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How Do You Protect Yourself?

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Dec 31, 2006 4:24 pm

May seem obvious, but I am going from a wirehouse to a bank, and I can already tell the clients are WAY less sophisticated.  That's OK.  I am used to hand-holding, educating, etc.

What worries me are 2 things.  The program I am in is only 3 yrs old, has had 2 reps, and both were fired.  I don't know why.  I know the last guy had a complaint filed - something about performance not being what they anticipated.  Don't know the details.

Secondly, from the people I have talked with already, I see alot of - well, I'm in this fund, but it "hasn't done anything" so I want another fund with this new $.  Something a little more aggressive.  You do that - even if it's documented, the market slumps, the fund is down, then you've got a potential problem on your hands.

I realize this is part of the business, and it's all about documenting everything, but was wondering beyond educating and documenting, what others do to avoid complaints.

I've been at this 8 yrs and never had a complaint - oral or otherwise, even through the bear market, so I'm hoping that's a good sign, but I don't know what I'm dealing with here, and want to protect myself as much as possible.

One other thing I found - unique to a bank, I think - is because banks are transactional, and you walk in, do business, and are in and out in 5 minutes, they expect the same on the investment side.  They walk in without an appt. (that's OK, I can deal with it), hand you a check, and expect and instant recommendation.  They don't want to sit and discuss their risk, and why they mention they want an index fund, and so on.  They've got their coat on, they're standing up and heading to the door....

I do my NASD share calculator each time, and have them sign off, I do risk profiles for every new client and have them sign off.  I document every conversation especially about recommendations.  Any other things I should be doing?  Of course I realize this is all part of the business, but there must be ways to protect oneself.

Dec 31, 2006 5:22 pm

Ok, until Bill Singer (securities attorney - Extraordinaire) chimes in, I'll attempt to answer the question. It's my understanding that you only have a problem when the investment is not suitable for the client, at the time of investment and/or for the foreseeable future. Vague enough for ya?

Doing just the bare minimum (legally-speaking) would involve discussing the risks with the client, documenting the meeting, then making the investment.

Protecting yourself even further, would involve doing the above plus refusing to invest the money in anything that is clearly not suitable for the client. Just because the client says it's ok, doesn't mean you've got the go-ahead to make the investment.

In addition, I would set-up "portfolio review" meetings with any existing clients you inherited when taking over the bank position. If the previous broker put the clients in unsuitable investments and you make no attempt to rectify the situation (or make the client aware of the unsuitable characteristics of the investments), you could be held responsible for any future fallout from the investment.

And for those clients in a hurry and want a fast recommendation, refuse to make the investment until you can sit down with them (at a convenient time) and discuss the investment. However, you can offer to open the brokerage account and place the money in a money market-type investment, until both of you can sit down and discuss the alternatives best suited for them. By taking the time with these clients now, you'll bond enough with them so that, if you leave the bank in the future, they'll go with you.

Dec 31, 2006 5:55 pm

Bank platforms are supposed to also have disclosures that state "Not FDIC Insured, may lose money, not a product of the bank...blah blah blah"     You need to strongly emphasis this point as bank customers will persist  in thinking that YOU are representing the BANK.

I used to treat the first time clients who dropped in or who were sent over from the teller line something like this.  

Gather some preliminary information first spend about 15 minutes. Then tell them that their investments and their money is too important to make a snap decision. That you need to schedule some more time with them and need time to do some research to be able to make appropriate investment suggestions. Have them come back for at least a 30 to 45 minute appointment where you can so some more education and make recommendations AND fill out all the paperwork without feeling rushed.

I found that most clients appreciated the due diligence and that you are treating their investments in a very serious manner.  If they didn't want to do that format, I really didn't want to do business with them.

In addition I would also tell them that not only are their investments and portfolio important to me......MY REPUTATION as a careful and ethical advisor was very important to me.

Doberman's suggestion of opening the account in a money market and having a later appointment is a good one.  At least you will have had them make a commitment and now YOU have their money.

Dec 31, 2006 10:07 pm

I may be wrong, but I think (with American Funds anyway), on their 529 plan, once you invest the $ - whether it is a money market or fund, you cannot change that investment for one year. 

I know it is try for the funds.  And I assume their money market falls into that category.

How then to handle this, when the client wants to send the check in, you have a responsibility to send it, can't change the investment once it's chosen, they don't have the time to sit for 30 min., and they already have the 529 account with you.  Not take the money?

Yes, my intention is to reprofile ALL the clients I inherited, and I also run a 2-appt. system.  First appt. is full profile where they bring their statements and 2nd appt - week or so later - is results of my analysis and recommendations.

I intend to use only funds, no indiv stocks, and use AF and Frankling Founding Funds.  I many use the MF wrap accounts the bank brokerage has for fee-based people.  Funds are recommended based on a questionnaire, rebalanced, watched for signs of trouble, etc. so that might be OK.

Dec 31, 2006 10:24 pm

New rookie do you do any financial planning?

Dec 31, 2006 11:14 pm


On a 529 plan, when a client wants money, send a check to them.

You have a responsibility to do 100% of your business jointly with someone more experienced.  Your current lack of knowledge is going to hurt your clients. 

In this business, you must learn FOR your clients instead of ON your clients.

Jan 1, 2007 12:42 am

newrookie, you misunderstood. When I said place the "hurried" client's money in a money market account (until you've had time to determine the suitability of the client) I meant a general, non-specific money market account. Surely, you offer those type of accounts.

As Babs pointed out, by doing this (instead telling them to come back in 2 weeks with the check), you've already got their money and to them mentally, it's already invested with you. All that's left is working out the details.

Jan 1, 2007 6:42 pm

I sounds like you plan to do all of your investing directly with the fund family and not in a brokerage account??   The 529 plans do have to be direct, but anything else can be in a brokerage account.

There are good and bad points for holding mutual funds in firm name instead of direct.  The good is that it harder for the client to change brokers...good if you are the holding broker.  Bad is that it is harder to change brokers....if you are the receiving broker or you have left the bank and want to bring your clients with you.  I speak from experience here .  Also with a brokerage account if you are positioning bonds, ETFs, stocks or other types of investments along with mutual funds the client will get a consolidated statement and you have a better grasp of their entire position.

Quite often I open a brokerage account, add the money that is going to be invested into a money market account and then do the second appointment to determine what they are going to be investing in.  Many of your broker dealer money markets are much better than the bank's.  The interest rate is higher  (4.65%).  They can write as many checks a month as they want unlike the banks MMKT.  Plus you have a place for their interest and dividends that are not being reinvested to accumulate for you to invest later.  Some brokerage mmkts offer linked Visa cards as well.

Money in the hand (your hands) and not in the bank.  You will find at a bank brokerage you are often at war with the bank manager and other people in the branches.  You are not really a team with them.  Don't be fooled.

Jan 1, 2007 8:35 pm

Only intend to do under 20K accounts direct (due to the charges Pershing imposes on the client), and 529s have to be done direct - there is no alternative.  Other accounts will be brokerage, which I am well familiar with.

I just did not want to have to open a 3rd B/D account (the B/D now makes you open a "shell" account for every direct account for disclosure purposes.  Since there is no money market option that you could then switch to a fund (not that I know of anyway - plan to call them tomorrow), with AF, then a 3rd B/D account would have to be created just to house the money in a money market prior to investing.  That's all I was trying to get around.

I'm not used to direct accounts - we weren't allowed to do them at the wirehouse, so it was easy - everything was right there.

Yes, do financial planning.  For most all but the very smallest accounts, and then use a simple version or a calculator.

Jan 1, 2007 9:56 pm

AF has a money market fund.

Jan 1, 2007 10:21 pm

[quote=doberman]As Babs pointed out, by doing this (instead telling
them to come back in 2 weeks with the check), you’ve already got their
money and to them mentally, it’s already invested with you
. All that’s left is working out the details.[/quote]

Doberman, now you understand why I like brokered CD’s so much?