Some independent advisors say they are being pressured by dealers to switch to their providers of errors and omissions insurance.

A case in point is Allan Haigh, the dually licensed owner of Haigh Financial, based in Saskatoon.

Haigh, who says he mostly sells group employee insurance to the Aboriginal community, found recently that despite the fact that he had bought E&O insurance from the Advocis Protective Association, his mutual fund licence sponsor, Toronto-based Dundee Private Investors Inc. , insists that he also buy its E&O insurance through
Toronto-based AON Canada — a policy that’s more expensive and to him seems redundant.

“My position is that as long as I have adequate E&O, I should be able to take the position whereby I take my right to support an advocate group by providing them with equal or better insurance,” says Haigh. “What’s Dundee doing in the E&O business anyway?”

Dundee confirms that it contractually requires independent advisors to buy the E&O insurance it has arranged with AON. “The short answer is that we’re comfortable with what we’re doing,” says Don Charter, chief executive officer of Dundee. He says the company’s E&O insurance policy represents strong corporate risk management and is a great service for most advisors, but he concedes that there’s no one insurance product that fits everybody.

It would be impractical for Dundee to vet the quality and breadth of each third-party E&O provider for its hundreds of advisors, he adds.

Haigh is not alone. Other dealer contracts are similar to Dundee’s, as the competition and risk management in the industry tightens.

Paul Bates, dean of the DeGroote School of Business at McMaster University in Hamilton, Ont., says that no matter what insurance an advisor may buy, his dealer may want to protect itself further.

Deeper pockets

In other words, Haigh’s coverage with the APA may provide some peace of mind for him, but it won’t satisfy dealers, who have the deepest pockets in the event of a lawsuit.

If you’re a lawyer representing a client who feels he has a good chance to win a case, “you go straight to Dundee,” says Bates.

Bates says advisors, too, unfortunately may find themselves needing protection from multiple angles: “It’s impossible to immunize yourself from error. You do your best, but in the end we are now in a complex environment in which products are complicated, being introduced through third parties and, in the end, it is tantamount to a shunting accident in which the blame makes its way through the system.”

The problem then falls in the lap of Dundee’s E&O provider, AON, which needs enough members in the group insurance plan to cover its own risk.

Although the Mutual Fund Dealers Association does not mandate E&O insurance by its members, the self-regulatory organization says the contractual agreement between dealers and its representatives is a private matter.

Advocis stands by its E&O insurance, and Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont., who was a key player in starting up the APA’s self-funded plan, provided through Willis Canada, says that there’s no easy answer for the advisor. His contractual obligation with his dealer may leave him no choice, Geller says.

“This is what David Brown, the former chairman of the Ontario Securities Commission, called predatory supervision,” says Geller. “Your employer can tell you do what it wants, whether it’s right or not.”

Gellers says there are frequent, if small, claims against advisors involving mutual
funds. Insurance claims are often large but infrequent, he adds.

A portus chill

The chill blowing over the industry after the Portus Alternative Asset Management Inc. scandal provides some of the background to the story, adds Bates.

“There are number of ways [that the industry] has been challenged with this Portus case, and this is one of them,” he says. “The question has always been more — ‘Who’s responsible for the know-your client rule’, and in addition it’s now ‘Who’s responsible for know your product?’ The Portus case shines a bright light on this issue.”

The insurance market took a nose-dive after the terrorist attacks on Sept. 11, 2001, and E&O insurance was one of the lines of insurance that was adversely affected. Several reinsurers left the E&O market and premiums jumped. This inspired some Advocis members to establish the APA, with the goal of developing a self-funded plan.

@page_break@The upshot for advisors is that they can pick and choose the dealers, product providers and, indeed, the industry organization they choose to deal with. Who will provide the best value to them?

“Everyone is grappling with how they are going to demonstrate value,” says Dan Richards, president of Strategic Imperatives Ltd. , a Toronto-based consulting company to the financial services industry. “Dealers, fund companies, industry associations alike.”

Meanwhile, Bates, who is also a part-time commissioner at the OSC, says that regulators are taking a fresh look at client’s redress in situations in which the liability against failed product provision is unclear.

The OSC is renewing its rules and guidelines for coverage, he says. Guidelines might suggest to firms to have advisors voluntarily refund commissions, at the very least, whereas some firms are considering covering product and liability coverage up front.
“In the past we’ve been focused largely on the know-your-client rule; now it’s know-
your-product rule as well.” IE