I recently worked on a court case where a series of small but horribly egregious errors were made in client financial plans. Twelve clients who had invested an aggregate $10 million with a broker at a national wirehouse were suing the broker after they each lost 50 percent to 75 percent of the capital held in financial plans the broker had prepared for them. A partner at my former CPA firm was asked to be an expert witness in the case, and, given my background in the brokerage industry, I was brought in to assist in reviewing the faulty financial plans. What I found was astonishing. The broker involved had made really embarrassing errors, like listing a client's 401(k) assets as taxable and his stock account as nontaxable. He had different numbers for total assets on different pages of the financial plan and was projecting overly aggressive future market returns.
What's worse, a supervisor never reviewed or pointed out these mistakes, so they were made repeatedly and for a couple of years, until finally the broker's clients realized something was not right. In court, the broker claimed she did not realize she had made these errors and attempted to pass blame, but there was no one to pass the blame to. No one reviewed her work…not until the clients went to an attorney and filed a lawsuit, that is. Ultimately, the case was settled out of court for an undisclosed amount, but the broker lost her job.
You might think this kind of thing would never happen to you, and, hopefully, you are right. But it's worth noting that when you are managing someone's financial future, even tiny mistakes can become huge problems. So you really want to make sure you minimize those mistakes. Here are five simple tips for doing so:
- The “ask thy neighbor” rule
Always have someone read over your work. Even an assistant who may not be familiar with your client can easily catch misspelled words. If you can have a co-worker glance through your calculations, even better.
- The “KISS” rule — Keep It Simple, Stupid
Don't try and massage the numbers or do some sort of fancy excel spreadsheet that shows that your unique stock-picking strategy is 99 percent guaranteed to pay off. This is just begging for trouble.
- The “coffee test.”
Finish your work and put it away for the night. First thing in the morning when you get your coffee take a fresh look at it. You'll be amazed how many errors you'll find from your late-night work.
- The “kindergarten test.”
Make certain you use clear and simple language with clients to ensure they understand what you're explaining to them. Ask the client if he is OK with your estimates, and make sure he understands how you reached them. If the client walks away without fully understanding, you could be in for trouble down the road.
- The “I'm in over my head” rule
Some clients have extremely complicated financial plans. If you are in doubt about what you're doing, it's crucial to bring in backup. Get connected with CPAs, lawyers and other professionals — and use them. Don't let carelessness sink your career.
