How to play the claim game

No matter what they do, financial advisors are going to get sued. And what’s worse is the court is not a level playing field.

An ounce of prevention, therefore, is worth a pound of cure, says Ruth Mercer, senior general adjuster for Crawford & Company (Canada) Inc.

Speaking to the audience at the Independent Financial Broker (IFB) Toronto Fall Summit, Mercer pointed out problem areas and offered tips on what financial advisors and life agents can do in case of a claim against them.

Advisors who are not taking time to understand increasingly complex products are making a false start they can’t recover from. “Make sure you have a solid understanding of products you are offering your clients and how they work,” said Mercer. “There are no short cuts, if you take one it’s going to come back and bite you.”

Common areas of contention Negligent misrepresentation of investment products and life insurance policies is one of the most common of claims. Most frequently, but not all the time, the advisor is held responsible for not having taken reasonable steps to provide accurate advice. The client relies on the advice and suffers the result, said Mercer.

Worse still, giving advice outside the area of expertise can cause serious consequences. “If your client needs some advice that is outside your comfort zone, refer them (to the right person), don’t wing it,” she said. “Making assumptions can be very costly.”

Failure to implement clients’ instructions on a timely basis can impact negatively on clients’ investments. These typically include instances where failure to buy or sell a product in accordance with the client’s instructions resulting in increased costs and lower profits. “You need to be timely in acting on your client’s instructions” while being accurate in following them.

Another type of common claim against a life agent is the cancellation of an old insurance policy before the purchase of a new policy has been confirmed. “This could result in a client who had insurance being left without it and being virtually uninsurable.”

Typically, when there’s a claim, the advisor and the client have different versions of what happened and what was discussed between them. “You’ll be shocked to know how many times clients tell me they are conservative investors, but their KYC documentation reveals they are 100% high-risk investors,” said Mercer.

When submitting the claim, very often clients take the position that they don’t want to make money, they just don’t want to lose their capital. “I’m pretty sure that’s not what they tell you,” because that is very inconsistent with the advisor’s notes taken during client meetings. “I promise you they are looking to make money.”

“It is these notes that are of huge value when it comes to a client pursuing you in an E&O claim, and the successful defense of an E&O claim,” she said. “Take notes when you discuss matters with your clients and take notes of your clients’ expectations—the best way to do this is contemporaneous with events or shortly thereafter.”

These notes become even more valuable in light of the fact that the court is not a level playing field between the advisor and a client. “If all things were equal, and if the advisor and the client were equally believable, 100% of the time the evidence of the client is going to be preferred over the evidence of the advisor.”

There are, however, ways to level that playing field, she said.

KYC covers your YKW (you know what) Claims are like cancer; both arrive unpredictably, and very often early detection and some healthy practices are the only way to control the outcome.

Don’t underestimate the importance of the KYC (Know Your Client) process. “Try and get a good handle on their risk tolerance and their true level of sophistication.”

Having a good paper trail can stack the deck in the advisor’s favour. Documentation can make or break a case like little else. “You need to make your notes and you need to keep them.”

From the defense perspective it is quite frustrating to hear the documents are destroyed, shredded or lost, she added. “If you can’t find that document, it doesn’t exist. It’s not going to help the defense counsel if you can’t produce it.”

Another preventive measure is knowing products that are being promoted to clients. “Products are becoming increasingly complex. Make sure you have accurate and more up-to-date information and relay it to your clients.”

It is also critical to make sure the advisor and client understand each other and keep expectations and promises realistic. “Don’t promise to deliver the stars, the sun, and the moon.”

Markets can be very temperamental so “temper your representations to your client.” In the long-run it pays to point out early if the clients have unreasonable and aggressive expectations while having low risk tolerance.

What to do in case of a claim There is no ready recipe for avoiding a claim made against an advisor altogether. Therefore, it is important to know what to do if a claim is made against an advisor.

It starts with acting promptly. “Call your [E&O] broker right away, even if you are uncertain as to whether or not a claim against you will be made,” said Mercer. “If you have any concerns at all, report, talk to someone, get some advice.”

The general rule, she said, is to report as soon as there is a notice, or an indication of a fact or a circumstance that may lead to a claim. This allows time for interviewing any relevant witnesses if necessary, asses the liability, and ascertain if there’s an opportunity to repair and control the damages.

Last but not least, exercise the right to remain silent. “You don’t want to make any admissions to your client either,” said Mercer.

(11/04/2010)