In a downturn, the value of professional financial advice is obvious This is especially true for seniors. Common aspects of aging include having limited or no ability to earn further money while continuing to require a constant and consistent source of cash to fund expenses. Our society urges seniors to seek and trust financial advice. Often this trust is misplaced.
The consequences can be devastating to elders and their heirs. Fortunately, financial advice is a heavily regulated area. The Courts can, and do, award compensation for negligence (bad advice) and other wrongdoings.
KYC and Suitability
Two cornerstone duties of financial advisors are:
- The "Know Your Clien"t Duty (“KYC”). The advisor is responsible to take steps to know the financial circumstances of the client.
- The suitability determination by the advisor and the advisor’s company. The advisor is responsible to take steps to know the products available to meet the needs of the client (“KYP” for “know your product”), and to recommend suitable ones.
The KYC duty essentially is a fact-finding process. The focus is on the circumstances of the senior and not the circumstances of the representative or the heirs. Unequivocally, this exercise goes far beyond just completing forms. It is intended to be an in-depth examination of the client’s circumstances. These include:
- Assets and liabilities.
- Income and expenses.
- Goals and investment objectives (which are not the same).
- Investment knowledge.
- Tolerance for risk.
- Investment time horizon.
The advisor must then match the KYC circumstances of the senior with a suitable strategy. The advisor should recommend the right products to conform to the strategy. The advisor must make the recommendations using plain language to explain both the benefits and risks (what could go wrong and how badly).
Furthermore, in most advisory relationships, the advisor must obtain informed consent from the senior for each and every trade prior to any trade or change in investments. The instructions must include: warnings of risks related to the investment and/or strategy, specific instructions on the stock, bond, mutual fund, or other security to be bought or sold, the specific number of shares, units, etc. and the price and timing of each and every transaction. Rarely do financial advisors obtain these detailed instructions. In many cases, the financial advisor generally discusses a planned buy or sell before or after the transaction. A general discussion before is a breach of the regulatory rules. A general discussion after does not sanction an unauthorized buy or sell.
To fulfill the advisor’s duty to obtain in advance informed consent of the senior, this requires the advisor to adapt all communications to the abilities of the senior client or a duly appointed representative (attorney or guardian).
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