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How to Avoid Pending Lawsuits

Follow the steps outlined in this article and reduce your chances of being sued.

By Ike Devji, J.D.

After the Sept. 11 market plunge and losses, people all over the United States turned to the litigation system to try to be “made whole.” Lawyers started advertising aggressively, asking questions about market losses, blaming financial advisors and urging consumers to “know and exercise their rights.”

Get ready for round two of lawsuits against financial advisors. The current environment is exceptionally dangerous, with a national distrust and hatred of financial institutions and the industry in general. Pity the advisor who faces a jury fed on tales of overspending and irresponsibility by the nation’s largest institutions.

What to do
You can minimize the chances of being sued or losing business by taking the following steps:

  • Examine your E&O coverage to see if there is room to increase your limits and add umbrella coverage in the multiple million-dollar range. The coverage is cheap, and you can always drop or reduce the umbrella later after the crisis has passed.

Be proactive and adequately address your asset-protection planning.
  • Be a hard target. Don’t be collectible above the limits of your E&O. Be proactive and make sure you have adequately addressed your own asset-protection planning. Make sure your personal investments and real estate are properly held. (See the “Asset Protection 101” article in the June 2007 issue of Advisor Today.)

  • Make sure your record-keeping and practices conform to the highest standards. I’m sure your compliance officers have a checklist they can provide on this issue. Also, be exceptionally careful that the interaction and dialogues between your employees who are not financial advisors and your clients are appropriate and limited in nature. Many advisors’ offices are operating with “old pro” administrative people who are exceptionally knowledgeable and take on a great deal of responsibility and client interface. Make sure you know what they are doing and saying—you are responsible for everything they say to your clients and prospects.

Make sure your record-keeping and practices conform to the highest standards.
  • Be nice and communicate often with your clients. Those with the best bedside manner and relationships in any profession have an edge over those who don’t have such relationships. If you have not thought about performing little touches like ordering cards and thanking your clients for their business, start doing so now.

  • Up your game. Are you sure you know the best tools and strategies in the business? Your competition does, and even if you don’t get sued, many of your clients could be poached if you are not talking with them about the new math. Taking clients from other advisors whose clients’ investment portfolios are down anywhere from 2 percent to 40 percent is like shooting fish in a barrel for the best advisors we work with. They are using this economic crisis as the best business-development opportunity within the past 10 years. Which side of that opportunity are you and your firm on?

  • Take action. This is the most important thing I teach. Now is always the time and later is almost always “too late.” If you are already in harm’s way, forget the current action and make sure it cannot be repeated.

  • Have friends in the business? Send this article to them so that they, too, can protect themselves.

Ike Z. Devji, J.D., is executive vice president of The Wealthy 100, based in Phoenix. You can reach him at 602-343-2272 or at


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