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Communication Risk Chapter 1

I. What Are the Causes of the Communication Gap?

I have spent more than 25 years defending advisors in litigation and regulatory matters, and in that time I have found that the main source of problems is the gap in understanding and communication between advisors and their clients. Where clients are secretive, advisors fail to draw them out; where clients expect too much, advisors fail to manage those unreasonable expectations. In this chapter, I will explore how the communication gap arises and what the consequences can be.

First, we'll look at three case studies: Dank, an investor who lost big money chasing big returns without giving enough thought to the risks; Flank, an investor who didn't save enough for retirement and hoped to make up the difference with higher-risk investments; and, finally, Shank, a client who was assumed to be so well off that the advisor was not comfortable asking the questions necessary to ensure she qualified for the investment. All three cases—and many others throughout this book—are real-world examples from my own experience as a litigator that portray common communication gaps between clients and advisors. For all, I have altered the details to the point where each case will be unrecognizable even by the people originally involved.

Example 1: Dank

Dank is arguably one of the most treacherous kinds of clients an advisor can have, because he pretends to be wealthier than he actually is. Dank is a highly educated professional in his early 50's, married with four children. He works hard and plays hard. Dank earns well but has expensive habits and expensive toys, such as cars and boats. He hopes to inherit money from his parents one day, but that is uncertain. While he has all the trappings of wealth, Dank is actually in dire straits. He might not have enough money to pay for his children's private school fees this year. He is deep into his line of credit and his credit cards. He hopes winning big in the stock market will help him out of his bind.

Dank calls up his advisor and asks for some high-return strategies he has read about. "Do you realize these investments are risky?" his advisor asks. "Sure," Dank replies in his quest for big gains, playing down any concern for potential risks. He's desperate. The advisor presses a bit but gives up when Dank stops responding and grows evasive.

Dank's advisor could ask: "How much can you afford to lose?" But he doesn't. Instead, he ignores the red flags and recommends a high-risk, diversified portfolio of securities. Months pass and things go from bad to worse. Dank bails at a huge loss.