How to Navigate Risk in Client Relationships

Four scenarios can happen with clients that constitute risks to your firm. Here's what you can do to alleviate them.

By David Youngwirth

In business, there’s no avoiding risk. Some necessary risks — such as those involving regulatory reviews and market downturns — are typical in the financial services industry, but a particular type of risk brings distinct challenges that can be hard to navigate: risks inherent to client relationships.

While you’re managing client relationship risks, it’s important to adjust your strategy to best suit each person. Some practical steps apply broadly, however, and will help you mitigate those risks:

• Home in on your target client base: Try to find clients you work well with—and who help drive your practice toward your goals.

• Establish relationship parameters: Be clear with clients about what they can expect from you — and what you expect of them.

• Document all interactions: The documentation you’ll need to keep responsibly includes investment recommendations and detailed notes from any contact you had with the client.

Taking the above steps consistently will help you manage known risks at your practice, but keep in mind that even with the best precautions, unexpected risks are always lurking. To ensure you’re prepared for potential challenges when interacting with clients, here are four scenarios that constitute risks — and what you can do to alleviate them.

1. Clients Acting Against Their Investment Goals

What should you look for? Some clients may be on the hunt for a “hot stock” and, when they find one, act contrary to your advice. They may want to invest in penny stocks or similarly risky investments, for example. If they do so and the investment performs poorly, then clients may come back, asking why you didn’t talk them out of it.

Of course, even clients who aren’t interested in making risky investments may trigger your concern. They may, for example, buy and sell based on emotions, making them easily swayed by the news or market swings. Some may spend beyond their means and ask to withdraw assets at a rate that could negatively affect their financial future.

What can you do? As we mentioned above, an essential part of managing risk in client relationships is documenting every client conversation and piece of advice you give your clients. If a client persists in making decisions that run counter to their financial goals, send an email or letter — something in writing — to remind them of their goals and how you think they can get there. This also serves as documentation of your consistent advice.

Treat each communication — including phone conversations — as an opportunity to reinforce your advisory role and remind clients of their account goals. You may also find that your expertise is necessary for only a portion of the client’s assets. In some cases, for example, a client may be better off placing some of their assets in a brokerage account as opposed to putting everything into an advisor account. Consider as well that a client’s suitability and overall financial picture may have changed.

If a client consistently flouts your advice, then it may be time to consider parting ways. A one-off uncharacteristic transaction may not necessarily be concerning—depending on their risk tolerance and investment objective—but if the client’s actions become part of a risky pattern, then they may not fit your practice anymore.

2. Unresponsive Clients

What should you look for? Most clients respond regularly to emails, calls, and meeting requests from their advisors. Every so often, however, a client doesn’t. These situations can put you in a tough spot and cause unnecessary risk to your practice — ==missing a meeting to review account sustainability can make your work more difficult, for example. But if a client doesn’t return your call about an intended RMD this year, that may lead to more actual trouble.

What can you do? As above, document, document, document. Ensuring that every communication is documented is crucial even when you cannot reach your client. Log these attempts to show you made the effort.

To avoid an unresponsive client scenario before it can begin, establish reasonable expectations for communication from the start. Learn the client’s preferred level and method of contact in the early stages of your relationship. Depending on your firm’s policies, you may be required to conduct periodic—even annual—review meetings for advisory accounts, and you’ll need to keep up-to-date suitability and investment objective information for your client to manage the account effectively.

What if you’ve started on a good path but a client becomes unresponsive over time? In that case, you’ll need to have a process already in place. Your policy should include using (and, of course, documenting) multiple methods of contact. For example, you might begin with emailing and calling then, if necessary and the client is local, stop by in person. At some point, you may need to move on to evaluating whether the client would be better served by a different type of account.

3. Complicated Relationship Dynamics

What should you look for? Every client has a web of connections that can sometimes be difficult to manage in a pivotal life situation, such as illness or a client’s passing. Understanding how to navigate those relationships successfully is key to reducing risk to your business.

Some potential risk scenarios involve:

• Information requests from third parties.
• Complex family relationships.
• Red flags indicating exploitation.

What can you do? Obtain and keep an up-to-date list of important relationships for each client. You must have clearly documented permission to speak with anyone not directly affiliated with the account. Some examples of people a client might want you to communicate with about an account — but for whom you must obtain permission to communicate with — include family members and professionals such as the client’s attorney, accountant, or tax specialist.

In the case of a strained family relationship, immediately make sure your client draws clear lines: Who do they not want you talking to? Certain family dynamics — for example, having an estranged family member or a divorce, completed or in progress — can complicate things.

For an older client or a client with diminished capacity, exploitation is a heightened concern that you should consider in the case of unexplained withdrawals. When a power of attorney designee or trustee is the one providing instruction, then you’re looking at an even more complex situation. Always ensure that you understand your clients’ financial needs and keep yourself informed about their capacity. If you observe a change in your client’s behavior or spending habits, connect with your compliance team to discuss the potential risk or exploitation.

4. Relationship Changes

You’re expected to give your clients investment advice, of course; but at times you may also be called on to calm their anxious thoughts about market conditions—and more. In times of health issues or other life changes, they may just need someone to talk to. Many advisors see friends become clients or clients become friends. You may at times need to look past the closeness of your relationships to follow your instincts and recognize that some tasks are simply out of your scope.

Clients may want guidance on private investments that your firm’s platform doesn’t offer, for example. They may ask for legal or tax advice, even if you aren’t an attorney or CPA. Or they could request you be named their POA, executor, or another control role you’re not comfortable with.

What can you do? Explain your role early in the client relationship and be ready to make referrals as needed. Ensure that you and your clients are on the same page—you know your clients and their needs best. Some tips to help you in your client relationship management efforts include:

• Trust your judgment.
• Continually evaluate the relationship, making sure you and your client are aligned.
• Maintain open and ongoing communication.
• Document your interactions.

For the sake of your clients and your business, you should confront any signs of risk that you notice in your client relationships as soon as you can. This is key to avoiding potential problems and providing a better overall client experience.

David Youngwirth is a supervisor, compliance, at Commonwealth. With the firm since 2011, David responds to telephone and written inquiries from advisors and Commonwealth staff about the firm’s compliance policies and procedures, as well as industry rules and regulations.

This post originally appeared on Insights, a blog authored by subject matter experts at Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

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