Financial planners who advise physicians probably know that time does not heal all wounds. A patient treated in 2006 might file a malpractice suit in 2009, long after the doctor has forgotten the details of the incident. To protect themselves, physicians buy insurance and also practice defensive medicine: They order multiple tests and keep thorough records of every patient contact.

Similarly, the bear market that started in late 2007 and continues to this writing may maul planners, now and in the future. "A lot of clients are losing money—some are losing a lot of money—and they're not happy," says Don Runkle, first vice president and chief compliance officer of Raymond James Financial Services, in St. Petersburg, Fla. "If clients feel that they have been wronged, they may bring complaints." To protect themselves, planners may have to do what doctors prescribe: practice defensive financial advice.

First, Connect

Sheryl Clark, who heads Sunrise Financial in Tucson, Ariz., picked up another lesson from observing the medical profession: that the first line of defense may be well-honed communication skills. "In a study I heard about, the doctors with legal problems were the ones whose patients felt a lack of personal care," she says. In fact, several studies have documented that failure to communicate is a key risk management issue in the healthcare world.

Physicians who didn't return calls and didn't listen to patients were sued more often than the attentive doctors, according to Clark. "I believe the best liability coverage is having a good relationship with my clients," she says. "That means returning calls in a timely manner and trying to fully answer all clients' questions. You want to make sure that they feel heard and cared for. Clients are really looking for someone to be on their side, more than they seek higher returns or lower taxes."

Risk Reducers

Nevertheless, even the most polite planner might be the subject of a client's complaint after the kinds of financial setbacks we've all experienced lately. People who have lost money may imagine maltreatment, and whether a complaint is valid or not, an advisor still may find his or her every move under scrutiny.

"I tell financial advisors that nothing is Kevlar," says Matthew Fornshell, partner in the Columbus, Ohio, law firm Schottenstein, Zox & Dunn, where he is the coordinator of the securities regulation and white- collar criminal defense practice area. "Their risk is not zero. However, they have to figure out how to operate their business and make a living while keeping their risk as close to zero as possible. Keeping good notes is one way to do it. Memorializing client contacts with a follow-up communication is another. Just relying on phone calls opens you up to liability."

Raymond James Financial Services tells its advisors that there are three levels of protection. "First, advisors can take notes and document contacts with clients," Runkle says. "Second, they can send a letter to clients after a meeting, to summarize what was discussed and agreed upon. Third, they can get the client's signature on a document before proceeding."

Document This

At any one of those three levels, good documentation can help ward off problems. Clients who have suffered steep losses may not remember all those warnings about market risk, but a paper trail can show that planners acted reasonably. "In my years representing brokers in lawsuits, I never once heard them complain that they had too much documentation or that they regretted following their firm's policies when dealing with a client," says Tracy DeWald, general counsel at Securities America, a broker-dealer based in Omaha, Neb. "It is always that short cut or exception that comes back to haunt them."

An advisor's thorough notes may be enough to head off a client's complaint. "One of our advisors was working with a client who had a very large position in one consumer goods company; it was about 90% of the client's portfolio," Runkle says. "Over a period of years, at the advisor's recommendation, this position was reduced via sales to about 5% of the portfolio."

Last year, this client made a verbal complaint, saying that the stock sales were unauthorized. "The company was the subject of a takeover," Runkle says, "and the stock reached a high price. The client calculated that holding on to the stock would have returned an extra $272,000, compared with the prices received by selling the shares over time."

The advisor in this situation had not asked for a signed letter, but had kept "copious contact management notes," Runkle explained. "Those notes showed that the advisor had frequently expressed concern about over-concentration, which the advisor had also communicated to the client's CPA. In addition, the advisor's notes indicated that the client's home had been destroyed by a natural disaster, so the client needed funds, and selling shares from the concentrated position seemed like a sensible way to get the money." So far, this client has not followed up on the verbal complaint, so it appears that the issue has been resolved.

Notes alone, however, may not be enough. They must be thorough. "I am an arbitrator, so I know that arbitrators may be skeptical about an advisor's notes, when they're presented at a hearing. They could have been prepared after the fact," Runkle says. "The more details the documents contain, the more persuasive they are likely to be." Details help to give credence to an advisor's notes, as does the automatic date and time stamp of a contact management system.

Fornshell provides a similar example involving an elderly client who met with an advisor in 2008. "The client had a large position in one stock, with a great deal of appreciation. The advisor suggested selling it to reduce the exposure to that one company, and also selling other securities for offsetting capital losses."