Winning the Credibility War
by Ellen Bessner
Originally published in the National Post on December 18, 2008, and based on
materials published in Ellen Bessner’s book: Advisor at Risk: A Roadmap to Protecting
Your Business
My previous column described risks for advisors in the securities industry, yet the most
significant risk to advisors is credibility risk – the risk that a judge or arbitrator will
believe a client’s testimony over that of the advisor.
Witness credibility plays a significant role in a judge or regulator’s decision whenever
the client and advisor each explain their version of the events to a judge or arbitrator.
The same events are often described by the client and the advisor is diametrically
opposed terms. It may be that they both attempt to describe the events as best as they
can but, no doubt, biases affect their recollection of what happened.
Consider this scenario:
Client. “I was referred to Mac (the advisor) many years ago. I was invited to one of his
free seminars in which he described the type of investing he was doing for his clients. I
knew nothing about investing, but Mac explained that I could make much more money
than what I was making on GICs (Guaranteed investment certificates).
“I worked hard all my life, and Mac said this was an opportunity to get my money to
work for me. I liked the concept, but I didn’t understand that there was risk involved.
Mac never talked to me about the risks of investing. I totally trusted him and followed
his advice because he promised that I would make more money following his advice
that if I left my money where it was.
“When I received my statements, I didn’t understand them, but Mac reassured me that
this was the way to go, and I should just follow his advice. I can’t believe how much
money I lost. I am now 62 years old and I need to continue to work to make back the
money I lost. I am mad at Mac, and I have found a lawyer to help me get my money
back by suing Mac and his employer.”
The advisor. “Mr. Kirk (the client) was a friend of my father. I had been helping my
father with his investments for years, and Mr. Kirk, who was invested in GICs, watched
my father’s retirement savings improve. My father took trips and bought new cars while
Mr. Kirk lived more carefully.
“Mr. Kirk was getting restless and wanted to switch to mutual funds. I explained to him
that while I would put him in mutual funds and conservative stocks, there would be no
guarantees, like there are with GICs, and there was risk of loss of capital. I invited him
to one of my seminars in which I explained the potential growth of mutual funds, and,
specifically, historical evidence that they yield better returns than GICs over the long
term.
-2“Mr. Kirk approached me after the seminar, wanting to meet with me immediately. We
agreed to meet the next day. I was pleased that Mr. Kirk wanted to invest with me, but I
was a bit worried because my father told me that he is a big complainer.
“I wanted to help Mr. Kirk, so I agreed to take his account. Well, that was about nine
months ago and now the market has taken a tumble. I told him not to worry; he was still
three years from retirement, and these were investments for the long term. Mr. Kirk
couldn’t handle it, even though I had previously explained the risks to him. He
instructed me to liquidate his portfolio and send him a cheque. He issued a complaint to
the regulator and sued me for his losses.
If it becomes the client’s word against the advisor’s, the onus is on the advisors to prove
that they fulfilled their duties to a reasonable standard. This is difficult to prove without
documentary evidence reflecting discussion the advisor had with the client. When it is
the client’s word against the advisor’s, courts sympathize with the client.
Why? Advisors – and this applies to other professionals such as doctors, lawyers and
accountants – are assumed to be better-educated, more knowledgeable and more
experienced in their respective fields than their clients. Indeed, clients seek out, rely
upon and pay for professional advice.
Accordingly, clients are perceived as vulnerable and reliant upon the better-educated,
knowledgeable and experienced advisors. That’s why courts and regulators tend to
view clients sympathetically. It’s also why advisors have to bolster their cases with
documentary evidence.
How can advisors protect themselves? They need a record of what the client said to
them and details that support the conclusions and summaries in the Know Your client
form. They also need a record that the risks of any investment or strategy was
explained to the client.
This can be in the form of handwritten or electronic notes, tapes or any other method
that the advisor can easily incorporate into his practice. I point out to advisors that very
few, if any .clients take notes at meetings.
Armed with evidence to support the advisor’s version of events, the advisor will have a
much better chance of winning the credibility battle. Don’t expose yourself to
unnecessary risk, just pull out your pad and pen and start writing!