Top 10 Reasons Why Financial Advisor Documentation is Critical!

Top 10 Reasons Why Financial Advisor Documentation is Critical!Who wins when your primary interaction with a financial advisor is verbal? It is certainly not you, if you are an investor who buys financial products from advisors, planners, stockbrokers, and agents. Verbal communications benefit advisors, in particular low quality advisors, and create major financial risks for you.

How big is the risk? Your alternative for documentation is verbal communications that allow advisors to control what they do and do not tell you. And, it pays to remember financial advisors do not have any type of mandatory disclosure requirement. In other words, they do not have to volunteer information that they do not want you to have.

There are ten critical reasons why you should require documentation when you buy products from advisors and follow their investment advice. Prudent investors will get the message. I hope you are a prudent investor.

1. Winner Take All

You should know the financial services industry is the most competitive business on earth. There are 700,000 licensed representatives, 25,000 registered advisory firms, and over one million life insurance agents. And, they all have one goal – convince you to buy what they are selling. If they win they make a lot of money. If they lose they make nothing. Consequently, most advisors are willing to do whatever it takes to win or they will have to sell their BMWs.

2. Low Quality Advisors

Low quality advisors prefer verbal communication because it maximizes the impact of their personalities and sales skills. They make undocumented sales claims and use sales pitches to support their claims. Documentation dilutes the impact of deceptive sales processes.

3. Accuracy 

Written communications are more accurate for one simple reason – you have a permanent record of what was communicated to you. Advisors cannot deny or change written communications. Aggressive, low quality salesmen do not want records of their sales pitches, sales claims, or sales practices. There is a good chance they are breaking more than one industry rule when they sell investment products and services.

4. Misrepresentation

No written record opens the door to exaggerated sales claims, “My performance ranks #1 in the country”. “I am the best advisor in your town”. “My clients average a 25% rate of return”. You may be thinking ethical advisors don’t do this, but how do you determine who is ethical. Or, I will fire the advisor if I don’t get the 25% return. The advisor could care less. He was paid a long time ago when he made the sale.

5. Omission

Sometimes your biggest risk with financial advisors is what they don’t tell you. They are trained to withhold information that damages their sales success. Verbal communication comes into play again so you have no record of what was withheld. So what if the advisor has several investor complaints on his compliance records. He will not volunteer this information and he knows there is very little chance you will ask the right questions. Even then you still need a documented response. 

6. Your Word 

When you make a claim against an advisor, and it is your word against the advisors, you will lose. The arbitration panel is going to want proof that supports your claim. No documentation, no proof. It gets down to your word against the advisors. And, don’t forget branch managers, compliance officers, and corporate attorneys are there to support the advisor and minimize damages. 

7. Miscommunication

This is a big problem. Communications based on “I thought you said” or “I thought I heard you say”. The Department of Labor solved the problem in the pension world when it said the investment of pension assets was too important to rely on verbal instructions. All communications had to written so there was a permanent record. This common sense requirement should also apply to the investment of individual assets.

8. Selective Amnesia

This is a common affliction in the financial services industry. When there is a problem or a dispute, financial advisors remember details that benefit them. They forget details that may create liability for them. Hence, what they remember is a selective process that benefits them and damages their clients. Documentation stops selective amnesia. Information is not based on recall.

9. Arbitration

If you have a dispute with an advisor and it goes to arbitration you had better have documentation that supports your claim otherwise it is your word against the advisor’s and the advisor will win because the playing field favors the advisor and not you.

10. Accountability

The single biggest reason for documentation is increasing advisor accountability. When everything is hearsay, and subject to interpretation, there is no accountability. Your advisor is not accountable for anything that is not written. You can fire the advisor, but you will not get your lost earnings back.

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