The title of this piece begs the question, can you avoid the litigious client? While there are things you can do to minimize the risk, it may not be possible to completely avoid it. In this article, we will explore this subject and I will share a personal experience when a complaint was filed against me. I hope you find it helpful.

The Complaint

It was early 2011 when I accepted a new client and his spouse. I had met this individual over a decade earlier and had no indication of his propensity to litigate. More on that later. I offered to do a financial plan, since this would determine his required return and the risk needed to achieve it. He declined. Therefore, the portfolio was based on his risk questionnaire. Among his answers on the questionnaire, he indicated that his maximum acceptable loss over a 12-month period was -0.1% to -0.5%. He could have chosen zero but did not. His portfolio was indeed conservative, with a 3-, 5-, and 10-year standard deviation under 5.55%. What caused the problem?

At that time, I purchased several three- and six-month reverse convertibles. Whenever I added one to an account, I sent an email to each client with a detailed description, including the best- and worst-case scenario. I sent an email to this client as well. His reply was “I like it.”

According to documents I gathered at the beginning of the relationship, the client owned individual stocks, REITs, and high yield bonds, all of which carry a fair amount of risk. A few months after purchasing a reverse convertible for this client, it fell 35-40%. I had a decision to make. Sell it and cut our losses or hold it and hope it rebounds. I sold. This security only comprised 6.0% of his account and 0.18% of his entire financial assets. Despite the drop in this one security, the account had a modest positive return.

The Result

The complaint was reviewed by the appropriate regulatory authority and a response letter was sent to me and the client. It stated that I did not violate any securities laws, the portfolio was in an overall conservative posture, and that I operated within the bounds of our contractual relationship. In short, it was dismissed. Frivolous and without merit.

How to Minimize the Risk of Client Complaints

As I mentioned earlier, it may not be possible to eliminate client complaints, but here are four things to consider:

1. Always do the right thing. Never give the client a reason to complain. This may seem obvious, but if you can honestly put the clients interests first, it will help. Don’t worry about your compensation. If you do a good job, people will refer you and you’ll make enough money that way.
2. Keep good records. This includes completing the appropriate questionnaires and documenting all client interactions, including meetings, conversations, etc. I’m glad I had meticulous records.
3. Get to know the client before accepting them. Some clients should not be accepted. Ask about their prior advisory experiences. Were there any problems? What went wrong? Ask open-ended questions and let them talk. Listen closely and learn.
4. GOOGLE the client. Has the client ever complained before? Is this a pattern? I did this after the fact and discovered that this client had filed a lawsuit against his siblings when their mother passed. If I had only known.

To complete the story, this client left me, engaged another advisor – someone I knew, and filed a complaint against him a year later. That complaint was also dismissed.

Always qualify the client, determine their risk tolerance, and when possible, create a financial plan and know the return (and risk) you seek. Does the required return mesh with the client’s risk tolerance?

Thanks for reading and have a great week!