Like many brokers, you may have a special customer. He is probably one of your more active and profitable clients. His name is on your speed dial, and he gets the first call when there is important news, good or bad. You were at his daughter's wedding and his mother's funeral. When you changed firms, he came with you. This is the one guy you can count on to be with you through thick and thin. He may well be your best client.
He is also your most dangerous client.
Our law firm has represented brokers and firms for three decades, and we have seen the same scenario time and again: Brokers tend to drop their guards and cut corners with their best clients. When a problem arises, the client turns on the broker, and a troublesome case ensues.
Here are seven tips for making sure your best client doesn't turn into your worst nightmare:
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Update new account documentation. You may well remember how your client developed an interest in options trading (against your advice). Fine, now update the account card to correspond with the new objective. Explaining why a customer has short puts in her account is much easier when the form says “speculation” instead of the original “safety of principal.”
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Document your communication patterns. Phone records often don't show local calls. It's easier to prove the frequency of communication with a client if you write a letter every year noting the two of you often speak daily. Computer notes and e-mail follow-ups can help.
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Don't let unsolicited trades go unnoticed. Often your best customer comes up with ideas or strategies on his own. Make note of them in your file, or better yet, drop the client a letter saying, “We don't follow XYZ, but I am happy to buy it for you. I know you think it makes sense and have reliable information from another source.” Mark the ticket “unsolicited.”
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Keep your manager involved. If you have a customer who is an active trader, ask your manager to talk to the customer at least once a year. Your manager has a financial incentive to keep your best customer happy, too. If things ever turn sour, you'll need your manager's support. His or her backing and confirmation of your story can mean the difference between a ruling for the customer and one in your favor.
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Refer your customer to experts. Referring your best customer to an options specialist, a workout whiz, a tax expert or an annuities guru gives the customer the best advice, provides a new source for referrals and shows you work hard for your customer's benefit.
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Always observe the formalities. Specifically, don't drop a ticket until you reach the client. No matter what the customer would do if she were available, or how certain you are of that fact, nothing is worth risking your license. It may be tempting to make an exception for your best customer, but the one time you take that risk, you could lose your license.
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Avoid all off-book transactions. Brokers usually only discuss outside business opportunities with their very best customers. Off-book transactions are always a bad idea, regardless of whether you are compensated. Firms prohibit off-book transactions for good reason (the deep pocket always gets sued), but they still happen and usually with the best customer.
By maintaining your objectivity, you will stay out of trouble with your best — and most dangerous — client.
David Bartholomew is an attorney at Keesal Young & Logan in Long Beach, Calif., where he represents brokers and firms in litigation, regulatory and employment matters. He can be reached at [email protected].