Who would have thought that a piece of regulatory paperwork could rank among an advisor's best friends? But it's true.
The piece of paperwork in question is the client account form. It's important because the financial services industry relies on verbal authorizations of transaction execution orders from clients. You know the drill: You explain a product in a phone call or a face-to-face meeting. The client likes the investment and tells you, “Go for it.”
The problem arises months or even years later when the client might decide the investment was not suitable for his investment aims. Or maybe he contends you didn't explain the risks. Most advisors try to settle such disagreements in a mutually agreeable way. But sometimes the cases end up in arbitration. It's in these cases that the client account form earns its friendship. As the only written document most advisors have describing the client, it is the centerpiece of defense at arbitration.
Unfortunately, this document's importance is misunderstood, and many advisors do themselves a disservice by not maximizing its protective qualities. Here's a guide to doing so.
General Information — Name, address, birth date, social security number, telephone number.
This section is straightforward. No need for any special detail.
Residence — rent or own?
This shows you that if your client owns a home he is not ignorant in all types of investments. He would have some idea of the liquidity and economic risks involved in owning real estate. If you sold him a real estate limited partnership or a REIT and it had decreased in value, your client could not claim that he was unaware of the risks in real estate.
Legal residence, if different from mailing address.
Having more then one home is an indication that the client has additional assets.
This shows the type of knowledge your client might have pertaining to investments in certain industries.
Client-stated annual income. Client-stated net worth exclusive of family residence and estimated liquid net worth.
These will show what portion of the client's assets is in a specific investment, which can help establish how damaging (or not) a client's actions were to the client's overall financial health.
Is the client on a fixed income? Yes or No.
When your client checks this box you are made aware that he has no additional income other than his investments, pensions and/or social security, and that he should be a conservative investor. This means you should be extra careful when selling him growth or speculative investments. If your client insists on buying these investments do the following:
Remind him that he is on a fixed income and that if the investment loses money he will not be able to replace the loss.
If he still insists on buying the investment then date and time stamp the conversation in your day timer.
Draft a letter stating you do not recommend that he buy the investment. Ask him to sign it. If he will not sign the letter, then at a minimum send him a letter about this conversation. Keep a copy of the letter in his file.
After he purchases this investment, contact him on a regular basis to discuss it. Is he satisfied with the performance of the investment? If it goes down in value, ask him what he wants you to do. Always document these conversations in your day timer.
Is the client an officer, director or 10 percent stockholder in any corporation?
This gives you additional information about the client's knowledge in a specific business or industry. It also tells you about additional assets.
Citizen of U.S.A. (if other please specify).
If your client is not a citizen of the U.S. he might have different tax liabilities, depending on the investments and the country. You must be aware of this — otherwise you, not your client, could be liable for any losses incurred.
Former client or account with other brokerage firm.
This shows you the type of investments that your client may have made in the past. This will also indicate if your client is knowledgeable or suited for certain types of investments.
This is very important. It establishes what sort of investor the client is, and any deviation from this profile should be documented. Also remember to record in this section the client's investment experience in stocks, bonds, options, etc. This information is very important in arbitration.
This is where you find out how your client came to open an account. The options are usually seminars, walk/phone in, advertising, personal acquaintance and referrals. Seminars, personal acquaintances and referrals may sound innocent, but each carries connotations. If the client attended a seminar, for instance, it shows he goes out of his way to get knowledge on specific investments. It bolsters a contention that a client pleading ignorance in arbitration is anything but.
References — name of bank.
If you ever have a problem with a client, you will want to know about their knowledge of investments. References would be a good place to find out this type of information.
Power of attorney.
This means someone besides your client has the right to handle the money in his or her account, as well as decide what investments should be made. Be very careful with this. Here is an example of a potential problem. You have a joint account, husband and wife. The husband makes all the decisions and transaction. You never speak to the wife. If there are major losses in the account, one of the first questions the client's attorney is going to ask you is “Why didn't you notify the wife since she is a joint owner in the account?” Remember, a portion of the money in their joint account belongs to the wife.
My suggestion is to get a letter when the account is opened stating that one spouse authorizes all transactions. If the spouse declines to sign such a letter, simply send a letter about this discussion and keep a copy in their file.
Account description — cash or margin?
Make sure you explain the way different accounts work. Also make sure your client understands both the risks and the benefits. Document the discussions.
Remember that in any arbitration proceeding, documentation is your friend, and few documents provide more information than the above form. Complete it with care.
Writer's BIO: Bruce Sankin, the author of What All Stock and Mutual Fund Investors Should Know, is an arbitrator and mediator at the NASD. investorsrights.com/fp