Don't kick the can, Pt. 3: Suitability traps

By Steven McCarty

The National Ethics Association


Today, financial advisors figuratively kick the can each time they ignore a compliance or ethics guideline. This practice won't kill them, but it might very well blow up their companies -- and their careers.

Have you been kicking the can when it comes to suitability?

As we've discussed over the prior two columns, kicking the can refers to engaging in bad habits that could end up hurting you, either literally or figuratively. During the Vietnam War, U.S. soldiers kicked the can quite literally. When they spotted discarded cans on the side of the road, they kicked them. The Viet Cong noticed this and began booby trapping the cans. But the soldiers kept on kicking, with deadly results.

Today, financial advisors figuratively kick the can each time they ignore a compliance or ethics guideline. This practice won't kill them, but it might very well blow up their companies -- and their careers.

We've already discussed can kicking in terms of client solicitation and disclosure. In this article, let's focus on suitability, a particularly explosive issue since regulators seem to be hard wired to detect product sales that don't fit a client's resources and goals.

So how do you prevent avoid suitability "explosions" down the road?

First, take your responsibilities seriously. The onus falls on you to demonstrate that every product recommendation you make is suitable for your clients. No exceptions allowed.

Second, rediscover the joys of fact-finding. If you really want to accelerate your business pace -- and your suitability complaints -- open and close a sale in the first interview. But if you want to build a high-quality, sustainable practice, take the time to thoroughly assess the unique needs of your clients before you recommend a solution.

Specifically, be sure to uncover all relevant facts about a current financial standing, including their current monthly income, tax status and life stage. Plus, you'll want to fully understand each person's financial objectives and concerns. To this end, encourage your clients to express their hopes and dreams for the future. If applicable, be sure to get heirs involved in these discussions, so they have no reason to complain or sue later.

Third, get familiar with your suitability forms. Yes, these forms are annoying, but they will help you walk on safe suitability ground. The goal: to make sure that what you recommend fits a client's current and future situation, especially in light of their income needs and risk tolerance.

Fourth, when you present a product, explain all of its moving parts. Review the product literature carefully, defining key terms and paying special attention to fees and surrender charges. Before you present your solution, make sure the product's advantages far outweigh any disadvantages for each individual client.

Fifth, and finally, always do the right thing. The best defense against exploding cans is to simply not kick them. Are you ready to stop kicking the suitability can down the road?