Ellen Bessner, one of Canada’s most experienced and respected compliance litigation lawyers, has written the first definitive book on the dos and don’ts of this increasingly complex and potentially career threatening issue, Advisor at Risk: A Roadmap to Protecting Your Business.

Much of her motivation, she says, lies in the desire to avert and, if necessary, alleviate the fallout that ensues when things go wrong between an advisor and a client.

“I have looked into the eyes of so many advisors, agents and branch managers,” she says, “and know that while they want to operate in a fully compliant way, they feel overwhelmed and discouraged by pressure from the regulators and media, which too often initially take the position that in a dispute the client is right and the advisor is at fault.”

For these reasons, Advisor at Risk is focused on practitioners, with a strong emphasis on both the practical side of compliance and the consequences of failing to act fully and carefully when it comes to meeting the demands of regulators and the courts.

“There was no manual to guide them and very limited access to anyone who could counsel them,” Bessner says of the written materials currently available.

Although written by a lawyer, this book is not a legal text. If anything, it is written for a lower comprehension level than I expected. Overall, much of what the book suggests should be intuitive and standard operating procedure for a professional advisor. As Bessner says, “Being compliant isn’t rocket science. Most of it is common sense that can be incorporated into everyday practice. You have to ask, however: ‘Are you doing it? and ‘Do you understand the implications of not doing it?’”

The book delves into all areas of compliance, but the fundamental, underlying issue that pervades 99% of all cases in which Bessner has been involved is suitability — in other words, the appropriateness of an investment or insurance program, given the client’s education, experience and knowledge of such matters, as well as their personal circumstances.

Perhaps even more crucial is the necessity of keeping up with changes in any of these areas. Shifts in needs, attitudes, preferences and life circumstances are often the catalysts for complaints. If the advisor cannot demonstrate what the regulators or courts deem to be an appropriate level of ongoing care and consideration, and a client experiences losses as a result, chances are high the advisor will be held liable.

And assessing suitability goes far beyond completing a “know your client” form. In fact, it is assumed that the form was reasonably accurate initially; otherwise, the dealer firm’s compliance department should have challenged it. There is, however, a need to be prepared to “prove” suitability, Bessner says, that never goes away. Years after an investment or insurance program was implemented, an advisor can be called upon to justify not only the original recommendations but also any changes or lack of changes, in light of a client’s evolving circumstances.

When a client forgets, conveniently or not, the basis on which the initial recommendations were accepted and implemented, the onus will fall on the advisor to prove continued suitability. That means managing client risk throughout the client’s lifetime.

Those risks are extensive. Market volatility is an obvious one, and even the most sophisticated inves-tor doesn’t like to lose money. So, when it happens, some clients will look to assign blame — and liability — to their advisors, despite the fact that they described themselves as “risk-tolerant” investors.

On the other side of the coin, human nature suggests that people become more risk-tolerant during bull markets, when they are exhibiting higher expectations. When markets decline, those same clients may cry foul, claiming their investments were unsuitable. Managing client expectations can go a long way toward reducing the potential for subsequent conflict.

According to Bessner, the advi-sor has to “win the credibility game” in a dispute, and the best defence is a combination of documentation and communication. Although most communication between an advisor and client is oral, records should be kept of every client interaction — particularly when it involves a decision around a recommendation, including decisions to either act or not to act. Being able to show that a client declined to follow your advice, assuming it was appropriate, can be as valuable in a defence as being able to justify the action that was taken. Using additional tools, such as risk-tolerance questionnaires and estate and financial planning software, can also support an advisor’s position.

@page_break@Several chapters of Advisor at Risk are devoted to the suitability issue, underscoring its importance. The starting point, as noted, is the KYC form, “the initial and primary focus of judges, arbitrators and lawyers,” Bessner notes. However, additional evidence of information gathering and testing is required when it comes to supporting the advisor’s position.

“A common misunderstanding among advisors,” Bessner says, “is that a product is considered suitable if the information on the client information form matches the trade.”

Some advisors also incorrectly believe that the form can be adjusted to match new recommendations that would have been unsuitable, given the initial KYC profile. If the client profile changes, for whatever reason, it will take more than an updated KYC form to explain the reason for an altered investment strategy.

Of particular use in this regard is what Bessner calls the “triangle of suitability.” This approach uses a three-step system to align client interests with the advisor’s advice. Step 1 is “knowing your client,” she says, through an examination of their wishes and needs. Step 2 is the completion of an accurate KYC form. Step 3 is the product recommendation. Retaining this order is vital. If a KYC form is adjusted after a product change to conform with a revised strategy, the flow becomes disordered, violating the triangle’s order.

In addition to specific advice on avoiding disputes — and winning them when they arise — Bessner’s book sends a message about the high price of non-compliance. She wants, she says, to “sensitize advi-sors, agents, branch managers and their firms to the dangers lurking in non-compliance.

“It is so costly in so many ways,” she says. “It causes stress, eats up energy, destroys reputations and careers, and can potentially cost hundreds of thousands of dollars.”

She also wants to applaud most advisors, who already follow the rules.

Advisor at Risk isn’t, in Bessner’s words, “sexy” but it is “digestible and meaningful.”

I would add that it doesn’t fully reflect the passion and humour she brings to her workshops and presentations. But I believe this book is a must-have for practitioners at every level.

Read it — and heed it. IE


Advisor at Risk:
A Roadmap to Protecting Your Business
By Ellen Bessner;
Shore Publishing,
169 pages,
$34.95