The title of this piece begs the question, can you avoid the litigious client? While there are things you can do to minimize the risk, it may not be possible to completely avoid it. In this article, we will explore this subject and I will share a personal experience when a complaint was filed against me. I hope you find it helpful.
The Complaint
It was early 2011 when I accepted a new client and his spouse. I had met this individual over a decade earlier and had no indication of his propensity to litigate. More on that later. I offered to do a financial plan, since this would determine his required return and the risk needed to achieve it. He declined. Therefore, the portfolio was based on his risk questionnaire. Among his answers on the questionnaire, he indicated that his maximum acceptable loss over a 12-month period was -0.1% to -0.5%. He could have chosen zero but did not. His portfolio was indeed conservative, with a 3-, 5-, and 10-year standard deviation under 5.55%. What caused the problem?
At that time, I purchased several three- and six-month reverse convertibles. Whenever I added one to an account, I sent an email to each client with a detailed description, including the best- and worst-case scenario. I sent an email to this client as well. His reply was "I like it."
According to documents I gathered at the beginning of the relationship, the client owned individual stocks, REITs, and high yield bonds, all of which carry a fair amount of risk. A few months after purchasing a reverse convertible for this client, it fell 35-40%. I had a decision to make. Sell it and cut our losses or hold it and hope it rebounds. I sold. This security only comprised 6.0% of his account and 0.18% of his entire financial assets. Despite the drop in this one security, the account had a modest positive return.
