Cover Your Assets in three easy steps

By Harper Fraze | October 1, 2009 | Last updated on October 1, 2009
4 min read

I recently read an article about a Canadian Web site to help investors pursue their financial advisors for their investment losses. So I visited the site and, incredibly, its author had listed 156 separate grounds for a complaint. 156!

Despite the site’s amateurish design, advisors need to pay attention to the key message: Clients are unhappy – and they have lots of rope to try and hang us with. If you want to stay in business, you need to learn from the mistakes of others.

The vast majority of client complaints fall into three categories: Poor service, unsuitability and discretionary trading. The first complaint will hurt your business. The next two will take you out of it.

Now, assuming you’re not a complete criminal bent on swindling people out of their retirement portfolios, it’s remarkably easy to protect your business from the vast majority of complaints. And it is precisely because it’s so easy that I’m amazed advisors fail to follow simple procedures because that ultimately leads to small issues becoming lethal.

There are three simple processes every advisor should implement into their businesses:

1. Take Notes

You should have a record of every client contact. This includes phone calls, meetings, service requests, correspondence, and anything else. Everything. Invest the time to learn how to use a proper contact management program. It will pay you dividends forever. Not only will it help improve your client service, as nothing is forgotten or missed, it will help you find and keep track of opportunities for more business.

Logging every conversation – and also every attempted conversation – can protect you from many complaints, including those involving discretionary trading. In my practice over the summer, we had a client dispute the timing of a trade. The client was upset we hadn’t contacted him, as we’d agreed to, when one of his holdings reached a particular price. But his tone changed quickly when I informed him my assistant had called on a specific day, at a specific time and left a message with a member of his household. If we had not been able to provide that answer, I would have had to cover the trade at a cost of over $5,000.

When you are making a security recommendation to your client, it’s essential to note what was discussed, including a description of the security, how it fits into the portfolio, the key risks and how you’ll be monitoring the security. Note any questions the client had and your responses. And, note the outcome of the conversation and any next steps to be followed.

2. Use an IPS

I absolutely hate that our world has come to this, but an investment policy statement (IPS) is now such an obvious and important requirement in our business that only a fool would fail to use one.

A good IPS documents your understanding of the client’s situation, his or her goals and challenges. It should identify the investment solution you recommend and a summary of the key risks and opportunities of each investment. The IPS should include how the portfolio will be monitored and its performance measured. It should also outline the service standards you’ll provide, so that expectations for the relationship are established at the outset.

If a client has received, reviewed and signed off on the IPS – and it’s followed throughout the relationship – it becomes very hard for the client to suggest the portfolio was unsuitable. Our firm has never settled a complaint when an IPS was used. Not one.

Most firms have prepared IPS templates for advisors to use, and there are hundreds of samples you can find by searching the Internet. My advice is to find one you like, adapt it for your needs – and then use it. Begin with new clients. And once you become comfortable with it, go back and introduce it to existing clients at a review meeting. Your clients will appreciate it.

3. Stick with Quality

The best advice is to stay out of trouble in the first place. There’s an old joke that “no one got fired for buying IBM.” During the worst of the market meltdown of 2008 and ’09, clients who held quality, blue-chip portfolios saw declines of more than 30%. Banks, which Canadians hate to deal with and love to own, fell by over 50% in less than six months. And we had no complaints. People held on or bailed out. But they didn’t complain.

What they did complain about were the zeroed-out PPN’s that they were holding but didn’t understand.

The primary job of a retail investment advisor is to help people reach specific financial objectives. These include retiring comfortably, educating their children, leaving a legacy to family, reducing taxes and protecting their incomes. Each one of them needs customized advice to make realistic plans, and they need diversified portfolios to fund those goals as well as a disciplined process to keep them on track.

The best advisors I know focus on managing the serious money in client portfolios. They don’t, and will not, advise on or hold, investments of poor or questionable quality.

If a client wants to take aggressive positions, they’re told to do so in a discount brokerage account and to keep those allocations to a minimum.

These three practices will enhance your business, and protect you from nearly every complaint on that disgruntled investors’ list of 156. In anyone’s book, that’s a good investment.

If you came into the industry because you like trading stocks and bonds, you’re in the wrong business. It’s fun to talk markets, but clients need a solid foundation on which to build their dreams. Yes, there’s room for some entertainment – just keep it to a minimum. If your clients want to buy a lottery ticket, send them to the gas station.

Harper Fraze