Can I (not) take your order, please?

By Brian Francetich
Recently, at an RIA Risk Management and Loss Prevention workshop that our firm hosted along with a well known Underwriter and RIA Compliance/Law Firm, one particular subject stirred considerable discussion: “Becoming an Order Taker of Your Clients” (how to avoid).

When a client is adamant that you purchase a particular investment in their account, what is your response? Are you a stockbroker? Or are you are a fiduciary under the 1940 Act? As a fiduciary, you know it is your duty to act in the best interest of your client at all times. So, are you liable for buying an unsuitable investment even if the purchase was demanded by your client? Are you liable for not buying an unsuitable investment ordered by your client? The discussion begins…

Document, document, document! Always a critical answer to alleviate risk, but by no means the end all. It is critical that your client understand why an investment is, in your opinion, unsuitable and that you point them back to their goals and, if utilized, Investment Policy Statement. If your client continues to fail to listen to your advice, ask yourself if you really want/need them as a client. No one is forcing you to be their advisor. One might argue that they cannot afford to “fire” clients… in reality, you may not be able to afford not firing this wayward client. Another, less extreme, option is to suggest that your client open an account with one of the many discount brokerage firms that will allow them to invest in that particular investment (this may simply be delaying the inevitable). Ultimately, there is a trust issue if your clients are not heeding your advice. Distrust can certainly lead to other, costly trouble… like a claim brought against you for breach of duty/negligence.

The above scenario is somewhat simplistic. Real life has unique twists and turns. Remember, it is a lofty standard you are held to as a Registered Investment Advisor, that of a fiduciary. Courts have established that you cannot allow your clients to commit economic suicide, yet you also have a duty to execute trades on behalf of your clients in a timely manner. These are situations that require caution and documentation in abundance. As always, we remain available to the RIA community to assist in protecting each firm’s practice properly.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors.. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

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