(May 19, 2005) Are you taking notes? You need to be if you want to fend off lawsuits from clients looking to claim you sold products that didn’t suit their circumstances, says Harold Geller, a partner at Milton, Geller in Ottawa.
“Professionals are easy to sue,” he said at the conference. “How can you know every mutual fund? You can’t. But the courts say you have to.”
He says advisors need to come to grips with the fact that clients’ memories will often outstrip their own. An advisor has multiple meetings in the course of a day. But the client likely only had one, and will better remember details because he or she was making decisions about how to invest significant sums of money.
At another Peel session, Gowlings lawyer Ellen Bessner noted the problem is exacerbated by the fact most advisors aren’t paid by the hour. They make money if a client decides to invest, so there’s an innate desire to move on from conversations that aren’t producing. “That doesn’t work in this environment,” she warns. “You need to take the time to explain things in a way the client understands. And then you need proof of what you said, and what they said to you.”
If a slide presentation was made, that needs to be mentioned. The date and time of the meeting, and who attended, should appear in notes kept in the client’s file. “The client remembers these things,” says Geller. “They’ll remember the weather. They’ll remember if they signed blank forms.”
It’s not good enough for an advisor to jot down five things that were said during a two-hour conversation. The goal should be to create a fact file thorough enough to make a lawyer reluctant to take a client’s case on contingency. Bessner says most clients don’t take notes, so it falls to the advisor to create records. “The rogue client is not seen as a rogue client until we unveil that,” she says. “You do that by having documentary evidence. If they have no records, and you do, you’re better off.”
In the aftermath of the Portus debacle, Geller reminds firms of their duty to both advise and dissuade clients. Products like universal life and hedge funds are highly complex and it’s up to advisors to understand what they’re selling so clients can make informed decisions. “Put the risks before them,” he says. “Clients can only take risks if they understand them.”
One way to make it tougher for clients to sue is to improve Know Your Client (KYC) forms. “If you think having a client choose from three to five risk categories without creating a common language of what that means is acceptable, then you’re kidding yourself,” Geller says.
Instead, he suggests looking at templates offered by Advocis and other membership organizations. What do these forms have in common? Generally, they’re longer and ask questions that can’t be answered with a simple yes or no. They require a dialogue and get the client to talk about things like cash flow, and the financial needs of other generations.
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When an advisor completes an analysis, Geller says, it needs to be sent to the client with a request to have the facts confirmed. Any corrections must show in the file. Further, if you suggest a particular type of insurance coverage and the client refuses, have him sign off. When going through a contract, have the client initial every page to indicate it’s been read. Highlight key terms, and have the client initial those too.
“It’s a common-sense process,” says Geller. “It’s also a sales opportunity, because if you look professional, then your client has more respect for you.”
Filed by Philip Porado, Advisor’s Edge, firstname.lastname@example.org