Lawyers who regularly represent disgruntled clients who make allegations against financial advisors offer reassurance to the vast majority in the industry. Keep the big picture in mind and recognize that only a tiny fraction of financial advisors get sued, they say. But if a client or former client names them as a defendant in a legal complaint, financial advisors should call their compliance officer or legal advisor before doing anything else—particularly before calling the person who filed the litigation.

'BAD, BAD APPLES'

“The vast majority of brokers don’t have any dings on their record,” says Tom Ajamie. A plaintiff lawyer in Houston who has represented clients who have sued Wells Fargo and a former Paine Webber broker, among others, Ajamie uses “dings” to refer to legal complaints against financial advisors. “About 95% of financial advisors don’t even have any customer complaints against them,” Ajamie notes.

But when a financial advisor’s client, angry and ready to litigate, telephones Ajamie and proposes litigation, he says, typically the targeted advisor has, at best, failed to communicate and, at worst, “done crazy stuff.” The advisors he has named as defendants in litigation have stolen a client’s money, transferred profitable stocks systematically from a client’s accounts to their firm’s accounts, or put an octogenarian investor into inappropriate assets, like 100% gold, Ajamie says.

“I see the really bad, bad apples,” he says.

If advisors stick to simple rules of putting clients in appropriate investments and don’t steal clients’ money, Ajamie believes they will most likely not get sued.

'INCORRECT EXPECTATIONS'

But Don Littlefield, a Houston lawyer, who typically defends financial advisors and sometimes opposes Ajamie, recommends financial advisors take pro-active steps to avoid litigation. “Set up your business so you follow procedures that make it not only possible to say you are doing the right thing, but also to show that you did the right thing,” advises Littlefield.

What does that mean in tangible terms? Keep paper work consistent, document all conversations, and perhaps, most importantly, but most frequently neglected tip: “Be as willing to share the good news as well as the bad news with your client,” Littlefield says.

“Most law suits” arise from clients’ “incorrect expectations,” Littlefield says. Often, the advisors who are named as defendants failed to warn clients early enough about bad news so it arrived as a surprise. Littlefield expresses empathy for advisors who fail to communicate with equal force when portfolios soar or when they tank. “Human nature is that we don’t really always want to give people bad news,” he says. But advisors must overcome such timidity, he warns.

When, despite an advisor’s precautions, a client files a complaint, the named advisor should refrain from succumbing to any immediate urge to call the disgruntled client. “Before you reach out and speak to them, contact your compliance officer or legal advisor,” Littlefield says. “They will help review the complaint. It may not be wise to contact the client,” he adds. What an advisor might tell the complaining client may be better left unsaid until the lawyers know the lay of the land, Littlefield says.

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.

Miriam Rozen

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.