Investment Products with Defined Outcomes
Many investment options, such as structured products, are worthy of extra effort and care is built into the sales practices. These defined-outcomes are based upon assumptions regarding underlying investments, strategies, and their expected rate of return. If those assumptions are wrong, in the end, the client does not get what they expected resulting in claims of the alleged misrepresentation, breach of fiduciary duty, and such. Historically, remember vanishing premium insurance products, variable annuity products, currently premium financing of life insurance with the expected built-in value to pay the financing installments, and now ETFs, structured products, etc. Every year there are 100+ arbitrations involving these products not meeting expectations. A stock going down is different than a product delivering a poor result based upon a built-in faulty assumption. Everyone is pressed for yield, it is what clients want to hear. Under-promise and over-deliver. A disclosed over-estimate will not prevent a claim. A "good-better-best" presentation of the potential results with documentation of the client's understanding is a good risk management step.
Third-Party Due Diligence Reports
The lawsuits and statements of the claim at times will make note of the fact the third-party due diligence reports are paid for by-product sponsors and are, therefore, by nature, full of potential conflict. For that reason, most BDs conduct their own due diligence also to offset that allegation/assumption. The due diligence reports are best used as a roadmap for the firm's own due diligence. With that, 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 and 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 they hear are 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 and 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. That, combined with documentation of the day and time of the meeting has proven very beneficial in the defense of their claims.