Eccleston Law: For Investors. For Advisors
About
Who We Are
Testimonials
Disclaimers
Attorneys
For Advisors
Broker Transition
Transition Negotiations
Employment Matters
State Registration Problems & Discipline
FINRA Matters
Promissory Note Matters
Team/Parnership Disputes
CFP Board Matters
FINRA Enforcement Matters
State Registration Problems & Discipline
Transition Negotiations
Broker Litigation & Arbitration
Employment Matters
Regulatory Matters
Strategic Consulting
Whistleblower Law
Promissory Note Matters
Compliance Protection
Lawyer Referral Network
Expungement of CRD/BrokerCheck Disclosures
For Investors
Securities Fraud
Breach of Fiduciary Duty
Negligent Investment Management
Unauthorized Trading
Lawyer Referral Network
News & Articles
News
Articles
Financial Counsel Blog
Videos
Newsletter Signup
Contact
Site Menu
About
Who We Are
Testimonials
Disclaimers
Attorneys
For Advisors
For Advisors: Overview
Broker Transition
Broker Transition Overview
Transition Negotiations
Employment Matters
State Registration Problems & Discipline
FINRA Matters
Promissory Note Matters
Team/Parnership Disputes
CFP Board Matters
FINRA Enforcement Matters
State Registration Problems & Discipline
Transition Negotiations
Broker Litigation & Arbitration
Employment Matters
Regulatory Matters
Strategic Consulting
Whistleblower Law
Promissory Note Matters
Compliance Protection
Lawyer Referral Network
Expungement of CRD/BrokerCheck Disclosures
For Investors
For Investors: Overview
Securities Fraud
Breach of Fiduciary Duty
Negligent Investment Management
Unauthorized Trading
Lawyer Referral Network
News & Articles
News
Articles
Financial Counsel Blog
Videos
Newsletter Signup
Contact

Smart Steps Advisors Need To Take To Steer Clear Of Legal Trouble

Posted on March 2nd, 2020 at 1:27 PM
Smart Steps Advisors Need To Take To Steer Clear Of Legal Trouble
If you're lucky, you'll go your entire career without facing litigation. But even the most diligent advisors can get ensnared in legal trouble.
 
Advisors fall into legal hot water for many reasons, including poor documentation or bad judgment in managing client relationships. While blatantly unethical or illegal acts do occur on occasion, it's more common for advisors to trip up when they're not properly protecting themselves from potential liability.
 
Most advisors appreciate the importance of documenting client communication. But that doesn't mean they always follow through.
 
Consider this scenario: A client's portfolio plummets in a downturn. The disgruntled investor quits your practice and subsequently claims that you didn't explain investment risks clearly. Absent specific documentation, your legal exposure increases.
 
Proving that you made a client sign a disclosure form riddled with legalese may not absolve you. Educating clients in plain English about the risks provides an extra layer of legal protection.
"Stay away from esoteric, trickier, hard-to-explain investments," said Gregory Simon, a Chicago-based attorney. Even if you avoid alternative investments and stick with relatively straightforward funds, you still need to convey in clear language what the client is buying and what limitations and risks come with it.
 
"The more you spell things out for the client in layman's terms, the better," Simon said. If you describe an investment as "illiquid," for example, go a step further and stipulate in writing that the client "will not be able to sell this investment for five years."
 
Or if a client expresses a willingness to take "moderate risk" in investing, drill down to determine what that means. Quantify what outcomes the client would find tolerable.
"Terms like 'moderate' are kind of ambiguous," Simon said. It's better to get in writing that a client would feel comfortable if their portfolio dropped by, say, 10% or 20%.

Conflicts Of Interest

Aside from vague communication with clients, another challenge for advisors involves steering clear of conflicts of interest. Many financial planners say that they treat their clients as family, but such closeness can work against you.
 
While there's nothing wrong with socializing with clients, friendships might lead you to cross a legal line. You may not realize the impropriety of getting too involved in a client's business or personal life.
Avoid situations that introduce the possibility of conflict of interest, says Max Schatzow, an attorney at Stark & Stark, a law firm in Lawrenceville, N.J. For starters, don't engage in a side business deal with a client.
"It can be something like 'Here's an investment opportunity. Let's go into this together' or 'My brother is starting a business. Let's invest together,' " he said.
Never lend money to a client, borrow their property or accept extravagant gifts from them. And while it's not illegal to have a romantic relationship with a client, Schatzow sees it as potentially problematic.
"A lot of advisors are close friends with a client, so the line gets blurred between their personal relationship and professional relationship," he said.

Reporting Requirements

If an issue arises in a client relationship that concerns you, Schatzow suggests consulting your compliance team.
"If you're worried they'll say no, then what you're doing is probably not a good idea," he said. "Almost all conflicts of interest can be overcome with full, informed consent. But that shouldn't be left to the advisor," as compliance officers can provide proper guidance on how or whether to proceed.
 
Another legal pitfall lurks when planners dish out what Schatzow calls "self-serving advice that would generate some monetary or non-monetary benefit to the advisor." An obvious example involves selling commission-driven products without appropriate disclosure, but more subtle perils include urging clients to donate to a charity in which you serve on the board of directors or investing client assets in a mutual fund company that employs your spouse.
 
"There are all types of self-dealing out there even if you're not trying to do something wrong," Schatzow said.
 
Advisors who join a firm face a different type of legal issue at the outset: negotiating an employment agreement.
 
"Whether you're a broker or an RIA (registered investment advisor), never sign the first employment agreement or independent contractor agreement that the firm puts in front of you," said Stephany McLaughlin, a partner at Eccleston Law in Chicago. "The firm might say, 'This is a standard deal.' But you need a lawyer to negotiate on your behalf," especially to address "termination for cause" provisions and control and ownership over your client accounts.
 
With regard to regulatory reporting, advisors need to document their communications with their managers and compliance. Don't assume that the firm will handle your regulatory reporting in case of a compromise with creditors or bankruptcy.

Related Attorneys: James J. Eccleston, Stephany D. McLaughlin

Tags: eccleston, eccleston law, james eccleston, legal trouble, litigation, financial advisors

Share

Return to Archive

Latest Articles
Texas Advisor, Fired for Unapproved Outside Business Activity, Transitions to New Firm
March 5th, 2021 at 1:33 PM
SEC Announces 2021 Examination Priorities
March 4th, 2021 at 2:29 PM
Read More »
Latest News
CFP Board is the New Sheriff and it Is Not Your Friend
October 24th, 2020 at 10:04 AM
Defending Against a Customer Complaint First Requires Selecting Correct Legal Counsel
October 15th, 2020 at 10:02 AM
Read More »
Share

Request a Free Consultation

Attorneys are standing by during regular business hours. Call us now for immediate service, or complete the form below and we will contact you as soon as possible.

Your E-mail Address:
 
Chicago
55 West Monroe St.
Suite 610
Chicago, Illinois 60603
(312) 332-0000
(312) 332-0003
New York City
One Liberty Plaza
165 Broadway, 23rd Floor
New York, New York 10006
(312) 332-0000
(312) 332-0003
Boca Raton
2255 Glades Road
Suite 324A
Boca Raton, Florida 33431
(312) 332-0000
(312) 332-0003
2021 © Eccleston Law, LLC.
All Rights Reserved.
The law is continuously changing. Please do not rely on information found on this site without consulting a lawyer to determine if any recent changes in the law may have an impact.