3 Steps To Protect Themselves Against Lawsuits

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This is the protocol for financial advisors. But there aren’t any obvious guidelines you want to adhere to avoid getting sued as a financial advisor — to avoid the major disruptions for a personal and business life a lawsuit could bring. FINRA received 3,000 investor complaints in 2017, registered 1,369 brand new disciplinary actions, imposed $64.9 million in fines, barred almost 500 people and suspended 733. Consider these suggestions to prevent getting a cautionary story about what not to perform as a financial advisor.

As an investment advisor, you have a fiduciary obligation to act in your customers’ best interests, to place their interests above your own, and to give guidance based on complete and accurate info. You receive complete and accurate information from a client through interviews, questionnaires, documents, and documents including tax returns and bank statements. You tell your client about the value of providing complete and accurate information and allow them to know that your recommendations will probably be impacted should they provide you with incomplete or incorrect information. The Certified Financial Planner Board’s Practice Standards say that advisers who cannot receive the info they need will either”limit the range of the engagement to those matters for which adequate and relevant information can be obtained; or even terminate the engagement.” This is a solid standard to follow even if you are not a CFP®.

If you are daring enough, you could go a step farther and ask clients point-blank:”Is there anything you haven’t told me because you believe that it’s embarrassing? Because I have probably seen it earlier.” Explain that you can’t perform your work if they don’t tell you about their gambling problem, their mistress, their failing business, their purchasing dependency, their parent’s constant guilt trips for financial help, their hidden accounts, the tax returns they haven’t filed, or whatever the key might be. It could be much easier to encourage customers to disclose this personal information if you remind them that fiscal advisors run under a strict client confidentiality agreement. If you are a CFP®, this duty is even more explicit and must be said in writing. The very best way to give impeccable service and keep clients happy is to learn as much as possible about their finances and about the facets of their private and business lives that impact their financing. (See: Tips on How Financial Advisors Can Speak to Clients.)

Provide Complete and Accurate Professional Disclosures

As you expect your customers to disclose specific information to you, they expect you to disclose certain information to them. Not only that, but federal and state regulations require investment advisers to disclose all the information a customer needs to make an informed choice about working with a professional and taking his or her advice. Clients need to understand about any past, current or future conflicts of interest, and the dangers involved with the methods you use to determine an investment’s suitability and any unusual risks posed by a specific investment or strategy you could recommend. They also should understand whether you’ve been disciplined or sued in the past.

All this advice and more must be compiled in a comprehensive document for your customer per the brochure rule (or a similar state-level rule in case you’re regulated at the state instead of the national level). Provide a copy to every customer and ask them to sign a form saying that they have obtained it and reviewed it, and maintain everything on your documents. Besides fulfilling your legal requirements, by providing this advice to clients upfront, you may decrease your risk of being sued and present a stronger defense if you’re sued.

Keep Client Information Safe from Cyber Attacks

Maintaining your clients’ information safe from cyber-attacks is key. Financial advisers are natural targets for hackers since they handle large quantities of money. As an adviser, it’s your obligation to be diligent about assessing the security of all your third-party sellers. You should also employ a strategy for how to react in the event of a hack so that you can minimize the harm to your clients’. If you handle any employees, teaching them to follow best practices for keeping customer information protected is crucial for maintaining the trust of your customers and the credibility of your clinic.

Diligently Train and Supervise Your Employees

In addition to the instruction about ways to maintain your clients’ information secure, in case you have employees, they ought to be trained in best practices in all areas of client relationships. Diligently supervise all members of the company so you’re in the loop regarding how they’re managing client information and what kinds of investment recommendations they are making. 1 way to protect against any significant mistakes which may put you at risk is to have a senior or lead adviser sign off on any plans made or action taken. Make sure your employees are setting client expectations appropriately rather than making any guarantees to clients that you can’t reasonably provide on.

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