Risk Management Lessons from InterWeb

Investment Products with Defined Outcomes

Many investment options and structured products are worthy of extra effort and care. Hence making this built into the sales practices. These defined-outcomes are based upon assumptions. Such as underlying investments, strategies, and their expected rate of return. Concurrently, the client does not get what they expected if those assumptions are wrong. These result in claims of alleged misrepresentation, breach of fiduciary duty and such. 

Every year there are 100+ arbitrations involving products not meeting expectations.  Therefore, A product delivering a poor result based upon a built-in faulty assumption is different then a stock going down.  Under-promise and over-deliver.  A disclosed over-estimate will not prevent a claim. Furthermore providing documentation of the clients understanding and a “good-better-best” presentation is a good risk management step.

Third-Party Due Diligence Reports

Lawsuits and statements of  claims at times will make note that the third-party due diligence reports are paid for by-product sponsors. Making them, by nature, full of potential conflict.  For that reason, most BDs conduct their own due diligence. To offset that allegation/assumption.  The due diligence reports are best used as a roadmap for the firm’s own due diligence.  Then the third party report supplements and supports that the firm performed due diligence and met their requirements.  This enhances the defensibility of a claim.

Evidence of Risk Disclosure to Client

This is a key part of defending a claim. Clients will often say they just signed all the papers. Consequently, they didn’t notice it was not consistent with the representations made by the advisor or rep.  Or, they will say they did not understand the terms and acronyms being thrown about.  All the client heard was the dollar figures and rates of return they expect to receive.  It is unfortunate that regardless of the usual documentation, the client usually appears sympathetic. Thus, panels find in favor of the investor.  One client of InterWeb actually goes through the prospectus or other disclosure documents with the client. Providing an initial as they go along proving they discussed the details.  With the combined documentation of the day and time of the meeting, it has proven beneficial in defense of claims.