Formulas for Success: Clients Have Rights, But Also Responsibilities

Okay, I know it’s not cool to blame the victim. But honestly, don’t you find it a bit exasperating that so many people have been clipped by so many fraudsters? Don’t you just cringe when clients and prospects imply with their questions that you may not be trustworthy because others in the industry have cast a shadow over your profession?

Haven’t you caught yourself muttering, “I feel sorry for some of those people who got taken, but how did they not get suspicious about the outsized returns and the lack of clarity around the investment process?” Don’t you get angry when you hear how feeder firms either failed to perform proper due diligence or overlooked the obvious and now claim to be victims themselves?

The canvas of this landscape, of course, is painted with multiple shades of gray. Clients hire advisors to guide them through complex financial decisions. Boards of non-profits outsource to investment consultants. Widows who have never balanced a checkbook seek handholding and direction from trusted financial professionals. Artists and actors delegate financial decisions to people who perform the role of business guru so that they can concentrate on their crafts. The whole point of hiring an advisor is to engage an intermediary, a guide, to do what a layperson doesn’t or can’t do well.

But does this mean the client should abdicate all responsibility? Wouldn’t they take action to understand nutrition and exercise if their doctor said they were morbidly obese? Wouldn’t they try to understand their child’s learning disability if he fell behind in school? People must frequently make decisions and take action on things they know nothing about. Why is understanding where their money is going and what their advisor is saying any different?

It is true that we seem to be living in a world where the obvious somehow becomes fodder for litigation and blame throwing. I came across a blog about frivolous law suits that have resulted in ridiculous warning labels like:

o “Remove child before folding,” on a baby stroller.

o “Harmful if swallowed,” on a brass fishing lure with a three-pronged hook.

o “Never iron clothes while they are being worn,” on a household iron.

o “Shin pads cannot protect any part of the body they do not cover,” on shin guards.

I can only imagine what advisors will now have to print on their ADV and application forms to alert clients to the obvious.

All of this raises the question: What is the client’s responsibility to minimize the risk of fraud or failure in the management of their account? The Madoff affair has elevated the question of whether the markets are fixed to work against ordinary folks. Multiple other incidents continue to reinforce the impression that the financial services industry is out of control. It’s maddening that while you’re keeping your nose clean, others are sullying your reputation by association.

Blame and Responsibility

This tension around whom to blame got me thinking about advisors helping clients to understand their rights and responsibilities in the management of their money. Yet how can this discussion occur at a time when clients are wounded and wary without the advisor coming off as trying to shift accountability?

Recently, I was asked to talk about this subject for the PBS television show “Consuelo Mack WealthTrack.” With the help of readers of the newsletter Inside Information, and input from members of the elite cadre of advisors in the Alpha Group, I pulled together some ideas that advisors might consider in communicating with their clients. One of those ideas is to provide clients with a “Bill of Rights and Responsibilities” as part of your engagement process. This document would outline responsibilities and expectations for both parties.

Clients’ Rights

Here’s how a Client Bill of Rights might read:

As someone seeking advice from a financial planning and investment professional, you have the following rights:

o To know the credentials and relevant experience of your advisor and her team.

o To know the compliance and disciplinary history of your advisor and his associates, including relevant problems in their past such as: personal bankruptcy, poor health that may impair their work on your behalf, business history, and financial strength.

o To know your advisor’s processes and protocols for developing her recommendations and executing their strategies on your behalf.

o To understand your advisor’s investment philosophy and to expect that he can communicate it in a way that you can comprehend and even recite back to them.

o To understand all the fees, charges, and expenses charged by your advisor, by the funds she uses, and the cost of execution.