to you, then you will have proof. This will support your version of events and will likely convince a judge that your version is more accurate than your client’s, which is dependent on memory alone, as few clients take notes during meetings with their advisors.

In my job, I defend advisors against regulators or clients. When I meet an advisor for the first time, I hope that he has a trail that proves at the very least he was diligent and at the most, his version is recorded in notes, letters, memos, etc. If there is no paper, we can only hope (or pray) that the judge finds the complaining client’s version of events completely lacking in plausibility and credibility. Only in those circumstances will the advisor be relieved from culpability.

Many advisors have challenged me on this issue — they say this cannot be true because we live in a country that is supposed to assume a person is innocent unless proven guilty. I explain that in civil law, when clients sue their professional advisors, although the onus is on the client to prove his case, he can simply tell his story to a judge. It is then the advisor’s turn to prove that the client’s testimony is untrue through his own testimony and hopefully, with supporting documentation.

Solid paper or electronic records can sometimes even spare you from having to appear in front of a judge at all. If you have records of meetings or telephone calls with the client who is complaining, I can call opposing counsel early in the proceedings to convince him that his client has no case. This might end the litigation. If, however, you don’t have any paper, then your chequebook is the only thing that can settle the matter.

Now that you are (hopefully) convinced that a paper or electronic trail is absolutely necessary, here are some tips on preparing your trail:

How to paper your file?

If you follow the four “Cs” of proper record keeping, your files will protect you through good times and bad. The four “Cs” are:

  • Correct
  • Complete
  • Contemporaneous
  • Current

It is easy to say that record keeping must be accurate, but that means that everyone on your team must work together with systems that ensure the information in the file is correct. For the information to be correct, it must also be complete and current. If the information is incomplete or outdated, this could have an effect on the suitability of — among other things — your investment recommendations.

Recently, the Financial Planners Standards Council (FPSC) proposed practice standards that incorporate certain record keeping elements. Instead of a standard know-your-client form, the FPSC describes in more precise terms the information required to formulate a plan for any client. Such a plan is set out in a written financial planning report.

The FPSC also intends to introduce the concept of an engagement letter to formalize the mandate of the CFP. Such a letter must be complete and correct and must be updated if any element in the plan is affected by any client change. The FPSC draft practice standards compel CFPs to update the engagement letter every year.

If an advisor keeps written records, including notes from all telephone conversations and meetings, and sends letters to the client from time to time confirming his mandate and explaining the risks associated with any investment recommended, the advisor will be in a better position to defend himself when the regulator or client comes a-knocking.

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Ellen J. Bessner is a partner at the law firm Gowling, Lafleur, Henderson, LLP with expertise in defending advisors and branch managers against their clients and regulators and offers compliance training to both advisors and branch managers for CE credits. For more information, please click here.

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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.