This question confronted a registered representative that we defended.  Unfortunately, he did not ask himself that question until the middle of trial.  You see, the registered representative never knew his six grade educated, retired doorman client could not read when he sold him a covered call investment strategy.

How can something so basic be missed?  The short and obvious answer is that the representative did not know his customer.  Although it is true that people, at times, effectively hide things from their investment advisors, it is equally true that you must do all you can to know your customer.

Believe or not, the SEC and FINRA have assisted you with this potential problem.  When it comes to knowing your customer, your regulators focus on a risk-based analysis, as should you.

As the risk increases, so should your know your customer analysis.  When you are recommending riskier investments, you need to do more to know your customer.  Similarly, when you have an unsophisticated client, you need to conduct more due diligence to ensure that you know that customer.

While it is true that someone who cannot read may effectively hide that fact from you, there is no excuse when it comes to the due diligence you perform.  If the advisor I mentioned was able to demonstrate that he conducted a high level of know your customer analysis for this unsophisticated customer, the arbitration result may have been much different.

In the end, there is no reason you should learn something new about your client in trial.  Ask the right questions, document the information; protect yourself from risk.