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Ellen Bessner on the Need for Financial Advisers to Document Clients' Levels of Financial Sophistication

Published: 02/16/2011

Senior litigation partner Ellen Bessner was quoted in "Document Your Clients' Level of Financial Sophistication," an article which appeared in the January 2011 edition of The Insurance and Investment Journal.

The article notes that there is no legal requirement for a financial adviser to put a client's interests ahead of his own and that courts decide on a case-by-case basis whether fiduciary duty exists. This means that financial advisers need to have their paperwork in order.

Ms. Bessner believes that legislating the formal designation of advisors as fiduciaries is an unnecessary step. "Financial planners need to be honest, trustworthy and put their client's interest first - and disclose any conflicts of interest," she said. "The word 'fiduciary' doesn't mean anything."

Advisors need to document their clients' level of financial sophistication, Ms. Bessner stated. "Paper your file with questions that tell you how sophisticated your clients are. Do they ask intelligent questions that show they're not asleep at the wheel? Do they read their financial statements? Do they understand them?"

Ms. Bessner emphasizes that advisors need to make sure their letters of engagement and investment policy statements clearly outline mutual expectations and the manner in which the advisor is being paid. Advisors who are only licensed to sell mutual funds and insurance have to tell their clients the parameters within which they can operate, and what their clients' other options are, Ms. Bessner added.