Principle 23: Do Good Work, Note the File

Risk is Spelled L-O-S-S

I once had a conversation with someone close to me who needed to invest $50,000. He explained that he really wanted to “stretch his legs” (my term) and seek a higher return. He was willing to take more risk than normal. I had an investment that seemed to suit the need and explained its features and risks. He said it sounded great and wanted to move forward. Sensing that he had not fully understood the risks of the investment, I said, “You realize you could lose money in this, right? He said, “What do you mean?” I said, “It could go down instead of up. Risk is spelled L-O-S-S.” He replied nervously, “You mean I could lose it all?” “It could happen,” I said. He said “Forget that. I don’t want to lose my money. I’ve worked too hard. I want something safer!”  Less than a year later, the investment was exposed as a Ponzi Scheme. The principals went to prison. Needless to say, I was thrilled that I went the extra mile to ensure proper disclosure of the investment’s risks, and that the client (remember, someone close to me) had made an informed decision and was spared a nasty loss. Instead of ignoring the signals that the client might not really understand the investment’s risk, I chose to circle back and revisit the issue one more time for my own satisfaction. It is easy to suppress these kinds of concerns or take the position of “let the buyer beware” in order to make a sale. But, the client has come to you for advice.  You are going to get paid for it. Using unsuitable investments, or investments that clients don’t understand is not necessary. Get paid for using the right investments. Do good work.

Sooner or Later

Someone is going to complain. Let’s face it. Things don’t always go perfectly in the markets and the economy. Despite your best due diligence efforts, you can’t see the future. Every portfolio is going to have a dud investment or two. Some investments lose money. Everyone suddenly has a lower tolerance for risk once something loses value. Clients’ memories can fade over time. Client relationships can deteriorate, and become strained, or even adversarial. What you remember about specific meetings, disclosures, and recommendations may not always match up with your clients’ recollections. You should take notes at every meeting, whether in person or over the telephone. File notes are your friend, not your enemy. Your notes should tell the story of each meeting: what topics were discussed, what decisions were executed, and what disclosures were made. Notes should be written legibly and be well organized.  Your notes are not only for your and your clients’ benefit, but also for the regulators as well. Keep that in mind. I once received a formal complaint from a client who decided that she was not as risk tolerant as she had originally indicated. An investment had turned out poorly, and she suddenly claimed that she didn’t understand real estate and oil and gas investments. From my file notes, I was able to show regulators that she owned an oil and gas service company, and that she was a commercial real estate developer. My notes clearly showed how I had reviewed the investment risks, given her the proper private placement memoranda and prospectuses, and allowed her ample time to review the investments and make an informed decision. Regulators denied the claim. Note the file.

One Final Thought

Some advisors are afraid to give certain advice or make some recommendations. But, our objective is to help our clients. The best way to live without fear is to do good quality work, and then note the file. You have nothing to fear if you have given quality advice with adequate disclosure. Just make sure there is a good record of what you’ve done. Do Good Work, Note the File.

Principle 22: Steady as She Goes

Keep Client Interactions Calm and Focused

Whenever I sense that a client is starting to get stressed in a meeting, I know that I must take action. I imagine, for my own amusement, that a small pressure relief valve is protruding from the side of his neck. In my mind’s eye, I reach across the conference table and gently turn the valve to back off the pressure until I sense that the client’s stress level has dissipated and his demeanor has returned to normal. This is is my cue to find a way to relieve his stress. If we are discussing the proposed allocation of his portfolio, I will say something like, “We are not making any decisions today. We are just talking. I will send you home with some materials to review on these investments and then we will get together again to make decisions. If you have objections to any of these recommendations, we will set those investments aside and keep working to find the right solutions. You are in the driver’s seat.” The client immediately relaxes, and I can see that we were moving too fast in making investment decisions. Communicating to the client that I was in no rush let him know that he was in charge, and that we would move at a pace that was comfortable for him.

If we are discussing our fee arrangement, and it is clear the client is getting uncomfortable, I will say something like, “I realize that you may not be used to paying an advisory fee, and if this type of arrangement doesn’t work for you, I will understand. I may not be a good fit for you, and that’s okay. There are other good advisors out there, and many of them do not charge a fee. Take some time to think it over, and let me know if you would like to proceed.” I am giving the client a way out. This relieves the immediate pressure so he can evaluate the merits of working with me and my staff in an atmosphere free of stress. When people are under pressure they make poor decisions. Stress can produce indecision and paralysis. My job is to help my clients make good decisions. If I create a high pressure environment, I am going to destroy my ability to help them make good decisions. If I am oblivious to the stresses they are under, I will plunge headlong into a morass of hesitation, suspicion, and doubt in the client’s heart. Once I have created those emotions, I will likely never turn them around.

Develop an Affable Bedside Manner

Never lose your temper with a client; no matter how justified you deem the provocation. Keep your demeanor deferential, polite, and courteous at all times. There is no place for arrogant pride, condescension, or intemperate behavior in your client relationships.  Rather, work hard to display humility, professionalism, and self-control in every client encounter. Some clients are hard to love, but love them we must. In our practice, the majority of our clients are in retirement.  At that stage of life, we see our clients struggle with frequent and significant loss: hearing, memory, spouses, and sometimes even children or grandchildren. We need to be sensitive to the challenges our clients are facing. Clients need our friendship, and they need our reassurance and support. We must be willing to forgive their quirks and small offenses as we hope they will forgive us. Working with clients, especially older clients, sometimes can be frustrating. Communication between people is always a potential source of difficulty. The Apostle James gave some great advice, “Be quick to listen, slow to speak, and slow to anger.” – James 1:19. The onus of good communications is upon us as the advisors. We must take responsibility for ensuring that our clients’ communication challenges are overcome. When we as advisors take the lead and treat our clients with dignity and respect, our staff members will follow suit. Set the best example and lead from the front.