Five Simple Steps to Help Avoid Sleepless Nights

By Katherine Vessenes, J. D., CFP®, RFC

With the wonderful success we enjoy from time to time, it’s easy to believe that all of our clients love us. In actuality, lawsuits, arbitrations, and complaints track the market. The key event that triggers a trip to an attorney’s office is a client losing money. Now, clients cannot sue you just because they lost money; as our investments have no guarantees. A client merely alleging they lost money will not succeed in court, meaning investors must have some other legal ground to succeed in their suit. Although there are many grounds investors can use to sue, the main ones are:

• Unsuitable investment
  
• Failure to disclose risk
  
• Failure to disclose sales charges

To help avoid sleepless nights in the future, here are five practice management rules to “litigation-proof” your office:

Rule #1: Happy clients don’t sue you

My years in this business have taught me that clients are amazingly forgiving if you communicate with them. Clients will stay happy, even if their investments have taken a loss, if their expectations are met and exceeded. My research has shown that clients are far less interested in performance than ethical trust. Trust is built by asking clients what they want from the relationship. Some open-ended questions are:

• “After one year, what will make our relationship a successful one?”
• “What will make our relationship worth your money and my time?”
• “What are the most important qualities you want in a financial advisor"
• “If there is one thing you would never want to experience with your agent or broker, what would it be?”

Rule #2: Document, document, document

One of the first things taught in law school is that clients love paper work. Never pass on an opportunity to let your clients know what you are doing for them. After every meeting or phone call, print a report and include a copy of your notes. Also enclose a handwritten note with the status reports, clients absolutely love it.

Your personal memos can be a lifesaver in tracking your client’s activities. After each recommendation, include a statement on why the investment or insurance product was suitable. Be sure to note that you disclosed the risks and sales charges in addition to the insurance company’s ratings.

Even if the market does go down, it will be very difficult for an investor to successfully sue you because your files will supply the perfect defense. The investor will have no legal grounds to press their claims and your suit should evaporate.

Rule #3: When in doubt, disclose

Initial meetings and annual reviews are good times to disclose risks and sales charges to your clients. Never promise specific returns; clients need to know the risks up front and be reminded there are no guarantees. Use a disclosure form when beginning the relationship to describe your background, licenses, and compensation. A study showed that 98% of all clients wanted this information in advance and in writing.

Use another type of disclosure every time you propose a new investment or insurance product. It should include information regarding sales charges and risks, as well as a prospectus receipt stating the client has received and read the prospectus. This insures a client cannot claim they were unaware of any risks or sales charges as they have already read and agreed to them.

Rule #4: Conduct a client satisfaction survey

Always stay on top of your client’s level of satisfaction with your services. Use the information learned in Rule #1 to construct a simple client satisfaction survey to distribute at the beginning of the relationship and at the annual review. You’ll find most clients want to trust you and believe you have their best interests at heart. Your survey should have a rating system (1 to 5) in these areas such as these:

• My advisor accurately explained all investments and confirmation statements
• My advisor thoroughly understands my financial goals and temperament
• My advisor is accessible to answer questions
• My advisor handles my affairs in a timely manner
• I feel comfortable with my advisor and his/her recommendations

Tell your clients you’re not happy unless they are completely satisfied. Obtain their assurances that any dissatisfaction will be communicated to you first. The survey will let you know when clients are unhappy, so you can address the problems early. The survey also creates a paper trail that can assist your ability to defend any client complaints.

Rule #5: Get feedback from your clients and act on it

If you can afford to hire a college student to follow up on the survey, you will get more candid results. If not, call personally until you are getting a perfect score in every area. The purpose of the call is to get feedback on to serve them better, not promote another fund. Throughout the year, call the client even if you have bad news. Ask the client if there is anything you can do to improve the relationship. Getting clients to talk about their frustration with you is crucial to keeping them happy. Most clients will be thrilled that you are taking the time to address their needs. If you find one who is unhappy, work diligently to satisfy their concerns, and keep records of the conversations.

Conclusion

If you follow these rules, it is unlikely that your clients will be unhappy, even if their investments go down. If they do become unhappy, you should be able to detect it early enough to ward off disasters. In the event you are sued, your records will show how hard you worked to communicate and disclose information. Those records would a long way to helping you win your case, but hopefully you’ll never have to worry about it.