If you’re an insurance advisor who hasn’t been keeping detailed records, watch out.
Any files connected to transactions after October 2007 must contain detailed needs analyses demonstrating product suitability and reasons for recommendations. If they don’t, advisors need to revisit transactions, speak to clients and create suitable records, says Rick Forchuk, vice-president of retail distribution at the Empire Life Insurance Company.
That’s because in 2006, the Canadian Council of Insurance Regulators and Canadian Insurance Services Regulators’ Organization endorsed three principles (see box below) for dealing with conflicts of interest. And in October 2007, the Canadian Life and Health Insurance Association published a requirement that brokers record recommendations so that documentation described “the linkage between fact-finding, needs assessment and advice.”
Despite this directive, “There are a lot of advisors in their 50s and 60s who aren’t used to doing a written needs analysis,” Forchuk says. These advisors typically focus on selling insurance and working directly with clients, and may view documentation as merely an administrative task.
Yet with more insurance advisors becoming independent brokers – meaning expanded product shelves – the need to record reasons for client recommendations is as necessary as ever. More choices mean more responsibility to educate the client, especially since many clients don’t read every page of their policy.
And good record keeping isn’t just a regulatory requirement – it’s also good business sense.
|The three principles held that:|
SROs that endorsed the principles include Advocis, the Financial Advisors Association of Canada, the Canadian Association of Independent Life Brokerage Agencies, the CLHIA and Independent Financial Brokers of Canada.
The implications of not having detailed records include potential for a lawsuit from an improperly insured client. For example, a client may become ill and question an apparent lack of coverage. Or a relative or lawyer can assume the role of Power of Attorney and start questioning the client’s coverage.
“We see that quite often,” says Forchuk. A well-documented file can support the advisor’s assertion that what he or she recommended was suitable at the time.
Litigation may be even more appealing due to the increasing face amount of policies, especially for high-net-worth clients, according to a major MGA who asked not to named.
Lack of record-keeping can also lead to problems for a broker who purchases your book of business. If a client experiences a life event and coverage does not seem appropriate, even where the previous broker had clearly broached it with the client, the new broker will be at a disadvantage without proper paperwork.
“All [the buyer] knows is the product is in place,” Forchuk says. “Going back to the client can be a pretty tedious process”—especially if that client is disgruntled.
Al Emid, a financial journalist, covers insurance, investing and banking.