As we all look to our planning for the coming year, we are all looking for ways to increase our client base.  Although that is the goal, a mistake in client selection can significantly harm your business. 

In my experience defending brokers and member firms, it seems as though mistakes made during client selection and intake ultimately lead to claims.  How does this happen? 

In my view, we are more concerned about getting clients, and less concerned about if they are the right clients.  There are a few red flags about potential clients that should steer you away from them. 

These potential problem clients are what I call:

  1. The free agent; these are clients that jump from one firm to another looking for better results.
  2. The client with unrealistic expectations.
  3. The client whose goals and objectives are inconsistent with your investing philosophy.

So how do you avoid these potential problems?  Detailed screening and know your customer analysis before commencement of the relationship is the best practice. 

Know that you will never satisfy the free agent, or the client who thinks that they are going to have a 25% ROI every year no matter what happened in the markets.  Likewise, do not try to pigeon hole a client into your approach because that approach may not be proper for that potential client.  In other words, if you are a long-term growth investor, having a customer with fixed income and liquidity needs, is a recipe for a lawsuit.

Dust off your investor questionnaires and client intake due diligence materials and use them when considering the retention of a new client.  Forgot to use them and only have yourself to blame when you get sued. *

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.