The Compliance Coach: An IPS Happy Medium

The Trouble With Language

Also, be very careful not to label investment suitability or strategies in terms of “conservative,” “moderate,” “aggressive,” “balanced,” “growth,” or some other nondescript terms, without defining what you mean by them: Ambiguities will most likely be construed by a court or arbitration panel against the advisor. Most important, be clear to define the risks associated with such strategies (i.e., principal risk and fluctuation), portfolio composition (i.e., equities, fixed income, a combination of the two, etc.) and the minimum anticipated time horizon associated with such a strategy.

Our general recommendation (and the corresponding documents we provide to our clients) is to keep the client “intake” process simple.

o First, use a new-client information document that requires the client to indicate, in his own handwriting, his risk parameters and investment objectives, and, most important, any reasonable restrictions that the client desires to impose on your investment management services.

o Second, have the client complete and execute the document, including a written indication if he wants to impose any reasonable restrictions: if none have the client, in his own handwriting, indicate “None.”

o Thereafter, prior to commencing the investment management process, confirm the information obtained in a written investment objectives or policy statement, either to be executed by the client, or, in the alternative, advising the client to notify you immediately, in writing, if his/her understanding is contrary to that stated.

o In addition, the confirming document should advise the client to immediately notify you if there has been a change in her financial situation or investment objectives, or if she desires to impose, add, or modify any reasonable restrictions to the management of her accounts.

o Finally, the advisor should send an annual letter to the client confirming that you continue to manage the accounts in accordance with their previously designated investment objectives, and that it remains her responsibility to advise you if there has been a change in her financial situation or investment objectives, or if she desires to impose, add, or modify any reasonable restrictions to the management of her accounts.

Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker/dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at [email protected].