ROB CARRICKGlobe and Mail Update

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April 21, 2009 at 6:00 AM EDT

T he stock market has recovered a bit from the depths of last fall, but not enough to fix the damage done to some investor portfolios by bad financial advice. One option for investors who believe their advisers have cost them money is to take legal action. To learn more about suing an adviser, I spoke with Harold Geller and John Hollander, lawyers with the Ottawa firm Doucet McBride LLP, who spend much of their time representing investors.

Gentlemen, how’s business right now?

Mr. Geller: A bit of a tsunami. There’s clearly a high level of interest among people to find us and discuss their situation. But there’s also an element of the ostrich here. People don’t want to think about the degree of loss. What we’re hearing is that advisers are saying, ‘Look, you haven’t got a loss because you haven’t sold.’ To me, that’s poppycock.

Are you getting lots of phone calls?

Mr. Hollander: Several a week.

How long does it take people to get out of the shock-and-dismay phase of suffering a big financial loss and start taking action?

Mr. Hollander: If it follows the pattern of the last bear market, then it may be anywhere from six months at the earliest to 24 months at the latest. But there’s a reason why that’s a problem. In the last bear market, you had six years from the time losses occurred in order to start a lawsuit. In 2004, a new limitations act went into effect in Ontario. So now you have two years from when you discover a loss. If you don’t act fairly quickly now, you may find your complaint has been barred by statute.

What are you seeing in the portfolios of the investors coming to you for help?

Mr. Hollander: What you find are people who should not have had all their eggs in the equity basket. The issue is a misallocation of assets.
Can you tell us about a current client?

Mr. Hollander: A woman, nearing retirement, came into funds, has an income but intends to retire in a few years. She goes to see a discretionary portfolio manager (has discretion to make investing decisions without consulting the client). All the money is put into small-cap stocks. In the debacle we’ve just seen, if the banks are down 40 per cent, the small caps are down by 80 per cent. And in some cases, there is no bid (no one wants to buy them).

How often do you look at an investor’s complaint and find it’s not legitimate, that his or her losses were in line with the correct set of benchmarks and thus not out of line?

Mr. Hollander: I would say that two or three [prospective clients] in 10 think they have a claim, but don’t.

Mr. Geller: This immediately begs a second question - is it a claim which, on a financial basis, makes sense to proceed with?

So, how do you decide on a dollar basis?

Mr. Geller: If somebody’s talking to me about $30,000, $50,000, $70,000, then we have real concerns about the price efficiency.

So we’re talking at least six figures?

Mr. Geller: Yes.

You’re both paid on a contingency basis for the investor cases you handle - how does that work?

Mr. Geller: Essentially, it’s payment upon result, although clients can be asked to pay out-of-pocket expenses. There’s a [base] rate of 30 per cent [of the settlement].

Mr. Hollander: Most lawyers require a fixed fee to determine whether or not they like the case. We call it an investigatory retainer. The range would be $2,500 at the low and, so far, $10,000 at the high end.

What percentage of cases are settled before trial?

Mr. Hollander: In my own situation, there have been four trials and four abandoned cases on about 70 cases that I initiated. The rest were settled for financial compensation that some clients would have said was fine and some clients would have been left unhappy, but at least it was worth their while.”

With a settlement, how many cents on the dollar can the client expect on average?

Mr. Hollander: It’s a huge range. I’ve had cases where the settlement has been 200 per cent of the loss and I’ve had cases where it was 10 per cent of the loss.

What are my chances of getting a settlement on my own, sans lawyer?

Mr. Hollander: Remote. Occasionally, we get calls from people who say, “This is what they’re offering, should I take it?” That has happened.

Orginally published in by Ellen Roseman in the Toronto Star on April 5, 2009

Hugh Lissaman, a Toronto lawyer specializing in stockbroker negligence, finds his caseload goes up when the market goes down.

Harold Geller, an Ottawa lawyer, is working on a case involving the sale of Olympus hedge funds.

Last year, TD Waterhouse Canada was fined $2 million by the Investment Industry Regulatory Organization of Canada and BMO Nesbitt Burns was fined $300,000.

Both firms were found to be selling these high-risk products without ensuring investors could handle the risks.

The parent company, Norshield Asset Management, was forced out of business in 2005.

So how do these lawyers decide if a case is worth pursuing?

Lissaman asks investors to drop off all their documents - such as the new account application form, monthly statements and any financial plans - before making a decision.

He looks for a mismatch between what the documents say and how the investor’s savings were handled.

Geller likes to look at the process that financial advisers go through before recommending investments.

Did they take the time to know a client? Did they do the proper due diligence on the suitability of their recommendations? Did they warn about the risks of an investment?

And when told about important changes in a client’s personal circumstances, did they review the portfolio and make changes as needed?

“Almost every financial adviser gives a process guarantee,” Geller says at his website, www.financialloss.ca.

Because of the process guarantee, a financial adviser can be expected to create a personalized paper trail.

In the absence of a paper trail, clients have a legal advantage - as long as their stories add up.

Geller spends time grilling people, as if he were a defence lawyer doing a cross-examination.

“Some clients tell me what they want me to know, but won’t answer my questions. They will be terrible witnesses because there’s a question of credibility,” he says.

Both lawyers will work on some cases on a contingency fee basis. (This means you can pay them out of the proceeds if you are successful.)

Lissaman usually hires an expert to calculate what a claim is worth. He asks clients to cover the cost in advance.

There’s a science to deciding on your losses. You can’t always ask for what your investments were worth at the height of the market and what they’re worth now.

The minimum threshold for proceeding with litigation is a loss of $150,000 to $200,000, the lawyers say.

There’s usually a day of pre-trial discovery for the plaintiff and a day for the defendant. That’s not too onerous.

You will have opportunities to settle along the way, but you’ll have to compromise. It’s not realistic to expect 100 cents on the dollar without a trial.

Besides paying for a lawyer’s hourly fees and disbursements, you have other costs to consider - your own time, stress and the risk of being asked to pay for the other side’s legal fees.

“There are both hard costs and soft costs,” Geller says.

“If you weren’t prepared to gamble on your stocks, then why are you prepared to gamble on a lawsuit?”

It may be easier to swallow an investment loss and move on, hoping to be smarter the next time.

This wraps up my Sunday series on investment advisers, which started last December.

Next week, I start a new series on cutting your energy costs.

eroseman@thestar.ca

Orginally published in a financial industry publication, Advisor.ca on April 7, 2009

As the market turmoil continues, advisors again have an opportunity to demonstrate their value. This opportunity should not be missed - volatile times are when clients look to their advisors for proactive advice. What’s more, advisors also have an opportunity to avoid the obvious, foreseeable negative result of actions made by clients who are spooked into crystallizing their losses.The absence of proactive advice during times of volatility is a major complaint that comes up in advisor negligence regulatory complaints and legal actions. The common refrain, “if only my advisor had reviewed my financial plan when my portfolio value was dropping…” is the chorus playing during most complaints and actions. Client perception is that the advisor did not review the plan with them because the advisor knew he or she had failed. This lack of contact, sometimes combined with newsletter communication that contradicts the news they see (with advice or recommendations to invest more) seems insensitive and out of touch.

Most advisors, though, have prepared clients for the market risk and volatility we are witnessing. Admittedly, there are many market risks. Recently, two particular risks that have affected client holdings are currency risk and sector risk.

With swings in the comparative value of the Canadian dollar, the value of non-Canadian dollar investments has fluctuated significantly. For clients whose financial strategies are not based on market timing, this volatility can seem like a very significant risk.

As for sector risk, the massive swing in the commodity sector and financial investments is compounded in many cases by the high degree of similar sector holdings among certain mutual funds. This can result in significant market and sector concentration risk.

Advisors who have clients with currency or sector risk should or will have specifically canvassed clients with exposure to these risks and addressed them during the planning process. These advisors will also have warned their clients, specifically, in plain English and in writing, to anticipate significant market volatility. The risk and volatility that are now so predominant have long been anticipated.

All advisors know a bull market is defined, in no small part, by the contrast of bear markets that bookend each sustained growth period. All advisors also know that markets have cycles, complete with low and high points. The good advisors have prepared their clients for where we are today by establishing plans that anticipated this volatility.

Providing risk and volatility advice along with education are two key parts of the advisory role. Clients turn to advisors to ensure that the investments in their portfolios all have suitable risk and volatility parameters.

Advisors, in turn, do not guarantee results; they guarantee that a professional planning process occurs for each client. It is the “know your client,” due diligence, suitability and review planning cycle that are guaranteed. Thus, advisors who have done their jobs are in an excellent position to politely remind their clients, and reassure them, with an “I told you so,” if needed.

The “I told you so” comment is not a point of pride; it is a factual statement, intended to reassure the client. The advisor who can reassure clients with a timely, factual reference to an informed and implemented financial plan is the advisor who has proven his or her value. This sort of reassurance in good times is easily dismissed as pride and boasting. Factual, timely reassurance in harsh times, though, is appropriate and professional.

Why now? Because clients are reading the news - reporting that is often extremist. Clients have reason to be fearful. Some will receive monthly and quarterly statements that may cause deep concern. An advisor who proactively reaches out and explains that the risks and volatility were all planned for in the client’s portfolio helps to illustrate the importance of a professionally designed plan. Clients may even be reassured by the robustness of the planning exercises they went through, the investment portfolio they’re holding and their advisor’s professionalism.

Consider, in contrast, the known risks. It is axiomatic or evident that investors follow market trends, buying in rising markets and selling in falling markets. The institutional and sophisticated investors are ahead of this curve, while average individuals, left on their own, are behind the curve - clients who lack a professional plan and faith in their professional are investors who are reasonably likely to be spooked by the unavoidable evidence of risk and volatility. If not reassured, clients will likely act irrationally and blame the advisor for the circumstances. Regardless of client actions, it will seem like these circumstances destroyed the professional’s planning, exposing investment suitability problems.

Clients left on their own are the proverbial loaded shotguns. Advisors can disarm those shotguns by proactively reviewing their financial planning exercises and carefully setting objectives for foreseeable circumstances. “Staying the course” is a viable option but the last bear market clearly showed us that some clients will not accept this option; they will not face further losses.

Clients who can no longer accept the volatility in an investment should make a decision to either stop the losses or make a planned transition to less volatile investments.

If there is a lesson to be learned from this stage in the last bear market, it is that advisors should act now - this is when clients need you most. They need your wisdom, your counsel and your help in making significant financial decisions. If you’ve left them on their own, do not be surprised if they act irrationally and blame you. If reassured, though, do not be surprised if their trust in you grows

Orginally published in a financial industry publication, Advisor.ca on November 20, 2008

The basic duties of an MFDA or IDA advisor may seem obvious to anyone familiar with the association rules and regulations, or the Canadian Securities Course, but these duties are routinely challenged by lawyers when we defend advisors before their regulators and courts. The lawyer’s purpose might be well intentioned (protect their client), but it is contrary to the investment industry’s interest in having strong consumer protection rules.

Earlier this year, however, the Ontario Securities Commission clarified the basic duties of an MFDA or IDA-licensed financial advisor. In large part, this decision adopts for Ontario the duties formally recognized by the Alberta Securities Commission in 2002.

The OSC’s decision, Daubney and Littler, summarizes the twin advisory principles that are known as the “Know Your Client” Process (KYC) and suitability analysis.

The KYC process comes from OSC Rule 31-505, Conditions of Registration (1999), which requires an advisor to make enquiries about each client as “are appropriate,” given the nature of the client’s investments, and the type of transactions being effected for the client’s account, to ascertain general investment needs, objectives and the suitability of securities bought by or sold to the client.

In a 1995 decision, E.A. Manning Ltd., the OSC recognized that the KYC process and suitability analysis requirements “are an essential component of the consumer protection scheme.” It also said both were basic obligations for any registrant. “Failure to comply with them is an extremely serious matter.”

The OSC stated that the KYC process includes examination of the following “essential facts and characteristics”, for each client, including their:

• age;
• assets, both liquid and illiquid;
• income;
• investment knowledge;
• investment objectives, including plans for retirement;
• risk tolerance;
• net worth;
• employment status; and
• investment time horizon.

The KYC process is not the completion of a KYC form. KYC forms are a starting checklist; the advisor must make detailed enquiries about their client’s circumstances to ensure that suitable investments are recommended, and to assess their client’s likely reliance on the advisor’s advice and recommendations. Furthermore, the client’s KYC forms must be amended whenever the client’s circumstances, investment objectives, or risk tolerance change.

Need help keeping on top of this? Click here to read KYC: Links and resources from Advisor.ca.

The advisor has a duty to know their products, including both those they recommend and those they do not recommend to the client. This is adapted from Alberta Securities Commission advisory standard - for an advisor to “know” the product, they must carefully review and understand its attributes, including the associated risks of securities they consider recommending.

The OSC uses the long-recognized, three-stage suitability analysis where an advisor is obliged to:

a) use due diligence to know the product and know the client;

b) apply sound professional judgment in establishing suitability of the product for the client; and

c) disclose the negative and positive aspects of the proposed investment.

Furthermore, where the advisor claims to be a “financial planner” or to offer “financial planning,” the advisor has a duty to discuss appropriate asset allocation and appropriate return objectives.
More Legally Speaking…
• Botched beneficiary designations
• The OSC states the obvious
• Volatility, prepared clients and opportunity
• The KYC process
• Professional networks, service and liability
• Bank insurance, consumer rights
• E&O claims - time to circle the wagons
• TPAs: helpful product or potential nightmare?
• Goodwill undone
• Legally speaking: When changing dealers

 
In this discussion, the advisor must take into account the client’s time horizon and risk tolerance. These are closely related. A failure to understand the client’s time horizon when assessing the client’s risk tolerance can be a fatal flaw in the advisor’s suitability analysis.

If a client seeks safe investments in their retirement years, then financial plans must prioritize this objective.

Furthermore, an advisor has a positive duty to make appropriate recommendations and make certain that clients understand the potential risks and returns. The advisor has a duty to assess, from an objective viewpoint, a client’s ability to ride out bad markets to recoup market losses.

Finally, the OSC laid to rest the common defence by advisors that clients are responsible for their own unsuitable investments. The Ontario Security Act places the duty of care on the advisor, “who is better placed to understand the risks and benefits of any particular investment product.” Unequivocally, the suitability analysis duty cannot be transferred to the client.

With this authoritative statement of basic advisory principles, in many ways a mere restatement of material found in the Canadian Securities Course, and a restatement of earlier Ontario Court of Appeal decisions. a clear line has been drawn for advisory, compliance and dispute-resolution purposes.

Orginally published in a financial industry publication, Advisor.ca on April 7, 2009

The Know Your Client (KYC) process is commonly misunderstood.

In general, the misunderstanding is born of the financial advisory and planning services’ history of being purely sales driven before it turned into a true profession. The misunderstanding is easily corrected, and should be, since correction is likely to result in more effective client communications, improved service and decreased liability risk.

The misunderstanding is four-part:

• The KYC obligation is not a single form, step or activity. KYC obligations are ongoing and should be part of an in-depth process. The KYC form is simply a “tip of the iceberg” snapshot. Completing a KYC form alone is not enough to prove that an advisor or planner is meeting his or her KYC obligations.

• Meeting KYC obligations requires ongoing and dynamic investigation of a client’s KYC attributes. The KYC process is multi-part and involves rigorous examination of information provided by the client.

• Some “mandatory” KYC forms used by IIROC and MFDA dealers are misleading to both the client and the professional financial advisor or planner. The KYC process requires holistic planning. Limiting the planning process to assets under administration or the products offered by the dealer is a breach of acceptable standards. A representative may be required to complete this form for the dealer’s use, but completion of this form does not provide meaningful evidence that advisors have fulfilled their KYC obligations.

• Life insurance agents must also undertake a meaningful examination of KYC attributes much like that required of an MFDA or IIROC representative.

The KYC process should include diligent and systemic efforts to gather all available information about the client’s assets, liabilities, routine expenses and foreseeable potential expenses that are often associated with life-cycle events.

The KYC process should involve an investigation of the client’s life-cycle hypothesis - foreseeable events and the client’s potential to accumulate net worth and wealth as he or she ages. A newly licensed professional (doctor, lawyer, accountant), for example, may have lower income than a unionized production worker or an oil rig worker, but the licensed professional’s ability to accumulate net worth is likely to be materially greater. So, too, wealth accumulation for your clients may be highly dependent on their health unless they hedge using appropriate insurance policies. Without consideration of a client’s unique life-cycle hypothesis, meaningful advice and planning cannot occur.

Collecting KYC information must involve a stepped process to educate all but the most sophisticated clients. It must build a communications bridge using language common to both advisors and clients.

The need for an educational process is self-evident: in almost all professional advisory relationships, the professional inherently knows more about the KYC process and planning. The professional financial advisor or planner understands the six-step planning process, the service and products available, the risks, benefits, complex concepts and highly specific industry jargon. All but the most sophisticated clients must be assumed to have limited relevant knowledge, education and experience in this respect. In order to obtain the client’s meaningful participation, the professional financial advisor must educate the client about the six-step planning process and the KYC process in particular.

Building the communications bridge is a key element in this education. KYC forms, engagement letters, information materials and disclosure forms used by most, if not all, companies are undermined by the use of industry jargon and subjective terms.

Two examples come to mind. One comes from the MFDA, the other from an IDA (now IIROC) case:

• What do the terms “diversified,” “balanced” or “long-term” mean? I have heard senior industry professionals testify under oath that a diversified holding can be composed of leveraged, sector-specific funds and that “long-term” means two years or more. Did witnesses believe this? Would any reasonable client agree? Would a judge buy this hogwash?

• What does “moderate risk tolerance” mean? In my opinion, I have a moderate risk tolerance. I would risk more than 10% of my present assets by investing in equities or mutual funds with equities components. I have an ongoing case, though, in which a major IDA dealer thinks a judge will agree that a recent divorcee who earns $40,000 each year, has $350,000 net worth with $250,000 of it invested in only one equity sector - 70% of which is invested in only one stock (which has a 100:1 price-earning ratio, no less) - is invested in a “moderate risk” portfolio. Who is he kidding? If you have a dealer who allows this, you should be concerned about whether or not your compliance department is doing its job.

Professional financial advisors and planners can overcome communication barriers during the KYC process by asking clients, in plain English (or French), what the different terms mean. A discussion of “risk” should begin with the fundamentals - that stocks are inherently risky, as are the mutual funds that invest in stocks; all money invested in stock markets is at significant risk, any company could go bankrupt, and the ownership interest of equity could be lost. That is where we start. Next, the discussion should examine the difference between highly regulated and capitalized shares (Canadian bank stock, for example) and highly leveraged shares (from, say, many mining companies), or the significant difference between those stocks and government GICs.

Related articles:
• Part 1: Second opinion seekers
• Part 2: Letters of engagement and your get out of liability free card
• Part 3: Your KYC process and other tools
From the series: Avoiding liability in uncertain times, by Harold Geller.
The bottom line is that a client needs to be educated about the difference between “return on capital” and “return of capital.” The client must be quizzed to ascertain his or her true risk tolerance, not just asked an opinion.

If a client were claiming to prefer “moderate risk,” the professional financial advisor should engage in an investigation to determine how much volatility a client would withstand in his or her portfolio (5%? 10%? 20%? more?) before running for the hills during an extreme market downturn (it happens in a regular cycle). Failing to put “moderate risk” into objective terms is a missed opportunity and a failure to communicate.

A meaningful KYC process requires professional financial advisors or planners to think beyond their own silo of products or services. An MFDA- or IIROC-regulated representative must consider the client’s risk of exposure to loss of income, loss of work or loss of the ability to work. Insurance agents conducting their own KYC process before recommending a universal or whole life policy must consider this same issue. Failing to consider all foreseeable potential downside events exposes the professional financial advisor or planner to meritorious negligence claims and regulatory complaints.

Two final points:

• Show your work. When clients experience a loss, professional financial advisors and planners should be able to prove that they met all reasonable standards of care and reasonable client expectations by making good on their process guarantee. The documents that are created during a meaningful KYC process are an essential part of proving fulfillment of this process guarantee and a powerful tool for responding to client concerns. If questioned, you can share your documents with clients to show how and when they bought into the planning process and that they were fully informed and fully engaged when they did so. Most clients are satisfied once their memories are refreshed.

• The KYC process is a dynamic and ongoing process. Your clients must be educated about what “material change” is and why you must be informed promptly when potential or existing material changes occur. You must educate them about why this is so important and what it means to their financial future. Regardless of whether they “get it,” follow up with them regularly (at least once each year - an absolute minimum) to ensure you have up-to-date records.

Orginally published in a financial industry publication, Advisor.ca on March 31, 2009

Part 2: Letters of engagement and your “get out of liability free” card.This three-part series, advice that reflects lessons learned during past economic downturns, is written to help advisors avoid risk during these turbulent times.

Professional financial advisors and planners beware. Clients look to you for advice and rely upon what you recommend. While there are the rare “rogue” clients, most clients turn to professionals because they don’t have the skills to create their own financial plans or the interest to learn how to undertake holistic planning exercises. Most clients are remarkably naive and overly optimistic when evaluating risk and options. They are quick to rely on assumptions of success unless confronted with the unknowns their assumptions are based on and the risks that underlie these assumptions.

See also: Part 1, second opinion seekers.

The trap for financial advisors and planners is that, when expectations are not met, most clients are quick to judge. Most clients who judge, though, judge harshly with the benefit of hindsight.

As lawyers who work with investors, financial advisors and planners, we have observed the effectiveness of some key tools advisors use to avoid negative client conclusions and escalation of complaints.

The most basic tool was learned by most people in high school math classes: show your work. Without written records or a process guarantee to prove how the professional financial advisor or planner came to his or her conclusions or fulfilled his or her obligations, responding to client concerns, let alone to a formal complaint, is difficult.

If a dispute is reduced to weighing what happened in the absence of independent contemporaneous written records, the client is unlikely to be persuaded by the professional’s recounting his or her version of events. So, too, if the matter escalates to a complaint, the regulator, licensing organization or a court will likely rely more heavily on the client’s version of the story.

The first step is keeping a contemporaneous record of all oral and written communications with the client. Where possible, and promptly following meetings or phone calls, confirm your understanding of oral communications in writing and send this to your client. This shows your professionalism and avoids misunderstanding. It also plays an important role in dispute resolution. Years later, the client may have a different recollection, but most are persuaded when shown a letter or e-mail confirming the conversation.

Engagement letters are perhaps the most important tool for avoiding negligence claims. Work with your expert lawyer and your compliance department to draft a template engagement letter for your clients. These should be written contractual exchanges, in which the professional financial advisor or planner and the client confirm they understand the obligations of each party and understand which services and products are excluded or not part of the service relationship - either because the professional does not offer the products or services, or because the client has declined to make use of the services available.

Ideally, an engagement letter is used at the commencement of the advisory or planning relationship and is updated on a regular basis thereafter. Updates need only to confirm the extent to which prior engagement letters are still in effect and any obligation changes or changes to the list of included products or services. Professional advisory and planning relationships evolve; the contractual records related to the relationship should evolve as well.

Related articles:
• Part 1: Second opinion seekers
• Part 2: Letters of engagement and your get out of liability free card
• Part 3: Your KYC process and other tools
From the series: Avoiding liability in uncertain times, by Harold Geller.
It is never too late to start using engagement letters in your practice or with a particular client. If you wish to introduce an engagement letter after providing financial advice or planning, a simple explanation is recommended. It is reasonable to expect that, as a professional, you will continue to upgrade your practices and services; in fact, this is a hallmark of professionalism. The trick is to explain to your clients directly the benefit of this improvement in your practice. You are making an opportunity to ensure they know:

• the services and products that you are qualified to offer;
• the services and products that you are comfortable offering;
• the limitations of your services and products offered; and
• your understanding of the services and products that they wish you to consider when providing plans and financial advice.

It is best to make clear which services and products you are not considering or offering when providing your financial advice. Ideally, you should make reference to qualified persons who can offer the excluded products or services or to another place to which the client can get a referral.

A professional is obligated to make his or her limitations clear. Overextending your service offering and promising a process guarantee is highly risky. If you have led a client to believe that you are qualified to provide advice or plan using services and products that are beyond your core competency, you are courting a client complaint. On the other hand, a forthright admission of your limitations bolsters credibility - a case of sales optics directly reflecting the best professional standards.

Letters of engagement also should contain the following information:

• the professional’s process guarantee;
• names of the parties;
• contact information including phone, e-mail, fax, address, etc;
• the services to be provided;
• client obligations (for example promptly reporting enumerated KYC information);
• advisor obligations and planned activities;
• how facts and assumptions will be confirmed;
• how recommendations will be developed;
• how recommendations will be presented;
• how instructions will be provided and confirmed;
• how the advisor or planner will be compensated;
• how either party can end the contractual relationship;
• recommendations for working with relevant professionals; and
• privacy information, conflict of interest disclosures (if any) and corporate relationships.

The key to a successful engagement letter is clear communication. Avoid industry jargon. Hint: You’re probably a jargon junkie if you’ve used and abused the Emperor with No Clothes parable to draw comparisons.

In any event, the goal of an engagement letter is to avoid misunderstanding and, in the worst case, to provide unequivocal support for the advisor’s recollection of an event if a dispute arises. To achieve this goal, the engagement letter must be complete and easily understood by the client. The best engagement letters can be understood by a teenager. The worst engagement letters appear to be written by a lawyer or an out-of-control compliance officer.

Thus, when reviewing or creating an engagement:

1. put it in writing;
2. use plain language;
3. keep it simple;
4. make your role clear; and
5. make it clear that the client has a role as well.

A professional financial advisor or planner who is aware, cautious and uses engagement letters is in an excellent position to respond to unreasonable expectations, especially when recollections are enhanced with flawed 20/20 hindsight.

The more the market falls, the more some “professional” financial advisors and planners recommend the buying and holding of volatile equities.

Many professional financial advisors and planners fancied that Baby Boomers possess the need or desire for high risk equities. Many of these professional financial advisors and planners recommend inappropriately high exposure to risk in order that their clients can be “first” in their returns or, at least, placed very high in short term return rankings.  Many of these advisors and planners were prepared to gamble their clients’ savings on short-term volatility called “growth” and “gains”.  These advisors and planners failed to recommend substantial investment in secure and guaranteed modest return investments such as GICs, CSBs, term deposits and other low risk investments.

Feeling like a lemming? Feeling like you, as a retail investor, are the last to know about developments in mutual funds and stock markets?  Feeling like the exorbitant fees you paid to your “professional” financial advisor or planner were paid for fancy offices, lunches, lectures etc, and not for sound financial advice and plans?  If more “professional” financial advisors and planners had admitted the limit of their knowledge and skills then you would not be in the mess you are in.  They gambled with your money while promising a careful and conservative planning process to secure your future.

What are you to do with the financial system seeming to be inches away from collapse?

If you were caught in the financial nightmare of 2007/2008, then you may be wondering “how did I get here?’

Many Baby Boomers and retirees who have become familiar with the violent ups and downs of the stock market are wondering why their financial advisors and planners recommended (or at the very least acquiesced to) massive exposure to the stock market.  Many Baby Boomers were not warned about the potential volatility of investing in equities (stocks) nor of the inherent and significant risk associated with these investments. 

Perhaps only in hindsight did the average investor understand what was behind the financial advisors and planners Wizard of Oz like curtain: pull back the curtain and there is a very average person with fancy gadgets that make the financial “wizard” seem much grander and wiser than the reality. 

Only after the onslaught of the long expected bubble burst did the average investor learn that financial advisors and planners use words like “balanced“, “conservative“, “growth oriented“, “diversified” but really mean “gamble”.  What each investor should have been told is that every dollar “invested” in the stock market is a gamble.  Every dollar gambled is potentially lost.  Every gamble in many years into a booming stock market, is a gamble on when the bubble will burst. 

When the gamble fails, when the bubble bursts, when the curtains are drawn back by Toto, then suddenly GICs don’t look so bad.

To add insult to injury, some professional financial advisors and planners are recommending high risk strategies such as “now is a good time to invest” and “avoid selling low and moving to security”.  In the face of such advice the investor is faced with a dilemma, going against the continued recommendation of their professional financial advisor to “ride the market” and gamble, or to appropriately address their remaining investments to reflect their

Many Baby Boomers are risk adverse.  They have paid their dues, saved their dollars, foregone some luxuries to reach their long term objectives.  As they approached and entered retirement, their risk tolerance and corresponding comfort with volatility reduced.  While they might have envied the returns of others who knowing gambled in the stock market and benefited from the rising tide of a stock market boom, their goals remained firmly focused on the security their financial advisors and planners promised.

These investors were prepared to pay enormous fees and commissions so that they could benefit from the professional expertise of their financial gurus.  Few gurus promised “crystal ball” successes in the stock market: only the truly novice would fall for such a results guarantee.  Most of these gurus provided ”Process Guarantees“; that is, guarantees that the professional financial advisor and/or planner would follow a strict and vigorous investigatory and planning process to minimize the Baby Boomer’s exposure to risk while maximizing safe investment returns.

Unfortunately, when the financial tide went out in 2008, the Process Guaranteesof many professional financial advisors and planners were shown to be manifestly sales promises lacking professionalism, expertise and/or credibility.  Their clients’ have finally realized that those professional financial advisors’ and planners’ expensive cars, homes and toys were bought with the commissions paid and were not earned for valuable work.

At Geller & Associates we work with you to put your money back in your pocket.  We help you to learn what was required of your professional financial advisors and planners by their professional licensing and standards.  We help you to understand how they failed you, if they failed you.  We help you to understand why your investments and plans failed.  We help you to get your money back.