Ron Rhoades, director of research and chief compliance officer at Hernando, Fla.-based Joseph Capital Management, offered up a number of suggestions at the NAPFA National Confererence in Salt Lake City, Utah last week to help financial advisors provide the best possible service to their clients while also protecting them from potential litigation.
During a breakout session titled "Your Fiduciary Duties: Due Diligence, Disclosures and Compliance Hot Topics," Rhoades said that beyond the basics -- establishing that you are a financial planning expert acting on the best interests of the client -- gaining a client's trust includes a "fourth dimension" of empathy and compassion.
"As much as I thought I was compassionate with my clients during the downturn, some didn't think I was very empathetic," he said.
To provide better service and stave off the attorneys, Rhoades said RIAs need to do a better job documenting and executing on their investment strategy plan they all must detail in Form ADV filings with the SEC and individual state regulatory agencies.
For each client, advisors need to document the details and thinking behind the investment strategy employed including, Rhoades said, specific assets classes, allocations and other investment strategies that have been rejected.
"Who will you defend these strategies to?" he said. "Probably not to the SEC or the Labor Department, but to a private litigant. The plaintiff will say you had a duty and did not fulfill it."
Beyond documenting the investment strategy, Rhoades recommends each firm's investment committee -- even if it's only one person -- make sure that all advisors "do what you say and say what you do."
Along with evaluating the various investment products recommended to clients, a basic tenet of due diligence, it's important to consistently pay attention to total fees and costs and be able to defend any production selection on this basis should litigation ensue.
It's also important to have an investment policy statement for clients to sign that clearly explains the historic volatility of investment portfolios, stresses the importance of adhering to the prescribed investment plan and documents asset allocations and the possibility that any investment plan could result in losses.
"Distribution of returns is not normal," Rhoades said. "It's not a perfect bell curve," adding that the historic range of returns is not a boundary on future returns.
Rhoades said it's crucial to have all clients sign the investment policy statement and any amendments and changes made along the way.
"Always get it in writing," he said. "If it's not in writing, you probably won't be able to prove it."
Advisors and firms also need to make sure they stay on top of client profiles and update them at least once a year, not only for compliance purposes but to provide better service to clients and anticipate and react to any important changes in their lives.
Taking notes is another small but important way advisors and firms can protect themselves in the event of a lawsuit.