The markets are in decline and you and your peers may very well be feeling a bit nervous. And, if in this environment even professional advisors are feeling jittery, how do you think your clients are feeling? What does an advisor do during such volatile economic and market times? It’s natural for an advisor to wonder how best to communicate with and protect clients during such times. But there’s someone else that an advisor should worry about now: himself.
Are you adequately protected? Does your firm maintain E&O insurance? Does your written disclosure statement and advisory agreement contain appropriate disclosures to help protect the advisor from adverse claims? Have your investment policy statement or investment objectives confirmation been updated? Have you confirmed with the client that her investment objectives remain unchanged?
Regardless of the merits of a potential adverse claim (or more importantly, the lack thereof), there is not, nor can there be, any guarantee that a client will not become adversarial. One thing is for sure, however: the wrong time to ponder these issues is when the market starts its downturn. All markets will sooner or later head south. Thus a careful ongoing review and updating of your insurance coverages, disclosure statement, and contractual documents is critical at all times.
Get Out in Front
One of the most productive actions that investment professionals can take during volatile markets is to be proactive with regular client communications. Communicating with clients during good times is easy, but communicating with them during difficult times is critical to maintaining those relationships. As a general rule, when times become difficult and you suspect that clients will have concerns, call or write your clients first; do not wait for them to call you. If you’re convinced that those client concerns are macro (i.e., worries over the performance of the overall market as a result of a terrorist attack, a weakened economy, and so forth), an initial written communication may suffice. However, if you believe that those client worries are more micro in nature–heightened concerns with respect to losses in their accounts due to a specific factor or confluence of many factors–calling or meeting with concerned clients is usually the best proactive measure.
In many circumstances, with quick and prudent action, an advisor may be able to successfully address client questions and concerns before they progress to an adversarial stage. When speaking with clients regarding their concerns, avoid being defensive or combative. Experience has shown that the extra effort you make in the beginning will pale in comparison to the efforts that you will have to make, the money that you will need to spend, and the stress that you will endure in the event that a state or federal regulatory inquiry or an arbitration or litigation proceeding is commenced.
Being proactive does not mean that all client concerns will be amicably resolved. For this reason, it is particularly important that the firm’s Policies and Procedures manual makes clear that all actual or anticipated client complaints–whether they be verbal or written–be immediately reported to the firm’s chief compliance officer before any action is taken. (By the way, it is prudent to remind all firm employees and representatives on an ongoing basis about this reporting requirement.)
Be especially careful before you respond to the client in writing. If the client has terminated the advisory relationship or has engaged counsel, that is a pretty clear sign that the matter has risen to the next level and that it may be too late to achieve amicable resolution. Notification to the firm’s insurance carrier at this point is not only prudent, but is most probably required under the terms of the policy. Be careful not to take any action that might jeopardize your insurance coverage. Moreover, recall that any settlement with a client should generally be contingent upon the execution of a Release and Confidentiality agreement.
The E&O Issue