If clients remain wildly optimistic about their invest-ments after meeting with you, something has gone wrong. It is your duty as an advisor to set clients straight about the risks involved in investing, to assess their appetite for risk and to structure their investments around that appetite.

This can be more problematic than it sounds. Many people view having a financial advisor as a guaranteed means to attaining wealth. Even with the recent slide in world stock markets, your clients may not acknowledge or accept the fact that risk is part of investing.

“People go to an advisor with unreasonable expectations,” says David Hausman, a partner with law firm Fasken Martineau DuMoulin LLP in Toronto. Hausman has worked with advi-sors long enough to understand the difficulty of grounding clients in reality.

“The problem is everyone wants and expects everything,” he adds.And clients don’t want to hear otherwise.

The legal duties of advisors can become blurry at times. The advi-sor is neither a true fiduciary nor an agent in a purely contractual sense. A great deal turns on the client him- or herself; thus, the first step in the relationship is a thorough assessment of the client.

> Know Your Client. An advisor must have a good idea of the client’s appetite for risk, experience, goals, sophistication and, to some extent, behaviour before undertaking any financial duties.

Ellen Bessner, a partner with Gowling Lafleur Henderson LLP in Toronto, spends a lot of her time defending investment dealers in litigation and regulatory matters, as well as educating advisors and keeping them abreast of industry changes so they can protect themselves and their practices.

Regulatory and legal obligations change rapidly, and Bessner sympathizes with financial advi-sors who are exposed to risks such as bad publicity from regulators’ Web sites that maintain infraction notices for seven long, unforgiving years. She tries to help financial services professionals wrap their minds around — and adjust their practices to — the ever-increasing obligations.

The prime obligation involves the KYC form. It is essential to have a blueprint of a client’s wants, needs and capabilities on which to base all action. But this document is just the first of many, all of which go to ensuring the advisor’s version of events is consistent and thorough.

To help advisors remember and accomplish this task, Bessner has developed “the five Cs”: be consistent, complete, current, correct and contemporaneous. Any inconsistency in documentation must be resolved immediately.

> Make Suitable Investments. It is ingrained in advisors that suitability of investments is of utmost importance. But in the day-to-day grind, this can drop out of sight. Bessner stresses the importance of not letting this happen by describing her “suitability triangle”: the client, the KYC form and the selection of investments.

The basic triangular relationship, she explains, moves from the client (from whom the advisor collects information to prepare the KYC) to the KYC, from which point the investments are chosen. This manner of moving through the triangle ensures all investments are and remain suitable.

> Serve Only The Client. Another key duty of advisors is to serve only the client, according to the best interests of that client. While the KYC and suitability are the cornerstones of the industry, there are circumstances that arise in which an advisor’s good intentions are in danger of being overridden by the client, or the client’s family or friends, Bessner says.

Caught between a client and the client’s family, the advisor will have to determine what the client truly needs and act accordingly. It can be a challenge to determine the client’s needs and objectives if the client is being deferential to another’s point of view.

> Document All Decisions. De-tailed knowledge of the client informs all investment decisions, which must all be carefully documented. The risk of loss is part of the investment equation, and advisors must take steps to protect themselves. The courts have proven unsympathetic to advisors with slipshod work habits and incomplete records.

Hausman says a paper trail is the best defence in what he calls the “memory test” — the conflicting versions heard by judges about what was said and done. The days of notes scribbled on the edges of notepads are history.

Hausman adds he has been surprised by court decisions that allowed highly sophisticated clients to recoup losses. That the courts have extended protection to knowledgeable clients stresses the importance to advisors of keeping clear records, he says. In situations in which there is any ambiguity, it is a safe bet that the courts will side with the client.

@page_break@> Explain All Products And Risks. Other duties that will protect advisors in a liability case include explaining all products and all risks as they occur, and not relying on clients to educate themselves. With sophisticated clients, who may have greater investment knowledge than the advisor, this might be an irksome task. But it can’t be ignored. Ensure that your explanations are clear. In fact, clarity in instructions, records and all other documents must become standard practice.

> Diversify. You have a duty to diversify, which cannot be contradicted, not even if the client expressly wants concentration. In that case, a client is better served by a different investment approach.

> Fire The Client. The duty to fire clients when the need arises may be either very difficult or blissfully easy. This duty kicks in when, in the rare case, the advisor finds himself or herself involved in, or complicit with, suspect transactions and questionable dealings.

> Preserve The Integrity Of The Market. Advisors are required to serve their clients’ needs to the best of their abilities — within legal limits.

But there is also a duty to preserve the integrity and reputation of the market. Fortunately, this is already included in the duties of suitability and correct documentation. IE