How to guard against clients making bad decisions

Client complaints are on the rise because of market volatility. So, how can you guard against litigation in this environment?

Ellen Bessner, a partner at Babin Bessner Spry LLP, laid out 10 red flags and 10 tips and tools to address them, when recently presenting at the FP Canada conference. She defends advisors when they’re sued by their clients or are dealing with regulatory matters.

“Litigation is on the rise. Client complaints are absolutely on the rise,” she said. “I’m getting calls from clients: ‘can we sue the advisor?’

“It’s on the rise because the markets are volatile. Because they were good for so long, we weren’t managing clients’ expectations and then, when the market started to become very volatile, advisors really need to call their clients and be proactive, and not do what I call the ostrich phenomenon.”

Bessner said advisors should watch for these red flags and protect themselves from clients who make bad decisions or don’t give them the information they need to make good decisions.

“If you can identify what those problems are before the client complaint, you can ward them off,” she said.

• Advisors should beware of information gaps when clients don’t share information. They need to ensure they have enough information to create the financial plan so they can fulfill their obligations, she said, “because, at the end of the day, even though it could be more the client’s fault or the advisor’s fault, the problem is a risk to the planner because you have to deal with regulators.”
• Advisors should also beware of clients with unrealistic expectations or who expect magic. Advisors should clearly set out what they can and cannot deliver as soon as they start working with a client. Bessner recommended they give their clients a retainer letter that spells this out, so there are no surprises later, especially if their marketing materials set up more unrealistic expectations.
• Advisors should also ensure that clients make planning a priority: dedicating time to providing the required information and staying engaged with the process.  If the clients are incapacitated, then advisors must ensure they the power of attorney and instructions from the appropriate person.
• Advisors need to ensure they’re not rushing clients, so they have the time to make decisions and aren’t indecisive and constantly changing their minds because they don’t have sufficient time.
• Advisors should also dig below the superficial to ensure they’ve completed the discovery process in a detailed way and communicated with their clients.
• Something else to beware of is risk tolerance. Clients may say theirs’ is higher than it is because they want higher returns. Or, they may feel they need to push it higher because they haven’t saved enough for retirement, so need to earn higher returns. Even if the client does that, Bessner said it’s up to advisors to be the professional and direct their clients to something reasonable for them. “If you let the client dictate the risk, that is going to lead to a bad decision,” Bessner warned,  “because if the client can’t afford to lose money and they end up losing money, that is going to come back to haunt you.”
• Advisors need to realize that clients also change – even if they’re older. So, it’s up to advisors to ensure they regularly update their discovery process and revise assumptions in the financial plan.
• Finally, advisors should beware of clients who ignore the plans or indicate they don’t trust the advisor’s advice. Bessner warned that advisors who accept clients who don’t trust them or follow their advice is risky because there could be complaints down the road.

“You shouldn’t accept a mandate from a client who doesn’t seem to trust you or is second-guessing you,” she said. “It’s never going to be a good relationship, so you have to suss that out right at the beginning.”

Bessner also offered the advisors tips and tools to address these problems. They ranged from setting the stage and being verry organized before meeting their clients to using clear language to speak to them and being curious in the discovery process. She urged advisors to be interested in their clients and write everything down, but also leave silence and listen to what clients say to understand the client’s goals rather than stereotyping them with generalizations and helping them understand the limitations of their plan.

She recommended that advisors protect themselves by being clear on what they can and can’t do and what the client’s obligations are, too, and that they manage their clients’ expectations and update them throughout the process. They may need to be reminded or their plans updated as the client changes, but it’s also important for advisors to keep communicating with them and documenting everything so they’re “correct, complete, current, consistent, and contemporaneous”.

Finally, she warned advisors about working with joint applicants – spouses or an elderly parent and an adult child with a joint account. Advisors must do an equal discovery with both parties, and not just the forthcoming one. They should also document that they have received information from both parties and not just meet with one of them. That’s particularly important when one of the parties leaves – either through death or divorce – as the other can suddenly “wake up” and complain.

“The other thing about joint applicants is sometimes the person with the louder voice may appear to be the most knowledgeable,” she said. “But, they’re actually sometimes less knowledgeable. “

“You really need to understand the risks of clients making bad decisions on your watch and how their bad decisions can impact you, too,” said Bessner. “So, you really want to sensitize yourself to what those bad decisions are and when they’re happening. If you really can’t work them out, then you need to manage the risks by saying goodbye and showing those clients the exit door.”