My previous column described risks for advisors in the securities industry, yet the most significant risk to advisors is credibility risk -- the risk that a judge or arbitrator will believe a client's testimony over that of the advisor.

Witness credibility plays a significant role in a judge or regulator's decision whenever the client and advisor each explain their version of the events to a judge or arbitrator. The same events are often described by the client and the advisor in diametrically opposed terms. It may be that they both attempt to describe the events as best they can but, no doubt, biases affect their recollection of what happened.

Consider this scenario:

Client. "I was referred to Mac (the advisor) many years ago. I was invited to one of his free seminars in which he described the type of investing he was doing for his clients. I knew nothing about investing, but Macexplained that I could make much more money than what I was making on GICs (guaranteed investment certificates).

"I worked hard all my life, and Macsaid this was an opportunity to get my money to work for me. I liked the concept, but I didn't understand that there was risk involved. Macnever talked to me about the risks of investing. I totally trusted him and followed his advice because he promised that I would make more money following his advice than if I left my money where it was.

"When I received my statements, I didn't understand them, but Macreassured me that this was the way to go, and I should just follow his advice. I can't believe how much money I lost. I am now 62 years old and I need to continue to work to make back the money I lost. I am mad at Mac, and I have found a lawyer to help me get my money back by suing Macand his employer."

The advisor. "Mr. Kirk (the client) was a friend of my father. I had been helping my father with his investments for years, and Mr. Kirk, who was invested in GICs, watched my father's retirement savings improve. My father took trips and bought new cars while Mr. Kirk lived more carefully.

"Mr. Kirk was getting restless and wanted to switch to mutual funds. I explained to him that while I would put him in mutual funds and conservative stocks, there would be no guarantees, like there are with GICs, and there was risk of loss of capital. I invited him to one of my seminars in which I explained the potential growth of mutual funds and, specifically, historical evidence that they yield better returns than GICs over the long term.

"Mr. Kirk approached me after the seminar, wanting to meet with me immediately. We agreed to meet the next day. I was pleased that Mr. Kirk wanted to invest with me, but I was a bit worried because my father told me that he is a big complainer.

"I wanted to help Mr. Kirk, so I agreed to take his account. Well, that was about nine months ago and now the market has taken a tumble. I told him not to worry; he was still three years from retirement, and these were investments for the long term. Mr. Kirk couldn't handle it, even though I had previously explained the risks to him. He instructed me to liquidate his portfolio and send him a cheque. He issued a complaint to the regulator and sued me for his losses."

If it becomes the client's word against the advisor's, the onus is on advisors to prove that they fulfilled their duties to a reasonable standard. This is difficult to prove without documentary evidence reflecting discussions the advisor had with the client. When it is the client's word against the advisor's, courts sympathize with the client. Why? Advisors -- and this applies to other professionals such as doctors, lawyers and accountants -- are assumed to be better-educated, more knowledgeable and more experienced in their respective fields than their clients. Indeed, clients seek out, rely upon and pay for professional advice.

Accordingly, clients are perceived as vulnerable and reliant upon the better-educated, knowledgeable and experienced advisors. That's why courts and regulators tend to view clients sympathetically. It's also why advisors have to bolster their cases with documentary evidence.

How can advisors protect themselves? They need a record of what the client said to them and details that support the conclusions and summaries in the Know Your Client form. They also need a record that the risks of any investment or strategy was explained to the client.

This can be in the form of handwritten or electronic notes, tapes or any other method that the advisor can easily incorporate into his practice. I point out to advisors that very few, if any, clients take notes at meetings.

Armed with evidence to support the advisor's version of events, the advisor will have a much better chance of winning the credibility battle. Don't expose yourself to unnecessary risk, just pull out your pad and pen and start writing!  

Published in National Post on Thursday, December 18, 2008 and based on materials published in Ellen Bessner's book: Advisor at Risk: A Roadmap to Protecting Your Business