I'm handling and making recommendations in an account for an elderly client who has several million dollars in assets.
The account is overly concentrated in one sector of equities. Despite the fact that the account has made money as a result of my recommendations, the client has called and said she is satisfied with the profits and wants me to go to cash.
I think this is the wrong way to go. The client insists. What should I do?
Your “elderly” client clearly has her wits about her and is smart enough to head to the casino exit while she is ahead of the game. You may think that her analysis is shortsighted, unwise or made out of fear, but it is hard to second-guess a client's declaration that she wants to capture profits and move on.
What is your alternative? Jawbone the client with your research and prognostications that her concentrated equity position will do even better than what has satisfied her? Will you guarantee that and put the wallets of you and your firm behind the guarantee? I think not. At some point, in any event, when the client “insists,” that becomes an order and you must execute.
I take it your hesitation stems from the fact that the client will at some point, when she sees additional gains foregone after the sale, become angry with you that you did not talk her out of her precipitous decision.
If the client is the type who would attempt to rewrite history, record your reservations clearly in your notes, or even in a letter to the client if you feel that strongly. Mention the dilemma to your manager and seek his guidance.
From a liability perspective, should you follow the client's insistence here — there is no real liability for you. The client would need to prove that you should have substituted your judgment for hers, because her judgment was obviously flawed (or impaired); that is pretty much impossible to prove in this context.
In the end, this client is doing you a favor by forcing you to leave this “overly concentrated” one-sector investment, for which you obviously have developed quite a fondness. That is where the liability would have arisen — when the business cycle inevitably turned the position against you.
Paduano & Weintraub
There is only one thing for a prudent registered rep to do in this situation: Follow the client's directions. This is not a managed account. The rep makes “recommendations” which the client either follows or does not. Never lose sight of the fact that the account and the money belong to the client. A rep can rarely, if ever, go wrong by following the client's directions — provided there is adequate documentation that the rep is following the client's directions — even if the rep disagrees with the client.
This particular situation is a problem waiting to happen. First, the client is elderly. It is very hard to justify a loss in an elderly client's account. Elderly clients do not have the earning capacity or the time frame in which to recoup losses, and most arbitration panels are very sensitive to losses sustained by elderly clients. Second, this elderly client's account is overly concentrated in one sector of equities. It would be very hard to justify having an elderly client in a concentrated segment of the stock market. Getting the client out of a concentrated position and into cash with profit avoids the potential for losses due to a concentrated position and unsuitable portfolio mix.
Let's look at the possible scenarios. Yes, if not liquidated the account could grow and the client could earn more profits. If you go to cash, it would, at worst, represent a lost opportunity, but one that the client has said she is willing to forgo to lock in profits now. The bigger risk, however, is that you talk the client out of going to cash, you keep the concentrated equity position intact and then the account begins to lose money. Such advice to the client would be very difficult to justify in hindsight.
It is far simpler to follow the client's wishes. Lock in the profits and send a short letter to the client confirming his or her wishes. In that letter, quantify the gains in the account and, if you disagree strongly enough with the client, politely state that the liquidation is against your recommendation. One simple letter, with a copy in the file, accomplishes the client's objective and protects the broker from any complaint that the sale was the rep's recommendation.
Having handled scores of cases involving elderly clients and reps that fail to follow the client's directions, I am always surprised at how rarely a rep will take the time to prepare a simple letter stating what is being done in the account, why and at whose direction, and confirming the amount of gain that is being realized on a sale in the account. In a case like this, one letter keeps everyone happy — and keeps the rep out of trouble.
Shustak & Partners
San Diego and New York
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