There are many ways advisors can stay out of court and avert regulatory attention, but scrutinizing your prospective clients carefully to avoid picking the wrong clients will help you reduce your chances of getting sued.

Here is an example of how this can happen: You attend a dinner party hosted by your favourite client, who raves about how great an advisor you have been over the years. Another guest at the party, Dillon, listens intently because he has been unhappy with his previous advisors and is looking to make a change; Dillon asks you for your business card, expressing an interest in meeting with you, and you happily oblige and ask him for a business card as well. You tell him you will call on Monday.

You leave the party feeling certain that Dillon will move his business to you after receiving the endorsement from the party host. Like most advisors, you are distracted by the opportunity and not focused on the risk, so you don’t turn your mind to whether Dillon is the right client for you.

You call Dillon on Monday and he expresses his gratitude for having called him so quickly. You dive into your sales pitch about your practice, your team, your service and how and why Dillon should move his business to you. You do not consider asking the key questions to canvas Dillon’s experiences with his previous advisors, the key and simple questions being:

  • Why are you leaving your advisor?
  • What were your experiences with your previous advisors?
  • What are you looking for in your next advisor?

So, you don’t learn that Dillon has moved to another advisor more than once, sued previous advisors and complained about them to the regulators. You don’t learn that he’s the type of client who is never satisfied with his advisors.

If you had asked, you would’ve learned that Dillon’s first advisor lost him so much money in higher-risk investments (Dillon told this advisor to take these risks) and the second one was too conservative and made him no money (Dillon told the advisor not to take risks with his money).

If you had asked him what he was looking for in his next advisor you would have learned that Dillon expects high returns with no or little risk. However, that doesn’t reflect the world we live in, so Dillon will never be satisfied.

Each advisor who served Diilon got into trouble. Why? Because they took Dillon’s word for what he said he wanted and never asked about previous experiences with advisors to identify these potential issues. This client, like many others, will never be satisfied; never thank you; and never refer other clients to you. Instead, these clients sue advisors and complain to regulators.

Thus, you need to scrutinize prospects — even those referred to you by your favourite clients — and send them away if they pose too many risks. So, in addition to the general aforementioned questions, it’s best to drill down and ask all prospects the following questions before accepting them as clients:

  1. How many advisors have you had in the past?
  2. Why did that/those relationship end? (Ask more questions if answer is vague.)
  3. Did you sue or complain to the regulator? What was the outcome? (Does the client seem happy that the advisor got in trouble or had to pay the client back?)
  4. What are your goals now concerning your account? (Assess reasonableness.)
  5. Have your goals changed since you worked with the previous advisor?
  6. What are your main complaints about your previous advisor(s)?
  7. Before we work together, can you show me your portfolio? (This will indicate whether the client is going to be transparent with you or whether he or she is hiding information; it will also indicate if the portfolio seems balanced and diversified or seems off side.)
  8. What is important to you in respect of your relationship with your advisor?

Listen closely to the answers to ensure you ask important follow-up questions to discover the truth. Don’t commit to the client in that first meeting unless you are certain that the failure in the prospect’s previous relationships with his or her former advisors is unrelated to the client’s unreasonable expectations or bad behaviour. If you think you can manage this client, be very careful to manage expectations up front and gauge the reaction. Managing the client’s expectations and documenting everything will also manage your risk. It’s difficult to turn away business, but you may need to if the client poses a risk to your licence, reputation and causes you too much stress.