Advisors: CYA with paper
By Bruce Sankin
Financial Help Centers, Inc
The interpretation of your client's answers on a client account form can make the difference between winning and losing a financial dispute or arbitration with a client. Knowing this information could help you avoid any negative comments in your file or on your U-4.
Who would have thought that a piece of regulatory paperwork could rank among an advisor's best friends? But it's true. The piece of paperwork in question is the client account form. It's important because many financial products sold in the financial services industry rely on verbal authorizations of transaction execution orders from clients. You know the process: You explain a product during a phone call or a face-to-face meeting. The client likes the investment and tells you, “OK, let's do it!”
The problem arises months or even years later when the client might decide the investment was not suitable for his investment objectives. Or maybe he contends you didn't explain the risks. Most advisors try to settle such disagreements in a mutually agreeable way. But sometimes, the cases end up in arbitration. It's in these cases that the client account form is paramount. As the only written document most advisors have describing the client, it is the centerpiece of defense at arbitration.
The arbitration may take place years after the original conversation between you and your client regarding the investment. I can almost guarantee that the client will remember the conversation differently than you do. That is why verbal discussions are unreliable and meaningless. Unfortunately, this document's importance is misunderstood, and many advisors do themselves a disservice by not maximizing its protective qualities.
I am going to show you how important this document is. It can be your strength and your client’s weakness. The interpretation of your client's answers can make the difference between winning and losing an arbitration. The following are questions typically found on a client account form.
1. General information: Name, address, birth date, Social Security number, telephone number. So far no problem.
2. Residence: Rent or own. This shows you that if your client owns a home, he is not ignorant in all types of investments. He would have some idea of the liquidity and economic risks involved in owning real estate. If you sold him a real estate limited partnership or a REIT and it had decreased in value, your client could not claim that he was unaware of the risks in real estate.
3. Legal residence if different from mailing address: This shows you that having more than one home is an indication of additional assets. 4. Employment/job title: This shows the type of knowledge your client might have pertaining to investments in certain industries.
5. Client-stated annual income: Client-stated net worth exclusive of family residence and estimated liquid net worth. This will show you what portion of his or her assets are in a specific investment. Having a diversified portfolio of no more than 2 percent to 5 percent of total assets in one investment may not be worth as much in an arbitration decision as having 50 percent in one investment.
6. Fixed income: When your client checks this yes-or-no box, you are made aware that he has no additional income other than his investments, pensions and/or Social Security, and that he should be a conservative investor. Be very careful when selling him growth or speculative investments. If your client insists on buying these investments, do the following:
- Remind him that he is on a fixed income and that if the investment loses money, he will not be able to replace the loss.
- If he still insists on buying the investment, then date and time stamp the conversation in your calendar or day timer.
- Draft a letter stating you do not recommend that he buy the investment. Ask him to sign it. If he will not sign the letter, then at a minimum, send him a letter about this conversation. Keep a copy of the letter in his file.
- If he purchases this investment, contact him on a regular basis to discuss it. Is he satisfied with the performance of the investment? If it goes down in value, then ask him what he wants you to do. Always document these conversations in your calendar or day timer.
8. United States citizen (if other please specify): If your client is not a citizen of the United States, then there may be different tax liabilities, depending on the investments and the country. You must be aware of this. Otherwise, you — not your client — could be liable for any losses incurred.
9. Former client or account with other brokerage firm: This shows you the type of investments that your client may have made in the past. This will also indicate if your client is knowledgeable or suited for certain types of investments.
10. Investment profile: This is very important. If your client wants safety of principal and income, don't sell him growth. Put down only what he wants. Also, remember to put down the investment experience in stocks, bonds, options, annuities, etc. This information is critical in arbitration.
11. Introduction: This is where you find out how your client came to open an account. The options are usually seminars, walk-in, phone call, advertising, personal acquaintance, and referrals. Seminars, personal acquaintances and referrals may sound innocent, but let me show you what they imply.
If your client went to a seminar, it shows you that your client goes out of his way to get knowledge on specific investments. You can say that if your client has gone to one seminar, he may have gone to many and that he is aware of different types of investments. This makes your client suited for many investments. If your client is referred by a person who is knowledgeable about investments, then there is a good chance he has had discussions about investments. This implies your client knows more about investments than what is stated on the account form.
12. References: Name of bank. If you ever have a problem with a client, you will want to know about their knowledge of investments. References would be a good place to find out this type of information. 13. Power of attorney: This means someone besides your client has the right to handle the money in his account, as well as decide what investments should be made. Be very careful with this. Here is an example of a potential problem: You have a joint account, husband and wife. The husband makes all the decisions and transactions. You never speak to the wife. If there are major losses in the account, then one of the first questions the client’s attorney is going to ask you is, “Why didn’t you notify the wife since she is a joint owner in the account?” Remember, a portion of the money in their joint account belongs to the wife.
My suggestion is when the account is open, get a letter from the wife stating she gives her husband authorization for all transactions in the account. Again, if she will not sign a letter, then send a letter about this discussion and keep a copy in their file.
14. Account description: Cash or margin. Make sure you explain the different accounts. Also, make sure your client understands both the risks and the benefits.
Other important account form information
It is very important to update the account form if your client’s situation changes, if a spouse dies, the financial situation changes, the client retires, etc. Make sure a new account form is filled out.
Another fact that you should know in case a dispute arises between you and your client is that you must be licensed in the state where the transaction takes place. If the client’s permanent address is in New York, yet he has a winter home in Florida, make sure you are licensed in both states. If you do the trade in a state where you do not have a license, then the trade could be voided and your client could get his investment back.
Please note: If you are licensed to sell securities, then you are regulated by FINRA. If there is a dispute between you and your client, then most likely, you will either mediate or arbitrate through FINRA.
It is paramount that you know and understand the arbitration and mediation process in the securities industries before a potential problem begins. Knowing this information about client account forms could help you avoid negative comments on your U-4.