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.