Market volatility is typically a time when investors reflect on their underlying portfolio risk. The concept applies equally to financial advisors confronted with the risks associated with client complaints, arbitrations and regulatory inquires. These risks substantially increase when clients suffer significant investment losses.

Risks to both clients and financial advisors can and should be mitigated by undertaking affirmative steps. These steps will not only limit risk, but will also help strengthen the financial advisor/client relationship.

Communication

The relationship between a client and their financial advisor is intended to be a collaborative partnership that requires trust on both sides. During non-volatile market conditions, financial advisors and clients have undoubtedly spoken about the client’s overall financial situation, including their specific investment goals, time horizon and risk tolerance. These discussions typically include how short- and long-term market volatility will impact a client’s portfolio.

As history shows, volatile market conditions are expected, and they should not be a reason to panic or to ignore prior discussions and understandings. When volatile market conditions arise, communication is key to avoiding potential issues that can result in investment losses, which in turn may result in customer complaints, arbitrations and regulatory inquires directed at the financial advisor and his/her firm.

During volatile times, financial advisors should thus proactively reach out to their clients to provide information and to address clients’ questions and fears. Clients should also feel comfortable reaching out to their financial advisor seeking information and communicating any concerns or worries.

Whether it is the financial advisor or the client, keeping your head in the sand only increases your risk. Investors who ignore their previously understood goals and risk tolerance typically make investment decisions based on emotion that they later regret.  Financial advisors who fail to realize that their clients are counting on them to be available, to provide information and to guide them through volatile market conditions risk facing an unhappy client who complains or files an arbitration.

Even if the complaint or arbitration is baseless, it can cost the financial advisor (or his/her firm) money in defense costs. It also may be a disclosable event that will become a public record on BrokerCheck. This may result in negative consequences to the financial advisor’s reputation. It could also serve as the basis for a regulatory inquiry.

Documentation

For both clients and financial advisors, it is essential to memorialize material components of all communications properly. Financial advisors should document all discussions with clients in writing, and when appropriate, confirm those discussions with clients by email. Similarly, clients should take notes on the guidance offered by a financial advisor.

Using history as a guide, the markets will eventually stabilize, and any temporary losses should recover. Both clients and financial advisors will benefit by maintaining active and ongoing communication. Proactively documenting ensures there are no misunderstandings concerning the agreed-upon course of action. This will instill trust and minimize the possibility of emotion-based action that, in the long run, could serve to hurt both the client and the financial advisor.

About Lewitas Hyman

Lewitas Hyman represents individuals and firms in matters relating to investment losses. We also advise financial professionals and financial services firms on Form U4, Form U5 and Form ADV disclosures resulting from customer complaints and arbitrations, along with related regulatory inquiries from the SEC, FINRA and state regulators. To learn more about the services we provide to investors, financial professionals and financial institutions contact us at (312) 291-4600 or through our online contact form for a free consultation.

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