Compliance Considerations: How Independent Financial Advisors Can Avoid Client Complaints

6 min read
June 03, 2019

There are many advantages of becoming a fiduciary, fee-for-service financial advisor, one of which is the (slightly) lower barrier to gaining client trust. While building trust with clients certainly still takes time, and in some cases can be an uphill battle, fiduciary fee-for-service advisors don't face the same obstacles as non-fiduciary advisors who operate under a much different model (and potentially under different values).

When those non-fiduciary advisors are compensated for selling products offered by insurance companies and broker-dealers, the client may always question whether the product they received was genuinely in their best interest, or if it was sold to them to assist the advisor in meeting their compensation goals. Fee-for-service advisors who have taken the fiduciary oath, and who are therefore ethically obligated to act solely in the best interest of their clients, do not face this same struggle. 

Distrust of financial advisors has a long history. There have been many documented cases of financial advisors selling annuity products and failing to disclose details about limited liquidity, surrender provisions, and fees associated with the product.

In some cases, advisors have executed transactions in client accounts that did not materially change the portfolio allocation in order to generate commissions.

These actions have created an erosion of trust between the consumer and the advisor. This lack of trust is a critical concept in evaluating the events and circumstances that may lead to a client complaint. 

As humans, we tend to be inherently uncomfortable with things that we don’t understand.

In school as children, we battle through the frustration of learning new educational concepts and practices.

As we advance into higher education through college or trade schools, we become stressed when it’s time to take an exam or to prove our understanding of recently acquired knowledge and skill sets.

When we begin our professional careers or jobs, we experience anxiety due to lack of experience and fear of the unknown.

It’s simply human nature to be uncomfortable with the unfamiliar. Compliance best practices to avoid client complaints are built upon this very principle. 

Client complaints can be derived from a variety of areas. For example, a complaint may originate from order handling or trade execution, trade suitability concerns, issues regarding money movement, or situations in which a client does not perceive the value of a financial planning engagement (i.e. buyer’s remorse).  

If advisors are proactive in their efforts to ensure their clients understand the processes and practices of the advisor-client relationship, these types of client complaints can be largely avoided.

Below are a few compliance practices advisors can follow to avoid client complaints. 


#1. Use Layman’s Terms

It’s one thing for an advisor to be able to articulate their investment strategies and practices to peers within the industry, or regulators who are experienced in dealing with investment advisory and financial planning matters.  

It’s another thing entirely for the advisor to be able to articulate these concepts to someone from outside of the industry who doesn’t know the difference between a stock and a bond.

It takes a significant amount of time and energy to educate someone on investment strategies. (Those who have gone through the educational and testing process to receive any professional license or designation will understand just how much time and energy this education process takes.)

Clients who do not understand what is happening in their portfolio are much more likely to complain than those who do.

From a financial planning perspective, educating clients based on realistic expectations is key to avoiding the appearance of overpromising and underdelivering.  

For advisors to avoid client complaints, it is wise to focus significantly on layman’s explanations of their services and how they will benefit clients, as well as any risks associated with investing and other factors that may cause a financial plan to veer off course. 

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#2. Pinpoint Suitability

As mentioned before, a fee-for-service advisor focuses on recommendations that are in the best interest of the client. This focus does not yield a relationship of trust unless the client understands the connection between the recommendations that are being made and their financial goals.

This connection may be intuitive to the advisor, but if the client doesn’t “get it”, then they are more likely to become uncomfortable with the path of the relationship.

For investment management services, collecting the client’s suitability information and generating an Investment Policy Statement (IPS) will go a long way towards creating this mutual understanding.  

An Investment Policy Statement (IPS) is a document drafted between a portfolio manager and a client that outlines general rules for the manager. This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives.

Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements are included in an IPS. Many advisors go wrong when they either fail to create an investment policy statement or when they create the IPS and have the client sign it without taking the time to explain the document to them.

Sure, a signed IPS fulfills the basic compliance requirement, but taking it a step further to explain the document in detail can help avoid a complaint down the road.

For financial planning focused advisors, maintaining detailed notes and client records that reflect an open-book process with the client can improve the process by which the client understands the “why” behind the recommendations the advisor makes.  

#3. Be Aware of Frequency of Contact

Ideally, an advisor will maintain a minimum amount of contact with their clients regardless of the nature of the relationship or the services being provided. 

For accounts being billed on assets under management, the advisor will need to meet with the client no less than annually.  

For financial planning engagements, the meeting requirements may vary based on the individual preferences of the state regulator and/or the services that were agreed upon between the client and the financial advisor.

Either way, the more often an advisor speaks with the client, the more likely the advisor is to detect and resolve an issue before it becomes an official complaint.

If there are frequent contact attempts on behalf of the advisor with no response from the client, this is a sign the relationship may be deteriorating.

While the tendency is to give the client the benefit of the doubt and simply classify them as non-responsive, advisors should document instances in which they attempt to reach out to clients with no response while anticipating a forthcoming termination of the client relationship.

From a financial planning perspective, a non-responsive client is less likely to achieve their financial goals. This same client is more likely to wake up one day and feel like they’ve been taken advantage of by an advisor who has been charging them “for nothing.”  

To avoid a client complaint, the wise advisor will consider terminating the relationships of non-responsive clients prior to escalation into a complaint.  

It’s virtually impossible for firms to entirely avoid negative interactions with clients. This is just not the reality of a people-focused profession.

There are cases in which a client is simply going through something difficult in their personal life, and the stress of this spills over into the relationship with their advisor.  

There may be a market downturn causing client panic that creates tension stemming from negative account performance.

There may be a financial plan that gets derailed because the client can’t stop buying things on Amazon, and that frustration is then displaced onto the financial planner.  

Whatever the case may be, maintaining transparent operations with a focus on client education, suitability, and frequent contact with clients will go a long way towards minimizing client complaints.

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Scott-Gill-Square-ColorAbout the Author
Scott is a licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC.

Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting, in Charlotte NC. He’s a graduate of The University of North Carolina at Chapel Hill and holds FINRA Series 63, 65, 24, 4 and 53 Licenses.

Scott lives in Charlotte, NC with his wife Meredith, and their two sons Tyson and Jackson and daughter Eva. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.

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