Advisors dealing with errors and omissions (E&O) insurance claims should be prepared to have their practices analyzed with intense scrutiny, however advisors can mitigate these kinds of claims by following certain best practices, experts said on Wednesday.
At the Independent Financial Brokers (IFB) spring summit in Toronto, representatives from Axis Reinsurance Co. outlined strategies advisors can use to reduce the likelihood of encountering E&O claims, and to effectively deal with claims that do arise.
The most common E&O claims are related to a lack of due diligence, said George Georgiadis, assistant vice president at Axis. Specifically, advisors are often found to be falling short of expectations with respect to know your client (KYC) and know your product (KYP) rules.
“Do you understand the products that you are recommending to your clients? Is it the best thing for your clients?” Georgiadis said. “This is something that has come up over and over and over again.”
It’s critical to remember that clients are relying on you for expert advice, and not simply a product recommendation, he added. “You’re not a salesman, you’re an advisor,” he said. “The emphasis on advising is getting stronger, and lawyers are picking up on it.”
Another common E&O claim involves false promises. For instance, advisors can get into trouble by telling clients that they’ll earn a specific rate of return on a given product.
“This is always something we see in the complaint letters that come in – ‘he promised that I was going to make 8% per year’, or ‘he promised that this would be a much better investment’,” Georgiadis said. “You can never promise your client anything, except for ‘I’m going to do the best that I can’.”
Other issues that commonly prompt E&O claims include failing to disclose the risks associated with investing in various products, and failing to check in with clients periodically to ensure their investment and insurance products continue to be suitable for their circumstances.
In the last five years, in particular, the economic downturn has meant some clients’ financial circumstances have changed considerably. This means it’s especially important to conduct portfolio reviews and make any necessary adjustments to clients’ financial plans as time goes by.
“You need to update and keep your plans consistent,” said Warren Cooney, senior claims specialist with Axis. “Life events need to be addressed, and plans need to be modified.”
When an E&O claim does arise, Cooney said advisors can expect the insurance company to carefully scrutinize your files and procedures. To ensure you’re well equipped to deal with a potential E&O claim, he said it’s critical to have detailed documentation of client meetings, conversations and transactions.
“It’s all about documentation and proof,” he said. “It’s important to develop best practices that essentially immunize you, not entirely, but reduce the risk of being held accountable or liable for doing things that somebody says you’ve done, but which you really haven’t done. It’s all about being able to prove what happened and what didn’t happen.”
To mitigate E&O claims, the speakers urged advisors to implement the following 10 best practices:
- Keep detailed documentation.
- Following a client meeting, send that client an email summary outlining what was discussed.
- Follow up with clients regularly to see whether things have changed, and update their KYC information accordingly.
- Provide additional disclosure for complex products.
- When a client chooses not to follow your advice, document it.
- Beware of rogue clients, such as clients who constantly switch advisors, or those who pursue aggressive strategies that you advise against.
- Be consistent with your approach to file management and documentation.
- Never rely on memory.
- Keep current on training and regulatory changes.
- Always put your clients’ needs ahead of your own.
Click here for more stories from the 2013 IFB Spring Summit.