There is an old saying, “caution is the eldest child of wisdom,” that seems to apply more than ever as I hear news of increasing FINRA claims and awards. Add to the mix that, within the recently enacted Dodd-Frank legislation, the Securities and Exchange Commission may give claimants the option of choosing jury-style litigation instead of arbitration. In short, there has never been a more important time to proactively manage our businesses.

Compliance officers agree that the top three best practices that help us as advisors protect ourselves against a client complaint and potential lawsuit: document, document and document. So that we don’t end up becoming full-time stenographers and to help save time, it is important to focus on five key areas:

FORM: Documenting client conversations, meetings, and telephone calls is critical and can be done in numerous ways. These include e-mail confirmations as well as notations in your favorite client relationship manager (CRM) program. Since the goal is to have these readily retrievable on demand, electronic notes are often preferred to those that are handwritten. Often times after a meeting, for example, I will e-mail a recap of our discussion and attach that to the client’s CRM file.

TIMING: “Out of mind, out of sight” is so apropos in the midst of a busy day. So, jotting down notes right away can make a significant difference. Timely documentation can more accurately reflect actual events, considering our memories fade over time. I am told that arbitration panels and regulators often place more weight on notes taken at the time of an event, over those taken at a future point.

FOCUS AREAS: It is imperative that we pay special attention to high risk clients, such as those more aggressive or elderly, as well as high risk investments and strategies, such as those involving annuities and mutual fund B shares. In my practice, we have a clear process by which investment strategies are discussed and agreed upon, as well as subsequently review. Take notes according a reader’s perspective; don’t assume your thoughts are readily understandable. Be clear.

UNREALISTIC EXPECTATIONS: Especially when interest rates are low and/or equity markets are strong, some clients may not be clear as to what is reasonable performance. I continually educate clients on current market conditions, making this part of f a regular review process, and make notations of these conversations. 

PRACTICE ARMOR: As a secondary defense, consider what “Errors and Omissions” coverage may be available, as well as the potential liability protection afforded by the structure of your business entity. By comparison to other professionals, such as doctors, the cost of our liability insurance is miniscule. Incorporating your practice could be helpful depending on your state laws, as well as the specifics of your situation, and is a question worth raising with your attorney or Compliance Officer.

Of course, all the antidote in the world is not worth an ounce of prevention. Especially in this day and age, our team strives to keep clients posted regularly and address their issues and concerns before they become potential problems.

Mitchell Kauffman is managing director and owner of Kauffman Wealth Services, an independent financial advisory firm based in Santa Barbara and Pasadena, California. For more information, visit

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