What’s In Your Client Agreements?

Why Financial Planners Need to Effectively
Communicate, in Writing, to Clients, and How to Do it.

When working with clients, it is often easy to overlook some simple, yet very important, standards that every financial planner should follow. CFP and FINRA rules protect financial planners from liability to clients who find themselves dissatisfied for a number of reasons, including because they closely follow the relevant legal standards. Accordingly, complying with them should be considered standard practice when communicating with clients both at the outset and when necessary during the client-advisor relationship. Taking the time to review your practices involving client communications is an important step towards protecting yourself from potential lawsuits. When doing so, there are some points to consider:

1. Advisors are Fiduciaries under the law.

  • But the duties owed to the client depend on the nature of the client relationship;
  • At a minimum, advisors owe a duty to give the client information which is relevant to the affairs entrusted to the advisor;
  • Which the advisor has notice of;
  • Which the client would desire to have; and
  • Which can be communicated without violating a superior duty to a third person.

2. Under some circumstances, and with some clients, follow-up communications may be necessary. 

  • First, doing so creates a clear written record that the risks of the investment were disclosed to the client.
  • Second, the clearer the record of disclosure, the easier it is to argue that the client ratified the transaction and/or is estopped from arguing that it is not suitable.
  • Third, clear disclosures trigger the client’s duty to mitigate their damages, since the test is whether a client’s actions and inactions are reasonable considering all the facts and circumstances.
  • Fourth, commentary to FINRA Rule 2111 allows for the use of a risk-based approach. However, the more complex an investment is in structure, performance, and risks involved, the greater the need to document suitability on a transactional basis.
  • Finally, regardless of whether or not advisors have an on-going duty to advise the client, they may nevertheless need to provide subsequent corrective advice about an earlier recommendation.

3. Final Thoughts. 

  • Clear and unambiguous communication with clients is key to avoiding being sued.
  • The written communication is your best ally because it memorializes and preserves the record.
  • While it is necessary to communicate, in writing, with all clients about the scope of work you will perform at the outset of the relationship, with some clients it is best to send them written communications throughout the relationship in order to avoid confusion on their part about their investments, especially the risks. This will help you to create and preserve a clear written record if needed later in time.

While it may seem that communications with clients are only important during the original engagement in order to the scope of engagement, there are times, clients, and circumstances that makes it essential to document clear communication set forth at other points throughout the relationship. Clear and concise communications will not only protect you from any potential future claim a client may make, but also leave a clear record of all activities you have performed and the intent of your actions. Armed with this documented and chronicled information, you can protect yourself from aggravating and potentially damaging legal repercussions.

This material is for informational purposes only. It is not and should not be solely relied on as legal advice in dealing with any specific situation.