Don’t get sued: The importance of monitoring client changes

• Mr. Mid was in his late 40s, married with two teenage children when he first met his advisor. Two years later, he has turned 50, he and his spouse have separated, and one of his teenagers is in university. Three years after that, he was diagnosed with cancer.
• Mrs. Pre was in her late 50s and has been divorced for years when she first started working with her advisor. Three years later, her three children have now moved out of the house and she has just lost her executive position after fully funding her children’s university education.
• Mrs. Ret is in her early 70s and has been travelling, but recently fell and broke her hip while on a cruise. After emergency surgery, she’s recuperating but needs full time care.

Unfortunately, you cannot expect clients to pick up the phone and tell you of their significant changes in their circumstances. It may not occur to them that it’s important for you to know so that any changes in their portfolios could be made, if necessary. However, it’s the advisor’s responsibility to know his or her clients at all stages of the relationship to ensure their initial investments are reassessed and that they continue to be suitable or are rebalanced to meet each of these clients’ new circumstances.

However, what often happens is that updating the KYC form is neglected until compliance begins to insist and sets a deadline; in these circumstances, there isn’t sufficient time to do justice to the exercise. Instead of sitting down with each client to give him or her an opportunity to tell his or her story, advisors send a new form for signature that’s prepopulated with the same information that was on the previous form. This is leaving it to the client to call the advisor to correct the information, which the client often doesn’t do because he or she might be private, feel embarrassed, or just not appreciate the relevance of letting the advisor know of the changed circumstances in his or her life.

The requirement to know your client and update the form should not be a “tick off the box” exercise. If this is the approach you use, you could be met with regulatory scrutiny — from the self-regulatory organization or the provincial securities commission — and litigation, particularly if there are losses in the client’s account for which he or she asserts the risk was too high given his or her changed, and more recent, circumstances.

To make the process of updating your clients’ KYC forms a more meaningful exercise, don’t wait until compliance comes calling. When you speak, or meet with each client, remind yourself at least annually to make inquiries of their personal situations. Take a few minutes to make inquiries; think about each client’s particular situation before you call them, reviewing notes of previous meetings to refresh your memory. Prepare a little checklist to follow up with each client. For example:

• Ask Mr. Mid how his spouse is doing and whether there are any specific changes related to his kids, health, home, etc. You should know that one child is in university from the RESP withdrawals.
• Ask Mrs. Pre how her job is going and whether the children have landed jobs out of university or whether they continue to be somewhat dependent on her.
• Ask Mrs. Ret how her travels have been and whether her health has continued to be strong; you may learn that her broken hip led her to place her house on the market as she’s moving to a nursing home. You need to ensure she has the liquidity necessary, particularly until the proceeds from the sale of her house are available, which could be several months until closing.

Knowing your clients is key to avoiding litigation because clients may sue you for failure to learn their changed circumstances and adjust their investment portfolios. Put a process in place and follow it to ensure you continue to know your clients’ personal circumstances, as well as adjust their portfolios, so that you stay out of court.