EDITORIAL: HOW TO AVOID SUITS BY FREELOADERS

The Institute of Certified Financial Planners should take no chances. It should define “client” rigorously and narrowly in its practice standards.

The definition should state that a person becomes a client of a certified financial planner only when a written agreement specifying the services to be provided, and the compensation to be paid for those services, is signed by both parties.

Such a definition would offer financial planners some measure of protection against frivolous lawsuits, as the leaders of the seven biggest regional ICFP organizations have suggested.

As reported in the June 22 issue of InvestmentNews, the Big 7, as they call themselves, are concerned that the definition of “client” in the ICFP’s proposed practice standards is too broad.

“Client,” in the proposal, is defined only as “a person, persons, or entity for whom professional services are rendered.” Since the professional services certified planners provide include giving investment advice, a financial planner discussing the relative merits of various mutual funds with another guest at a party might be construed by a court as having provided professional services, the members of the Big 7 fear.

The dictionary definition of “client” makes no mention of any written agreement and so a party-goer acting on the unguarded — and unpaid for — comments of the financial planner could well be defined as a “client.”

If the guest can show a court of law that money was lost by acting on any of those casually offered opinions, the planner could be held liable.

In a society so litigious that McDonald’s Corp. can be successfully sued for serving hot coffee too hot, and not foreseeing that a customer would place it between her knees while driving, who can say the Big 7’s fears are unfounded?

Far better to anticipate trouble and arm the financial planners with some modicum of protection.

Tightening the definition might deter lawyers from taking a borderline suit. If not, it would at least allow the planner’s attorney to argue that, according to the professional group’s practice standards, there was no client relationship.

These proposed standards are designed to advance professionalism in financial planning and to enhance the value of the personal financial planning process. Both of these goals are well served if financial planners can go about their lives with less fear of frivolous lawsuits.