Dealing with the client from hellArticle added by Katherine Vessenes on March 4, 2009
Katherine Vessenes

Katherine Vessenes

Chanhassen, MN

Joined: August 21, 2010

My Company

I don't know if it's the economy, the war or two full moons, but I have had more than my share of clients from hell (CFH) recently. It has been particularly painful since I pride myself on retaining happy, satisfied clients who refer us to other like-minded firms. If you, too, are having more than your share of the CFH, take these steps to bring some peace into your practice and your life.

1. The first rule of dealing with the clients from hell is not to take them on in the first place. If all of your clients are sweetness and light, count your lucky stars -- you have found the right client base. Stick with it and save this article for conversations with your in-laws.

When you are screening new clients, make sure you ask them some crucial questions to help identify the CFH in advance. In addition to the obvious intake questions, you should also obtain a list of previous advisors and learn why your new prospect stopped doing business with them. Ask whether there were ever any lawsuits or arbitrations with former advisors. Unhappy investors who have successfully sued one advisor are highly likely to do it again.

Also, ask if your prospect has ever sued another professional, whether doctor, lawyer, or someone else, be wary. There are experienced plaintiffs, well-schooled in the art of courtroom blackmail. One advisor told me he saw a big red flag when his new prospect came in to invest a large sum of money he had gotten in a malpractice suit against his doctor. "I should have known," he said to me. Having tasted blood once, the investor sued this advisor a few years later.

Attorney David Markun, who has defended between 300 and 400 financial advisors, cautions advisors to avoid investors with unrealistic expectations or those who make extreme statements. For example, perhaps this investor left their last advisor because they were not satisfied with a 12-percent return. Markun says that taking on a client with red flags is a risky proposition. After all, it's a lot less expensive and stressful to avoid getting married in the first place than to have to divorce your client later. Just pass on these clients; they're not worth the risk.

2. If you have a client who has gotten through your early warning system, and then becomes impossible or unreasonable, consider taking the hard stand. Draw a line in the sand and give the client an ultimatum. Some investors are so out of control, you get sucked into running their lives. Bud Bigelow is CEO of Cambridge Alliance, the national program manager for the first specialty E&O program, and an expert on E&O coverage and lawsuits against financial advisors. Bigelow says, "We have insured financial advisors whose clients consistently refused to follow the financial plan or the investment policy statement."

Typically, the client refuses to stop spending over their allotted amount, which not only jeopardizes the plan, but also can put the investor in the poorhouse in a hurry. In one case, the investor was housebound, confined to a wheelchair, and spent her days buying china dolls on the Internet with her debit card. After she spent $30,000, the financial advisor found out about it and drew a line in the sand. He painted a clear picture of what would happen to her if she did not stop this excessive spending, and then advised the investor that if she continued with her spending habits, he would terminate the relationship. This story has a happy ending, because the investor followed the advice and hasn't caused any more trouble.

"Unfortunately," says Bigelow, "it is far more likely the investor ignores the advice and keeps spending." This places the advisor in the lose/lose position of having to increase returns to meet the client's ever escalating needs. Higher risk is one way to handle this situation; firing the client is another.

"I have had dozens of financial advisors who were sued in cases like this," Bigelow explains. "Each time they say, `I should have fired her, but...,' they always have a good reason, such as there is no one else to handle the case, but they sure paid the price in a lawsuit."

3. Keep good notes and telephone logs. Beth Dickinson, who helps us with some of our compliance work, tells the story of a mock audit she was doing for a big RIA. While working on the files, Dickinson overheard not one, but three phone calls one morning from the same unhappy investor. Each call was handled by the seasoned sales assistant. The assistant mentioned to Dickinson that this was a very high-maintenance client, an elderly doctor who frequently gave them buy or sell orders, forgot about them and then accused the RIA of unauthorized trading. These calls had been going on for years, but the sales assistant was terrific at diffusing him -- for the moment anyway.

Dickinson asked about her file notes and was appalled to see there was not one note or written memo in the computer database regarding hundreds of calls! This is a classic example of a train wreck waiting to happen. No matter how perfectly this RIA acted, no matter how accurately he processed the trades and followed his client's orders, he is unable to document it. He did not have a single piece of written evidence to prove what transpired on those phone calls. This case looks like a loser in arbitration.

Likewise, I recently reviewed a case from New Jersey wherein the RIA made a few painful, but not fatal, mistakes. She had only one letter, which helped her case slightly. However, she had the most detailed phone log I have ever seen. It was pages and pages long, all single spaced and organized by date. The financial advisor won that case, solely based on the phone log.

A common issue that occurs in arbitrations is the client who, during your first intake meeting, tells you they are a savvy, sophisticated investor and they follow the investment news daily. Fast-forward to this same client hauling you in front of NASD arbitrators. At that stage, they suddenly dumb down and become the little old lady in tennis shoes, slightly addled, and with absolutely no idea about the markets or the investments. Bigelow actually had an investor play this role to the hilt when she brought all her papers to the arbitration in a paper bag.

Protect yourself by keeping detailed notes about your investor's level of sophistication. Make sure you ask them what investments they have purchased and sold in the past. How did they track the investment? What kind of investment news do they follow? The more details the better. This is great counter-evidence in arbitration when your investor suddenly loses 80 IQ points.

4. Talk with your compliance department or your attorney. For example, let's say your CFH is in full attack mode. They are wildly angry with you, your investments and your staff; you can do no right, and they can do no wrong.

Markun says the first thing to remember is not to respond -- either verbally or in writing -- until you have talked with your compliance officer or attorney. It is always surprising to see how many unwittingly incriminating written statements an advisor can make. These are difficult to overcome if the case goes to arbitration or court.

However, Markun says, "If the investor has put the complaint in writing, you have to report it on your U-4 anyway. At this stage, you have little to lose and lots to gain by asking the client to respond to you in detail in a written letter. I have a case like this right now. The investor is just dealing with me. All I say to her over and over is, `Send me more information in writing.' I know sooner or later there will be inconsistencies we can use at trial."

Bigelow had a case where an advisor attended an "ambush meeting" where the deceased client's heirs awaited the financial with a tape recorder ready to go. As the meeting commenced, the heirs confronted the advisor with issues that occurred 10 years earlier. The advisor's comments, on tape, formed the entire basis for the complaint. If your clients want to tape you, or if their lawyer is present, the only avenue to consider is the one to the exit door. Do not pass go, and call your attorney and compliance officer. You are clearly a target for a lawsuit. Keep your mouth shut until you get good advice.

5. Listen carefully. Once you have worked out a strategy with your attorney or compliance officer, request to meet with the client in person. When the client goes into attack mode, shift into problem-solving mode and start actively listening. Here are some of the things I do:

I carefully watch my body language. It is very tempting for me to cross my legs and arms and put a defensive scowl on my face. However, non-verbal communications can comprise up to 90 percent of your overall message. Since I don't want the client to get even more defensive, I remind myself to not look self-protective or threatening. Instead, I mirror my client's physical communications. If they lean forward, I lean forward. If they are using their hands a lot to speak, I will use mine, too. If they cross their legs, I do the same. Mirroring creates a subconscious impression in the client's mind that you are a lot like them and on their side. I also put a pleasant look on my face. I won't call it a smile, but I manage to look calm and concerned.

I listen very carefully and let them completely vent and diffuse. You need a thick skin for this exercise because clients who are under a lot of stress will strike out at anyone in their path. I have had clients say bizarre things to me. One accused me of saying Satan was walking the halls of his office!

I never respond in kind for two reasons: I don't want to be that kind of person and I don't want someone to come back to me in a lawsuit with information I spouted off without thinking about it.

In fact, this happened to me recently, when I had a CFH call me on a Saturday evening while I was entertaining 12 guests at dinner. He let loose with a stream of outrageous and false accusations. Normally, I don't contradict a client when I am actively listening, but just encourage him to elaborate on his concerns. However, when this CFH let out one particularly outrageous comment, I had had enough of being falsely accused. In my most quiet, calm voice I responded, "You know, we don't believe in fixing blame, we just believe in fixing problems. Let's focus on fixing your problem." This is a great U-turn statement that gets angry clients off of the personal insults and onto creating solutions. It stopped him in his tracks and forced him to start thinking productively.

While listening very carefully, I noticed a number of things. First, my CFH is under a lot of stress. His financials are way down, his expenses are up, he can't get a handle on his business and he can't manage his way out of a paper bag. In short, he is in over his head and sinking fast. Unfortunately, this kind of stress brings out a person's true nature. I realized this was not about me so I didn't take it personally. This was about a person whose life is out of control and their true nature wasn't pretty. If you are wondering why would I want to work for someone like this, I'll get to the answer below.

6. Request a solution. After the client has vented completely, they are usually a lot more calm and reasonable. At this point, it is safe to ask, "How would you like me to help you?" Don't ask this question earlier, because if they haven't finished venting, they are likely to ask for the moon and even that won't satisfy them.

One of the worst things you can do at this stage is to offer up solutions. I often tell clients the basic rule of negotiating: He who speaks first, loses. Whatever you do, don't offer up a compromise.

Instead, put the burden on the client to come up with a good solution that will satisfy them. If the solution is reasonable, give them some positive feedback like, "That is a good idea. Let me run it by my (compliance officer, partner, attorney or fill in the blank.)" You are letting them know you are not the final authority, which strengthens your bargaining position. It also allows the final authority to be the "bad guy" and take the blame off of you if their solution won't work.

Whatever you do, don't commit to a solution on the fly, offer to pay for losses, write them a check or guarantee an investment's performance. Seem obvious? Not as obvious as you would think. I have seen numerous advisors face off with an unhappy investor, and the first thing the advisor does is pull out a checkbook and start pushing money across the table. Not only is this illegal, it's stupid. If you are going to settle, do something many financial advisors have failed to do: Get a release of liability so the client doesn't go after you for more money.

Frequently, financial advisors who are kind and generous offer the quick settlement. They just don't want their clients to be unhappy. Unfortunately, the quick payoff is usually illegal, because settlements must be run through your broker/dealer and because it could be construed as guaranteeing an investment's performance. Furthermore, it also can be seen as an admission of guilt. The investor is not happy with the first round of money, so he sues for more. One of their key pieces of evidence is that the financial advisor refunded fees or paid them a cash settlement. This kind of evidence can torpedo your case by making you look guilty.

Before you settle, make sure you consider all the ramifications, including whether your E&O coverage will cover the solution and whether it will need to be reported on your U-4. Then get a release of liability from the client. The release should also include a statement that the client will not file a complaint with the CFP Board or other licensing body. I have seen a number of cases where the CFP licensee thought they had the case all tidied up, only to find the investor did an end-run and now they must convince the CFP Board not to yank their rights to use the marks.

7. Are you even partially responsible for an investor's losses? Carefully review their concerns and ask yourself the hard question, "Are they justified? Did I really do something wrong here that damaged my client?" If you are truly responsible, get your compliance officer or attorney on the line as soon as possible to work out a strategy to compensate the investor. After watching cases like this, one thing is for sure: the longer you drag things out, the more you have to pay.

8. Don't get hypnotized by the Ben Franklins. This is the answer to the hard question, "Why would I continue to work for the scumbag client?" posed in No. 5. In a painful moment, I realized the only reason I put up with people like this is because they pay well. I was letting my desire to remodel my basement come ahead of my desire for sanity. It was painful to see, but constantly dealing with abusive clients was not contributing to my wellbeing.

Another way to think of this issue is whether the tradeoff of a higher return is worth the higher risk; or are you simply assuming higher risk with only a remote possibility of higher returns? You must personally make the choice between eating well and sleeping well.

Don't let the dollars come between you and a good decision. In fact, I have made a promise to myself -- I will never work for a CFH again. I don't care what it does to my business, it takes too much out of me and it's simply not worth the aggravation.

9. Cut your losses and terminate them pronto. When I asked Bigelow, a person who has seen hundreds of investors from hell, how to handle the pain, his answer said it all: "Fire `em, quick."

This is the time to terminate the CFH with some grace. After all, you want them to go away, but you sure don't want them to go away mad. Consider having a face-to-face meeting and using this script: "You know, we've worked together for a long time, but I sense we just can't provide you with the kind of service you really want. How would you like me to close your file? Should I just make you copies of everything or would you like me to send it to an advisor who would be better able to serve you?"

Notice, there is no wrong answer here. Either way they choose, you are walking away from this client.

Here are some of the clients Bigelow recommends you should cut loose:
  • High maintenance. These people take up 15 hours a week and generate about $200 per month. The pain-to-pay ratio is too high. Dump them and move on.

  • Clients who are in a high-stress environment. They may be wealthy investors in the midst of a divorce or watching their business going down the tubes. They are so conflicted that they are impossible to deal with and nothing you do makes them happy. Send them to the new guy across town.

  • Clients who sabotage the plan. They don't follow either the financial plan or the IPS. In short, they don't follow your advice, but they still want to blame you. Send them to an experienced advisor who you really dislike.
I have always cautioned financial advisors to never fire the smoking gun -- the case where you have clearly screwed up and firing them sends them into the arms of an attorney who will sue you. Bigelow says he has seen a number of cases where the advisor falsified information on an insurance application and committed insurance fraud. These same misstatements were included on similar questions on the Form ADV. They probably would have gotten away with it if they had not ticked off the client by firing them, leading the clients to sue and expose the fraud. The advisor not only lost the case, but also faced charges of insurance fraud. Some things are truly worse than the client from hell. Jail time is one of them.

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