Over the years that I have defended broker-dealers, investment advisors and registered representatives, a common theme has steadily emerged. In many instances, customer complaints can be avoided altogether through the better selection of customers.
I have seen the desire to increase assets under management effectively cloud the judgment of the advisor. So the question becomes, how can you avoid risk through better customer selection. As set forth more fully in my risk avoidance guidebook, the key to risk avoidance is to avoid the problem clients before they become clients.
Who are the types of customers you want to avoid? First, is what I call the free agent. This is the customer who bounces from advisor to advisor over the years, constantly looking for a desired answer that probably does not exists. Do not make the mistake of thinking that you have all of the answers.
Second, beware of the potential customer with unrealistic expectations. The clearest example of unrealistic expectations is the customer who wants high returns but without significant risk to principal. This is a client living in a dream world. Although this may seem obvious, I have represented the same advisors in multiple cases because they gave into trying to meet unrealistic client expectations.
The third type of potential problem customer is one who does not fit your personal investment style. Many advisors have, after years of training and experience, developed an area of investment expertise. Yet, all too often these same advisors try to pigeon-hole all of their clients into their unique investing style. This never works. The better course is to refer a customer who does not fit your style to a colleague, who will likely return the favor with referrals of his own.
In these challenging times, better customer selection is more and more important. With a bit more due diligence on the front end of the relationship, you may be able to avoid the risk of a customer complaint on the back end.