The SEC recently completed the Dodd-Frank mandated study on financial literacy for retail investors and it revealed, not shockingly, an absence of basic financial literacy. The study also found that it was important for retail customers to have a better appreciation of the costs associated with their investments, as well as conflicts of interest related to transactions.
All those years of hearing customers testify of not knowing the difference between a stock and a bond may not have been a lie. Without basic financial literacy, how can you know your customer to make investment recommendations with a reasonable basis and satisfy the applicable rules.
These issues should not come as a surprise to you because they are fundamental things that both your clients must know and you need to certain that they know. The absence of financial literacy will lead to two bad results. First, you do not know your customer as required. Second, if you do not know your customer, you could not have had a reasonable basis for making your investment recommendations. As such, you will have liability exposure if sued by this client.
So what do you do. For one, make sure that you do what you can to make your clients financially literate. Once you have level of comfort that your client possesses some basic understanding of investing, you are then able to make suitable investment recommendations. Take your time with this analysis; it may be the best way to protect yourself from customer complaints.