Resolving Client Disputes

Learning From The Inside Out
   Testifying as an expert witness for more than 15 years has taught Harold Evensky some interesting lessons. It’s more than a chance to gain business intelligence on how the rest of the industry operates and how people get into trouble.
   “It’s a great way to learn from the inside out,” he says. “The downside is you’ve got some really smart people [usually lawyers] trying to make you look like an idiot.”
   As an expert witness, Evensky is not technically representing one side but instead simply providing an expert’s opinion. If he believes his opinion will hurt the case of the side that has approached him, he makes it clear. And if the attorneys are trying to control costs and limit the material they provide to him, he indicates he needs to see everything.
   What are some of the major lessons Evensky has learned from the process? Compliance experts often tell advisors to avoid excessive documentation, but Evensky disagrees. He cites a recent case where an advisor had no investment policy statement for his client. But he did have extensive notes saying all the client really wanted was real estate investments, about which the client claimed to be very knowledgeable. When the arbitration hearing occurred, the client claimed he never said any such thing and just wanted very conservative investments.
   “As an expert, I put a lot more weight on contemporaneous notes than I do on what someone remembers three years after
the fact.”
   In his 30-plus-year career, Evensky has witnessed two severe bear markets—the tech wreck and the Great Recession. Both produced millions of angry clients. But he views these events very differently.
   The conventional wisdom that many people saw the tech bubble coming, something Evensky hears all the time, doesn’t cut the mustard. If that were true, “it wouldn’t have happened,” he says. But what ultimately occurred between 2000 and 2002 was foreseeable, given the volatility in the tech sector.
   Very few folks saw the financial crisis coming, however, and even fewer estimated its magnitude. The Great Recession was a “four-standard-deviation event. Correlations went to ‘1’ across the board. The only saving grace was fixed income.”
   Looking at future liabilities facing advisors and their clients, longevity is a risk that frequently surfaces. If many clients unexpectedly become centenarians and run out of money, would advisors who only planned for life expectancies of 95 face lawsuits?
   “I don’t think anyone could credibly argue that good planning would say plan to [live to] 120,” he says. There’s nothing in today’s mortality tables to support it.
   Besides, if clients run out of money, they can’t afford lawyers.