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How keeping a good paper trail protects you and your clients

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“No file and no system is litigation-proof, because you don’t have to be lying, cheating or stealing to be sued,” according to Jim Ruta. “Somebody only has to want to go after you. But you can be litigation-resistant.”

Ruta, the well-known financial industry advisor, speaker, media commentator, author and writer who is also a Managing Partner of InforcePRO Software, knows a thing or two about the need for advisors to keep and maintain a good paper trail in their dealings with clients. He is a big advocate of doing just that, and can frequently be found teaching agents how to build strong client files that keep the litigators away, including his friend and colleague, Ontario-based lawyer Harold Geller, who sues advisors for failing to do their jobs properly but also defends advisors who are doing it right.

Geller is constantly preaching that as an advisor you need to “show your work” by having sufficient documentation in your client file to prove the logic behind make the recommendations you made, Ruta said. “And that’s really all there is to it. Empty files make Harold rich,” he said.

This is not just something that happens to other advisors – it can happen to you, and you might not see it coming. “Many advisors think, ‘Well, my clients wouldn’t sue me.’ Well, yeah, you’re right. Your clients won’t sue you. It’ll be their attorney and their kids who will be fighting over their estate. That’s who will sue you. And they don’t care about the relationship you had. If you don’t have it documented, and you can’t demonstrate that you have it documented, you’re going to be doing an awful lot of sweating,” Ruta said.

To Ruta, this subject is a very big deal. And he says it’s not only an ethical issue—it’s a practical one as well. He said he’s always noticed a reticence on the part of advisors to do much paperwork. “Despite the financial planning focus of the industry, they talk about us being financial planners and financial advisors, we really have a sales culture which means all of the work we do really lines up toward our getting the sale done. Lengthy paperwork doesn’t usually help sell anything.”

While advisors who are great salespeople are seldom also great note-takers, Ruta said you still need to have a paper trail. Good communication is good compliance, and good compliance demonstrates a high degree of professionalism.

Suppose a deceased client’s children decide to sue because the client only had a $250,000 death benefit when a $1 million death benefit would have been more appropriate for his situation. If you have it documented in your client file that the client was presented with such an option but flatly declined, the children have no case.

“That stuff saves you every time,” Ruta said, adding that his lawyer friend always asks for the agent’s client file during a lawsuit. “If it’s four inches thick and costs $65 to courier, he looks at it and thinks, ‘I’ve got nothing.’”

On the other hand, Harold gets rich if the client file is lacking in substance. The opposing counsel can claim just about anything and the advisor can’t disprove it. “That is why advisors lose in court, because they have no documentation to counter anything said by the opposing counsel.”

But by getting a client to acknowledge what you’ve done, and why you’ve done it, in writing, you’re going a long way to protect yourself. It could be as simple as asking a client to initial pages detailing your fact-finding and subsequent recommendations. Sometimes advisors will write little pieces of information during client meetings on legal pads. That material, even if it’s written on a napkin during a lunch meeting, legitimately should be in that file. Making notes with times, dates and subjects in CRM systems such as ACT, Salesforce or GoldMine when you speak to a client in person, on the phone or via email are other ways to build a “virtual” paper trail. “‘Spoke about such and such, no need for a meeting right now, will call again in June.’ That’s all you’ve got to do,” Ruta said. “Like Harold always says – show your work.”

One way to get a client relationship started on the right foot, Ruta said, is by employing what he calls a client “relationship engagement document.” Once someone is interested in working with me, I use the relationship engagement document to tell you a little bit more about how I work and what it means to you,” he said. The document explains to the client what you do and what you don’t do.

“Let’s say I only sell life insurance or I only sell disability insurance, and that’s all I do. It may be possible for me to do other things (may be licensed to sell long-term care insurance or critical illness), but this is all I do, and I’m and expert on this one thing. Period. As long as your client understands that the scope of your work is limited to that, and they sign off, it’s all good.”

Ruta said the relationship engagement document is kind of a key piece to your whole documentation process. “Because if you and I understand what we’re doing and the scope of how we’re working together, you could see how it could minimize problems at the far end if something happens,” he said.

Proper documentation will keep lawsuits from ever developing, unless of course you did something terribly wrong. “Generally speaking, if you’re doing a good job and you’re documenting that you’re doing a good job, you really minimize the amount of potential problems,” Ruta said.

“You do not want to show up in court against widows and orphans and try to demonstrate how you’re ‘pretty sure’ you did everything you’re supposed to. You want to prevent yourself from going to court and the way that happens is by having a great file,” Ruta said. “An empty file makes Harold rich, but a full one keeps him out of your hair completely.”