Some time during the September/October meltdown, I saw a huge billboard. I was just turning into a wealthy subdivision. Everyone who went there saw it.
The phone number was catchy — something like 1-800-SueYourBroker. No doubt 2009 will be a banner year for the attorneys who specialize in suing financial advisors.
Those few financial advisors who go over to the dark side are not alone in their pursuit of evil. There is another side of the coin, another source of evil we rarely hear about in the media. It’s investors who would use the system to recover losses to which they are not entitled, or just outright steal money from financial advisors and their broker-dealers.
Let’s assume you have one such client in your book right now. Let’s further assume your record-keeping has been sloppy. You, my friend, are at risk of losing your business. Ask yourself this question: How many bad-apple clients does it take to wreck a career? You know the answer, don’t you? It’s just that one.
Bullet-Proofing Your Practice
So let’s talk about protection.
Obviously, your best protection is doing the right thing, which means following sound investment principles and the ethical guidelines of the industry. But sadly, today that’s not enough. You can do the right thing and still lose everything.
So you need a second line of defense: meticulous documentation that you did the right thing and did not omit any of the things you should have done.
Here are just two charges that the folks over at 1-800-SueYourBroker might bring against you.
A client could allege you misrepresented something, perhaps the risk involved in a mutual fund portfolio. Or a client could allege your recommendations were unsuitable.
Yes, the mutual fund portfolio is surely down. But what do your notes say about your discussion of risk factors? And what information do you have to back up your claim that the investment recommendations you made were suitable? While you may have done the right things, if you can’t prove it, your goose is as good as cooked.
The foundation for professional-quality documentation is “The Law” which states:
“Every contact and contact attempt with a client or prospect produces an updated record.”
YOU: Bill, that’s awfully severe. What if someone calls my assistant to wish him happy birthday? Should that generate an updated record? Suppose I run into a client at the grocery store. We chat a few minutes about the market and then go our separate ways. Should the supermarket contact produce an updated record? Isn’t that going too far?
ME: Yes, yes, and no. Yes, the birthday call should produce a note in your database. Yes, you should document the supermarket contact. And no, this is not going too far.
The problem is: When you allow exceptions to “The Law,” you will come up with other exceptions. When there are a bunch of exceptions, neither you nor anyone on your team can then remember exactly what those exceptions are. Now it becomes a free-for-all, and soon your documentation process has collapsed. One of these days — gotcha!