Certain clients understand their role in respect to their investments. These clients meet with their advisors regularly to share their concerns and challenges as well as their hopes and dreams. It’s from this dialogue that the advisor and client develop — and carry out — an investment plan together, while the advisor carefully manages the client’s expectations. This is what I refer to as an “engaged” client who understands that it’s his or her money — and that he or she plays a role in developing and carrying out the plan to meet his or her goals. But are all clients like that? Absolutely not.

When I explain to advisors their many legal and regulatory obligations, (see my previous Inside Track article, entitled Striped socks and knowing your clients), not the least of which is knowing their clients at every stage of their relationship, the advisors complain they have to chase down many clients just to meet with them to get documents signed. These clients are reluctant, to say the least, to share their personal/ financial information with their advisors; however, they’re the same clients who may have high expectations of their advisors. These are the riskiest clients for advisors because, one day, the client wakes up and begins to complain, saying, “I never hear from my advisor; he takes no interest in me and the returns have been disappointing.” At best, the advisor loses the client; at worst, the client sues if there are losses. These are the cases that need to be defended regularly in litigation or regulatory proceedings, alleging failure to know your client and to explain the risks of the product; perhaps it may even include allegations relating to improper discretionary trading.

So, what are you to do to reduce this risk? First of all, examine your own practices. What do you do in the first meetings with new clients? Do you ask open-ended questions and allow the client to talk? Do you listen and ask follow up questions, or do you do most of the talking? Many advisors do most of the talking at most meetings with clients, especially the first few meetings in which the advisor believes he/she is “selling” his or her services. In actuality, you’re better off using these meetings as a listening exercise rather than a speaking one. Assess the client; understand his or her goals; determine why he or she is dissatisfied with his or her current or previous advisor. Once you’ve done all that, then it’s time for you to talk.

During this process, advisors need to train their clients so they understand each of the advisor’s and the client’s respective roles in this engagement or mandate. If advisors begin to train their clients in the first meetings concerning these roles, then the client might understand that their goals may be better served if they actually communicate their goals to their advisors and meet with them regularly. Of course, this should then be put in writing in a letter of engagement.

It’s very difficult to change other people but it’s much easier to change ourselves. Your conduct during those first meetings with prospective clients will set the tone for the relationship and you may be able to engage better with prospective clients if they understand that they may be more likely to meet their financial goals if indeed they work as partners with their advisors instead of being absent.

You can take a horse to water, but you cannot make it drink. Even if you change your practices, there will always be those clients who insist that their money is the advisors’ problem and they continue to ignore the process. However, you should be able to ascertain who these clients are early in the process; at that point, it’s then your decision as to whether you will agree to work with these clients. If you take those clients on, you need to remember it may increase your risk substantially.