![10 FORUM MAY 2009
A CONTINUOUS PROCESS
Knowing your client does not begin and end with the comple-
tion of a form. Clients change over time and staying up to date
with these changes is of paramount importance. According to
Bessner, regular contact is critical.
One of the most effective ways to strengthen an advisor-client
relationship and develop a deeper understanding of a clients per-
sonal situation is through regular and consistent contact, she
explains. Clients may get married, have children, get divorced,
lose a job or get a raise, for instance. Any such change needs to
be properly documented so that clients information is up to date.
In addition, life changes such as these may involve a change
in goals and, therefore, dictate a change in a clients current
investment strategy. For example, a client previously suited to
an aggressive growth strategy may now be more interested in
protecting principal. Or, as weve experienced in the past and
as were experiencing again in todays roller-coaster-like mar-
ket, clients may change their risk tolerance according to cur-
rent market conditions. Risk tolerance, along with most other
information gathered on the KYC form, is subject to constant
change. In order to offer meaningful advice, advisors need to
stay abreast of these changes, as products that were once suit-
able may no longer be appropriate.
BURDEN OF PROOF
Its one thing to know your client. Being able to demonstrate
this,however,is an entirely different kettle of fish.When it comes
to compliance, simplyknowing your clientjust doesnt cut it.
Advisors have to be able to prove they know the client.
In an advisor-client relationship, the advisor is the profes-
sional and, therefore, assumes an inherent duty of care to the
client. After all, thats why clients deal with an advisor they
cant do it alone. In court, many clients will emphasize this
point: that they lack the necessary sophistication and knowl-
edge and, therefore, yield to their advisors recommendations.
Unfortunately, what often accompanies this point is that the
clients did not understand their investments or their associat-
ed risks. The onus is now on the advisor to prove otherwise.
Advisors need to demonstrate not only that they were acting in
their clients best interest and that the recommended invest-
ments were in line with the clients goals and risk tolerance, but
that the client was aware of the investment strategy and any
related risks, thereby acknowledging the advisors actions.
This is where an advisors practice goes under a microscope.
Fortunately, there are several key exercises that can help advi-
sors safeguard against client allegations. Cilia McGee, CFP, CSA,
financial advisor and branch manager of the downtown Ottawa,
Ont. office of Manulife Securities Inc./Valcore Planning
Solutions, discusses her approach.
My focus, after trade suitability, is accurate and useful doc-
umentation,she explains.I encourage advisors to use a note-
book with pre-numbered pages. The notebook would contain
the details of conversations with clients and would include the
date as well as a start and an end time of the conversations. This
COMPLIANCE
COMPLIANCE
CHECKLIST
Documentation: Advisors should document all con-
tact with clients. Face-to-face meetings, conversations
by telephone and email correspondence are all impor-
tant. Its important to save all client-related email and
take detailed notes during all meetings and telephone
conversations with clients. Be sure to include any
questions asked or comments made by the client.
KYC: Know your clients and know them well.
Advisors can stay up to date with changes in their
clients personal situation through regular and con-
sistent contact.
Disclosure: Advisors need to properly notify their
clients,in writing,of any potential conflicts of interest.
Written declarations should be signed and dated by
both the client and the advisor and stored in client files.
Risks: Its important that advisors outline the poten-
tial risks (such as principal risk, interest rate risk,
longevity risk,etc.) associated with any recommended
investment strategies and investment products.
Product: Before recommending any investment
product, advisors should do their due diligence in
order to gain a solid understanding of the product.
Only then can advisors truly determine if the product
is suitable for clients.
type of documentation will go a long way if an advisor is ever
put in the unfortunate situation of having to defend her
actions. Contact management software [with capabilities for]
emails, letters, tasks, etc., is also an invaluable tool. Its impor-
tant that sufficient time be taken after every client contact to
document the conversation and subsequent actions to be taken.
McGee works very closely with the advisors in her branch,
helping them manage their businesses in accordance with the
appropriate compliance procedures and guidelines.No detail
is too trivial, she adds.When I conduct reviews, I am expect-
ing to read a story about the client. If the story is there, then I
feel confident that the advisor really doesknow the client.
McGee runs a tight ship and theres no doubt that follow-
ing this advice can prove invaluable, especially if an advisors
actions are called into question.
KNOW YOUR PRODUCT
It seems straightforward that advisors should have a solid
understanding of the products theyre selling. But thats not
always easy, depending on what types of products an advisor
When working with clients, advisors can take the steps
necessary to ensure compliance for general advice-giving:
4
4
4
4
4](https://image.slidesharecdn.com/b3206a9a-d10d-4870-8090-b1bb2cb82a74-150807132629-lva1-app6891/85/p8-12-The-BLAME-GAME_May-2009-3-320.jpg)
![12 FORUM MAY 2009
COMPLIANCE
benefit one client while damaging another. All were punished
for their actions, including Shanahan, who was permanently
banned from the industry and fined $482,353.58.
While these cases of fraud and embezzlement may seem
extreme, advisors often end up in complicated positions, even
when acting appropriately. Bessner describes one of the most
difficult issues facing advisors today.
Consider the case of a client who is properly asset allocat-
ed, properly diversified and whose investments are well in line
with goals and risk tolerance. But due to current market con-
ditions and through no fault of the advisor, the client has lost
money. Continued discussions with clients concerning the mar-
ket and its impact on some of the investments, along with a
paper trail to prove that these discussions occurred, will help
support the advisors version of events that the client did accept
some risk and understood the investment choices, she says.
Without appropriate records, advisors leave themselves vul-
nerable to a client who claims that he or she did not understand
the risks associated with their investments.According to Kehoe,
this often results in a he said, she said-type scenario, which
is a very unfortunate position to be in. Indeed, the risks an advi-
sor takes by not keeping proper documentation are substan-
tial. On the other hand, advisors who act appropriately and
keep a paper trail are in a better position to defend their actions.
Take comprehensive notes and document all conversations.
Because in the end, thats what we [IIROC] want to see, adds
Kehoe.
A HAPPY ENDING
In a recent article in the Financial Post, Gowlings Bessner dis-
cusses a case of particular interest where an advisor who main-
tained a paper trail of communication in which the client is
warned of the risks regarding an investment strategy taken is sued
by the client. The clients action was dismissed.
In March 2008, Superior Court Justice Thomas Lederer dis-
missed Ron Parents claim when he sought to have his financial
advisor, Leach, and investment dealer, Merrill Lynch, reimburse
him for losses incurred in a risky investment strategy. Its the
classic case of an aggressive client who wanted to take high risks
in order to enjoy high returns, but pointed a finger of blame at
the advisor when the strategy didnt pan out.
Leach kept a good paper trail. He had warned Parent of the
associated risks on several occasions and there was ample doc-
umentation to support his testimony. Leach had letters deliv-
ered, one of which was received with Parents signature and
returned to Merrill Lynch. Parent argued that Leach told him
the letter was unimportant and that he should disregard the
content but sign and return it as required.
Judge Lederer didnt buy it. Parent denied regular contact
with Leach, but Leach had notes of discussions with Parent over
decisions made regarding accounts and specific trades. For
example, The Option Account Agreement, signed by Parent,
was accepted as evidence of what was told to Parent. Attached
to that agreement was a list of the risks associated with option
trading and, ultimately, Leachs evidence was preferred over
Parents. Judge Lederer concluded that Parents allegations were
unsubstantiated. Parent could not blame his losses on Leach
or Merrill Lynch, as there were too many warnings and too
many opportunities to make the necessary changes.
While its clear that the advisor had acted appropriately in
this case, its the sound documentation that helped prove it
the advisor had the records necessary to defend his actions.
To help advisors,Bessner has recently published a book titled
Advisor at Risk: A Roadmap to Protecting Your Business (avail-
able at Chapters-Indigo). Intended as a guide for advisors, deal-
ers and insurance agents, it is designed to equip advisors with
the tools necessary to reduce the risk of client complaints.
In the end, advisors must protect themselves.
MICHAEL CALLAHAN can be reached at callahan_michael@yahoo.com.
The risks an advisor takes by not
keeping proper documentation
are substantial. On the other hand,
advisors who act appropriately and
keep a paper trail are in a better
position to defend their actions.](https://image.slidesharecdn.com/b3206a9a-d10d-4870-8090-b1bb2cb82a74-150807132629-lva1-app6891/85/p8-12-The-BLAME-GAME_May-2009-5-320.jpg)
![[Era] cost reduction guide - issue 4 professional services](https://cdn.slidesharecdn.com/ss_thumbnails/era-costreductionguide-issue4professionalservices-100908161856-phpapp01-thumbnail.jpg?width=560&fit=bounds)
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- 2. FORUM 9 Game A sharp rise in investor lawsuits is expected within the coming months. Much of these will likely be attributable to selective memory clients who have sud- denly forgotten the nature of equity markets and why they were in those investments in the first place. How can advisors protect themselves against such charges and allegations from angry clients? At times like these, advisors need their firm and, more precisely, their compliance department, on their side. THE GOLDEN RULE: KNOW YOUR CLIENT This is where it all starts. Does the advisor truly know the client? Know Your Client (KYC) forms (also known as New Client Application (NCA), New Account Application Form (NAAF) or some other variation) exist to help advisors gather necessary information, thereby satisfying the professional obligation to know their clients. These forms contain some of the basics, such as a clients investment experience, financial and personal situation, investment objectives, marital sta- tus, net worth and risk tolerance, to help advisors become familiar with clients. There are, however, many other relevant factors required to gain an in-depth understanding of each clients unique situation. When completing KYC forms,advisors really need to delve into it and get the information behind the answers. But this isnt always easy, says Ellen Bessner, litigation partner in GowlingsToronto,Ont.office.Advisors often have to tackle sensitive issues and there must be a certain level of comfort in the advisor-client relationship to facil- itate open and effective communication. BlameThe PHOTO:DAVIDMCGLYNN/GETTY Compliance is a hot topic these days and will likely continue to heat up even more. Plummeting equity markets have no doubt caused many clients to open their account statement,only to dis- cover theyve incurred horrific losses.Unfortunately,many of these disgruntled clients are looking to point a finger of blame and, as Michael Callahan explains, advisors are often an easy target
- 3. 10 FORUM MAY 2009 A CONTINUOUS PROCESS Knowing your client does not begin and end with the comple- tion of a form. Clients change over time and staying up to date with these changes is of paramount importance. According to Bessner, regular contact is critical. One of the most effective ways to strengthen an advisor-client relationship and develop a deeper understanding of a clients per- sonal situation is through regular and consistent contact, she explains. Clients may get married, have children, get divorced, lose a job or get a raise, for instance. Any such change needs to be properly documented so that clients information is up to date. In addition, life changes such as these may involve a change in goals and, therefore, dictate a change in a clients current investment strategy. For example, a client previously suited to an aggressive growth strategy may now be more interested in protecting principal. Or, as weve experienced in the past and as were experiencing again in todays roller-coaster-like mar- ket, clients may change their risk tolerance according to cur- rent market conditions. Risk tolerance, along with most other information gathered on the KYC form, is subject to constant change. In order to offer meaningful advice, advisors need to stay abreast of these changes, as products that were once suit- able may no longer be appropriate. BURDEN OF PROOF Its one thing to know your client. Being able to demonstrate this,however,is an entirely different kettle of fish.When it comes to compliance, simplyknowing your clientjust doesnt cut it. Advisors have to be able to prove they know the client. In an advisor-client relationship, the advisor is the profes- sional and, therefore, assumes an inherent duty of care to the client. After all, thats why clients deal with an advisor they cant do it alone. In court, many clients will emphasize this point: that they lack the necessary sophistication and knowl- edge and, therefore, yield to their advisors recommendations. Unfortunately, what often accompanies this point is that the clients did not understand their investments or their associat- ed risks. The onus is now on the advisor to prove otherwise. Advisors need to demonstrate not only that they were acting in their clients best interest and that the recommended invest- ments were in line with the clients goals and risk tolerance, but that the client was aware of the investment strategy and any related risks, thereby acknowledging the advisors actions. This is where an advisors practice goes under a microscope. Fortunately, there are several key exercises that can help advi- sors safeguard against client allegations. Cilia McGee, CFP, CSA, financial advisor and branch manager of the downtown Ottawa, Ont. office of Manulife Securities Inc./Valcore Planning Solutions, discusses her approach. My focus, after trade suitability, is accurate and useful doc- umentation,she explains.I encourage advisors to use a note- book with pre-numbered pages. The notebook would contain the details of conversations with clients and would include the date as well as a start and an end time of the conversations. This COMPLIANCE COMPLIANCE CHECKLIST Documentation: Advisors should document all con- tact with clients. Face-to-face meetings, conversations by telephone and email correspondence are all impor- tant. Its important to save all client-related email and take detailed notes during all meetings and telephone conversations with clients. Be sure to include any questions asked or comments made by the client. KYC: Know your clients and know them well. Advisors can stay up to date with changes in their clients personal situation through regular and con- sistent contact. Disclosure: Advisors need to properly notify their clients,in writing,of any potential conflicts of interest. Written declarations should be signed and dated by both the client and the advisor and stored in client files. Risks: Its important that advisors outline the poten- tial risks (such as principal risk, interest rate risk, longevity risk,etc.) associated with any recommended investment strategies and investment products. Product: Before recommending any investment product, advisors should do their due diligence in order to gain a solid understanding of the product. Only then can advisors truly determine if the product is suitable for clients. type of documentation will go a long way if an advisor is ever put in the unfortunate situation of having to defend her actions. Contact management software [with capabilities for] emails, letters, tasks, etc., is also an invaluable tool. Its impor- tant that sufficient time be taken after every client contact to document the conversation and subsequent actions to be taken. McGee works very closely with the advisors in her branch, helping them manage their businesses in accordance with the appropriate compliance procedures and guidelines.No detail is too trivial, she adds.When I conduct reviews, I am expect- ing to read a story about the client. If the story is there, then I feel confident that the advisor really doesknow the client. McGee runs a tight ship and theres no doubt that follow- ing this advice can prove invaluable, especially if an advisors actions are called into question. KNOW YOUR PRODUCT It seems straightforward that advisors should have a solid understanding of the products theyre selling. But thats not always easy, depending on what types of products an advisor When working with clients, advisors can take the steps necessary to ensure compliance for general advice-giving: 4 4 4 4 4
- 4. uses. Investment products of today are vastly different than those of yesteryear, says Jeff Kehoe, director of enforcement and litigations for the Investment Industry Regulatory Organization of Canada (IIROC). According to Kehoe,the density of structured products today can cause a great deal of confusion. Investments such as mort- gage-backed securities, asset-backed commercial paper, hedge funds, credit default swaps and funds of funds can prove very confusing for even the most seasoned investor. Products are increasingly sophisticated, making it harder for advisors and clients alike to understand exactly what theyre buying,he says. But understand it they must. Kehoe cites this is one of the most common ways advisors get themselves into trouble by selling products they do not understand. SUITABILITY Bessner describes a triangle of suitability, which starts with the client, proceeds to the KYC form and finally the product. Only then can advisors truly determine the appropriate suit- ability of investments. The trouble begins when advisors jump to the third step, delving into the product and its merits, and thereby omitting the client from the process. This is a big no- no. The basis for an advisors recommendation must come from an intimate knowledge of the clients personal situation. Another common pitfall is failing to properly communicate the associated risks of an investment product or strategy to the client. Bessner lists several reasons advisors sometimes omit this explanation:The client wouldnt understand even if I did explain it,orThe client will buy whatever I tell him to buy, so why waste everyones time?While that may be true, its the kind of logic that can land advisors in hot water. Bessner offers a sim- ply eloquent solution: Say to the client,Please bear with me, I have an obligation to go through this, followed by the appro- priate explanation.Advisors who chose to gloss over such detail could be heading for trouble. THE COST OF NON-COMPLIANCE The cost of non-compliance can prove quite extreme. Various fines, a suspended licence or being permanently banned from the industry are all possible outcomes.When engaging in non- compliant behaviour, an advisors lifeblood is truly at risk: licence, reputation and income theyre all on the table. Consider the cases of Robin Anderson in Edmonton, Alta. and Robert Ernest Leo Hart in Toronto,Ont.Anderson and Hart had embezzled hundreds of thousands of dollars from elderly, unsophisticated clients,depositing the funds into their own per- sonal accounts. Both advisors were fined and banned from the industry by the Mutual Fund Dealers Association (MFDA) and IIROC, formerly the Investment Dealers Association (IDA). In another case, Sean Shanahan, Stephan Katmarian and Nicole Brewster participated in trading schemes designed to MAY 2009 FORUM 11
- 5. 12 FORUM MAY 2009 COMPLIANCE benefit one client while damaging another. All were punished for their actions, including Shanahan, who was permanently banned from the industry and fined $482,353.58. While these cases of fraud and embezzlement may seem extreme, advisors often end up in complicated positions, even when acting appropriately. Bessner describes one of the most difficult issues facing advisors today. Consider the case of a client who is properly asset allocat- ed, properly diversified and whose investments are well in line with goals and risk tolerance. But due to current market con- ditions and through no fault of the advisor, the client has lost money. Continued discussions with clients concerning the mar- ket and its impact on some of the investments, along with a paper trail to prove that these discussions occurred, will help support the advisors version of events that the client did accept some risk and understood the investment choices, she says. Without appropriate records, advisors leave themselves vul- nerable to a client who claims that he or she did not understand the risks associated with their investments.According to Kehoe, this often results in a he said, she said-type scenario, which is a very unfortunate position to be in. Indeed, the risks an advi- sor takes by not keeping proper documentation are substan- tial. On the other hand, advisors who act appropriately and keep a paper trail are in a better position to defend their actions. Take comprehensive notes and document all conversations. Because in the end, thats what we [IIROC] want to see, adds Kehoe. A HAPPY ENDING In a recent article in the Financial Post, Gowlings Bessner dis- cusses a case of particular interest where an advisor who main- tained a paper trail of communication in which the client is warned of the risks regarding an investment strategy taken is sued by the client. The clients action was dismissed. In March 2008, Superior Court Justice Thomas Lederer dis- missed Ron Parents claim when he sought to have his financial advisor, Leach, and investment dealer, Merrill Lynch, reimburse him for losses incurred in a risky investment strategy. Its the classic case of an aggressive client who wanted to take high risks in order to enjoy high returns, but pointed a finger of blame at the advisor when the strategy didnt pan out. Leach kept a good paper trail. He had warned Parent of the associated risks on several occasions and there was ample doc- umentation to support his testimony. Leach had letters deliv- ered, one of which was received with Parents signature and returned to Merrill Lynch. Parent argued that Leach told him the letter was unimportant and that he should disregard the content but sign and return it as required. Judge Lederer didnt buy it. Parent denied regular contact with Leach, but Leach had notes of discussions with Parent over decisions made regarding accounts and specific trades. For example, The Option Account Agreement, signed by Parent, was accepted as evidence of what was told to Parent. Attached to that agreement was a list of the risks associated with option trading and, ultimately, Leachs evidence was preferred over Parents. Judge Lederer concluded that Parents allegations were unsubstantiated. Parent could not blame his losses on Leach or Merrill Lynch, as there were too many warnings and too many opportunities to make the necessary changes. While its clear that the advisor had acted appropriately in this case, its the sound documentation that helped prove it the advisor had the records necessary to defend his actions. To help advisors,Bessner has recently published a book titled Advisor at Risk: A Roadmap to Protecting Your Business (avail- able at Chapters-Indigo). Intended as a guide for advisors, deal- ers and insurance agents, it is designed to equip advisors with the tools necessary to reduce the risk of client complaints. In the end, advisors must protect themselves. MICHAEL CALLAHAN can be reached at callahan_michael@yahoo.com. The risks an advisor takes by not keeping proper documentation are substantial. On the other hand, advisors who act appropriately and keep a paper trail are in a better position to defend their actions.