Filed Under:Your Practice, Practice Management

When good clients go bad

A NAILBA 31 speaker shares why documentation has never been more important

Image: Keattikorn / FreeDigitalPhotos.net

Image: Keattikorn / FreeDigitalPhotos.net

Have you ever had a client who was, for lack of a better word, bad? It’s an easy target to put the bull’s-eye on the advisor’s back anytime anything hits the fan, but what if the advisor did as they were told and it was the client who was the “demon seed.”

During a workshop at NAILBA 31, that very scary, very real scenario was discussed in detail. Rob Erzen, an area vice president with Arthur J. Gallagher & Co., led the session, which was titled, “What you don’t know about your E&O might hurt you!”

Erzen talked about many facets of E&O (errors and omissions), including the growing threat of cyber crimes, but the one that hit home had to do with the little ole lady who turned out to be a bad, little ole lady.

Erzen presented a true case that he described as “The Case of Carolyn K.” In this case, as with many that go to court, the key for an advisor in protecting himself is to make sure all communication was made clearly and that all communication was documented.

Here are the facts of the case:

  • Carolyn K. is a 50-year-old widow
  • A homemaker at the time of the claim, but previously was a special ed teacher
  • Four children, two in high school
  • She received $1.7 million from her husband’s life policies
  • She placed all $1.7 million with Bob, a registered rep
  • Bob the rep traded investment equities, primarily technology plays and then naked option contracts
  • During one year, Bob the rep traded $5.5 million in securities from the account
  • Within three years Bob the rep had lost $1.5 million
  • Carolyn K. sued him

Looking at the facts from this perspective, Carolyn K. had every right to sue Bob the rep, right? Maybe even tar and feather him. After all, the facts were plain and simple. Carolyn was a simple homemaker, a widow on top of that. These assets were all she had and this rep had played fast and loose with the money until there were just a few crumbs left.

At least that’s the way it looked on the surface. If Bob the rep hadn’t kept documentation of all of their correspondences, and detailed notes when they spoke by phone, he would have been in a heap of trouble. But he did keep the documentation. The following are actual emails sent to Bob the rep from Carolyn K.:

Within the first two months of opening the account:

From: Carolyn K.

            To: Bob the Rep

Please put assets in aggressive growth!

One year after opening the account:

From: Carolyn K.

            To: Bob the Rep

Bob, keep your eye on Raytheon today. I just heard the government asked them to increase their Tomahawk production by 600 missiles.

Two years after opening the account:

From: Carolyn K.

            To: Bob the Rep

Bob, I won’t sue you.

Two years after opening the account:

From: Carolyn K.

            To: Bob the Rep

My cousin’s wife was found dead this morning. Btw, do the Calpine options expire tomorrow?

Because Bob the rep maintained meticulous records of his correspondence with Carolyn K., when she sued him, the proof showed that she wasn’t the naïve and innocent little ole lady she’d portrayed herself to be. Instead, she was an investment junkie with a predilection for options—case closed.

 

For more coverage from NAILBA 31, see:

Are agents holding back the underwriting process?

7 key takeaways from NAILBA 31’s state of the industry

Why are we selling Brussels sprouts and calling it candy?

More Resources

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