Did You Understand Your Financial Advisor’s Advice?

Should a Complex Investment Require a Confusing Explanation?

Investments and insurance products can be complicated. The explanation should not have to be. Heavy use of industry jargon can make it difficult for an investor to understand what they are buying, what it costs, what could go wrong and what alternatives exist. Being confused does not mean the client is unsophisticated in life. Sometimes it means the explanation was poor. Sometimes sophisticated people in non-financial areas are unsophisticated when it comes to their own finances and investments.

Why Ask What the Client Understood?

One useful communication technique is simple. After explaining an important concept, ask the client to explain what they understood. This is not a test of the client’s intelligence. It tests the communication. If the client understood something different from what the advisor intended to convey, that can be corrected before an investment decision is made rather than discovered after a loss.

What Can You Ask Before Making a Decision?

Do not be afraid to stop a meeting. Break complicated advice into pieces and say: “Let me tell you what I understand you to be recommending.”

Then ask:

• Have I correctly understood what I can lose?
• What happens in a bad market?
• What are the costs?
• Can I get my money out when I need it?
• What are the alternatives?
• Why are you recommending this for me?
• Are there circumstances where this strategy could fail?
• What will you be paid?

If you cannot explain the basic recommendation afterwards, you may need another conversation before making the decision.

Why Can Written Follow-Up Matter?

Important advice should not necessarily disappear when a meeting ends. Plain-language follow-up can help investors remember:

• what was recommended;
• why;
• the important risks;
• alternatives that were discussed; and
• what happens next.

A practical communication technique used by competent advisors is to put a question in follow-up communications. That’s to test the client’s understanding not by rote, but by asking about concepts and comparing the client’s response for completeness and a practical, applicable understanding. A correct response helps establish whether the client actually received and considered the communication.

Why Does Communication Matter When Markets Fall?

Communication can become even more important when investments are performing badly. That is when investors may be frightened and when the assumptions behind a financial plan are being tested.

When Could a Communication Problem Deserve Legal Review?

Not every misunderstanding means there was negligent advice. After an advisor’s records are examined, a communication breakdown may be identified without establishing wrongdoing. That distinction is important. But sometimes the communications and records raise deeper questions:

• Was the risk actually explained?
• Did the client understand the strategy?
• Did the advisor understand the client?
• Were important alternatives explained?
• Do the documents match what was discussed?
• Was the recommendation appropriate in the first place?

Those questions require examination of the evidence, not assumptions based solely on the outcome of an investment.

If you suffered a significant financial loss and what happened does not match what you understood your advisor to be recommending, we can review the documents and help determine whether the problem was simply poor communication or whether there may be a basis for a claim.

For information about our services, see financial advisor misconduct.

Frequently Asked Questions