This is the 18th installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.
Complaints arise in any human endeavor. And financial advisors running their own registered investment advisory firms must take special care with negative feedback, lest a client concern escalate into a pricey legal saga.
Immediately consulting a lawyer or a compliance professional after learning of a customer’s grievance can help advisors sort out their response, experts told FP. The spectrum of complaints ranges from small issues, such as trouble finding a parking spot near an RIA’s office, to serious claims involving financial harm that can result in FINRA arbitration or lawsuits.
RIAs have a vested interest in ensuring that client dissatisfaction does not turn into a legal proceeding.
For example, claims can linger on advisors’ records. Even a FINRA arbitration case that is later withdrawn may remain on an advisor’s Central Registration Depository file or public BrokerCheck page until advisors pursue its costly expungement, according to Jenice Malecki, a securities attorney who represents advisors, firms and investors at Malecki Law. That “still looks like it’s a massive complaint, even though it was withdrawn,” she said.
“Theres a lot of fear factor — the fear isn’t always the customer. It’s often the regulator,” Malecki said. “It’s a ‘one strike, you’re out’ world we’re living in for financial advisors.”
Most of the time, client complaints aren’t personal attacks on advisors, said Doc Kennedy, the founder and president of compliance and law firm AdvisorLaw. “It’s typically, ‘Hey, they need their memory jogged and they need to be reminded of how you got to where you went with the investment decisions and why,” he said.
The heirs to a large inheritance can often be a major exception to that general rule, according to Kennedy, because they frequently fight with each other and their benefactor’s advisor. If a complaint rises to the level of a legal filing, an advisor can no longer rely on their long-term friendship with a client to diffuse the situation.
“You’ve got to have someone who looks out for your best interests,” Kennedy said. “A lot of them still cling to this notion that they can resolve it with typical negotiations and talk.”
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Report complaints to compliance or legal first
Regardless of the degree of potential risk, advisors and their teams ought to strive to “be objective, as opposed to subjective, when things come across,” said Kyrstin Ritsema, an executive director of compliance services working with RIAs, investment companies and broker-dealers at international regulatory technology firm Confluence. She answered “every single time” to the question of when a client’s negative feedback prompts her concerns.
“You don’t want it to be a situation where it is a complaint and you decided it wasn’t,” Ritsema said. “As a compliance person, I would much rather you report something to me that is negligible than you fail to report something to me and it’s serious.”
The “appropriate reporting” to a chief compliance officer or a trusted legal advisor represents the No. 1 step in the process of managing a client complaint, Malecki said. The response to the feedback will vary based on the size of an RIA or another advisory practice, and writing a letter or email is much different from the formal comment that could appear on BrokerCheck about a client allegation. So it behooves advisors to move thoughtfully.
“They have to make sure that the firm approves anything that they may say to the public, and they should always consult counsel,” Malecki said. “The cleanup is usually so much worse than how it could have been fixed on the front end. … It makes sense to get advice in that scenario, because you could make things worse, and you might think you’re making things better.”
Kennedy always asks advisors to run any written communications with the client who lodged the complaint by him before sending them, but he says there are times when an RIA owner or executive could benefit from calling that customer to figure out the full nature of the problem. To avoid the worst-case scenario of lengthy litigation, advisors can protect themselves by following their firm’s documentation procedures closely as a means of affirming that they made clients aware of every possible pitfall with any investment decision, Kennedy said.
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Careful documentation ‘goes a long way’
In fact, one of the advisors working with Kennedy is so diligent about documentation that the planner asks clients to initial each page of an authorization form before writing down the exact time they did so. That reminded Kennedy of how a car buyer must initial and sign seemingly countless documents before they can drive away in their new vehicle.
“That level of precaution really serves you well if things ever start to go sideways,” Kennedy said. “They serve to reflect the reality and head off any sort of false complaint that it was a quick swindle, that they misrepresented or failed to disclose certain items. And it’s similar in the advisory industry, where carefully documenting those things goes a long way.”
Every single complaint “requires some sort of prompt and professional reply,” whether the customer has, for example, posted an ugly review of the firm online or discussed the shortcomings of an RIA’s office setup, Ritsema said. And she advises firms to lay out their road map for doing so in their policies and procedures. Advisors and their clients could always part ways, and there are bigger issues at stake than any single customer relationship.
“Every piece of negative feedback is an opportunity to fix something, so take it as that,” Ritsema said. “You’re protecting your firm’s reputation. So that’s what you have to think about every time there’s a complaint.”
