Advisors must consider client suitability before investing money

Anyone that has ever been to one of my presentations knows that I like to tell stories. True stories. With all the discussions going on now about fiduciary liability, I thought it would be a good time to tell a story about a decision I made more than 35 years ago. Two of my clients were retired and lived in a trailer in south Florida. They had been clients for many years but we had never met in person. All transactions were done by phone. All they bought were income producing stocks, mostly utility stocks. They lived off the dividends they received from those stocks. It was in 1977 or 1978 that they showed up at my office one morning. After chit-chatting for about 10 minutes they got down to their reason for coming to the office. They said, "do you know where we lived and worked before we retired to Florida?" I told them I did not. They said "Atlantic City, New Jersey". They followed up with "do you know what's going on in Atlantic City with casinos?" I responded that I was aware of casinos opening there. They then said "we've decided what we want to do with our stock account. We want to sell all of the stocks we own and use the proceeds to buy Caesar's, Bally's and Resorts International stocks. Those are the companies that have casinos there." My response was "you live off the dividends from the stocks you own. Those 3 gaming company stocks don't pay any dividends. How are you going to live and pay your bills?" Their response, "don't worry about it, we know what's happening in Atlantic City and it's big!"

That meeting ended ugly. I told them I wouldn't make those stock transactions for them because it wasn't suitable for them. I couldn't justify selling income stocks for a retired couple and putting the proceeds into gambling stocks with no dividends. I told them that if they insisted on making those transactions they would have to transfer their account to another firm. They stormed out of my office and I never talked with them again.

What happened after that meeting? Over the next 2-3 years interest rates moved higher and most income producing stocks moved lower in price. Those 3 gaming stocks quadrupled in value. It would have been a HUGE score for the retired couple if they made those transactions! So did I make a mistake in not allowing them to make the trades? Absolutely not! It was my responsibility to only allow transactions to be made that were suitable for the investors. Those were not. Consider what would have happened if the opposite results took place. Gaming stocks moved lower and no dividends for the retired couple. There would have been many lawyers that wanted to represent the retired couple because almost certainly they would have gotten all their money back in a lawsuit or arbitration.