When Mr. and Mrs. Shnig retired they were worried that their advisor couldn't help them structure a retirement plan that would provide them with enough money to continue their lifestyle through retirement. So, they moved their account to another advisor who they say promised he could do better than what they were earning and could ensure they would have the required income through retirement.
Five years later, Mr. and Mrs. Shnig have lost money with their new advisor and they're now complaining that their investments were much more risky than what they wanted in their portfolio. The advisor and his dealer firm hold up a copy of the know-your-client (KYC) form, which indicates 25% medium and 75% high-risk as evidence that the clients wanted higher risk. But Mr. and Mrs. Shnig deny the accuracy of the risk tolerance provided in the KYC. They say they told their advisor that they didn't want and couldn't afford to lose any money, but their losses were as a result of the high-risk of the investments in their portfolio. They also complain that they were provided with regular income from their portfolio, which led to a considerable depletion of their capital. So, between the losses they experienced and the depletion of their capital, they will run out of money by age 75.
Will a copy of the signed KYC be sufficient evidence to support the dealer and advisor that this investment risk is what the Shnigs wanted? The judge and regulatory panel will hear the evidence.
What really happened? Mr. and Mrs. Shnig, like many clients, retired without having saved enough for their retirement. They didn't want to change their lifestyle and wanted to enjoy life in retirement while they were healthy. They told their advisor they needed a regular income stream during retirement. The advisor says that he told Mr. and Mrs. Shnig that if they wanted a considerable income, they had to invest in high-risk investments.
The advisor says that he warned them that if they invested in high-risk investments they could also lose their capital — and if they took too much money in income, they would deplete their capital considerably reducing their chances of having sufficient money for the rest of their lives. The Shnigs deny that such advice was provided and that the risks were explained. They say that if this was explained, and if they had been warned, they would not have taken these risks or spent their capital.
So, who will the judge and regulator believe? It will come down to the paper trail that the advisor has in his file. Does he have notes, emails or letters confirming, or any record of having warned the clients? If he does have such records, then he will be just fine. If he doesn't, the client is likely to be believed.
With the average age of the population increasing substantially, advisors must be alerted to clients who have not saved enough for retirement. These clients turn to advisors to help them solve their problem and advisors, hoping to help these clients while increasing their assets under administration, take on the challenge of these clients. However, advisors are not magicians. Clients need to understand that they dug themselves into the hole they're in and cannot expect the advisor to choose exclusively the winners among the many high-risk investments in hope of pulling them out.
As an advisor, you must be direct with these clients and explain to them that they may have to make some serious lifestyle decisions. It's only if the clients are prepared to step up and work with the advisors to reduce their expenses and try to increase their capital with perhaps part-time jobs that the advisor might be able to help them. However, if the advisors suggest that if the clients move from their previous advisor so they can get them the income they need for retirement, they're leading clients to believe that they are indeed magicians and can pull money out of thin air.