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When your divorced client remarries, he fills out a change-of-beneficiary form for his insurance policy. He gives the form to your assistant because you’re busy with another client. The request doesn’t come to your attention, the form isn’t filed and a claim ensues when the client dies a few years later.

“There’s no defending the advisor in that case,” said Roberta Tasson, a partner at The Magnes Group in Oakville, Ont. when she spoke at the Independent Financial Brokers of Canada’s spring summit on Thursday. Magnes is the broker for the IFB errors and omissions (E&O) program. “That’s why you carry E&O insurance, because people make mistakes,” she said.

At the event, she highlighted items for independent advisors to consider as they implement policies and procedures to mitigate exposure to client claims, which tend to be on the rise.

“Financial advisors are increasingly the target of E&O claims,” she said, in part because litigation is generally increasing and also because products are increasingly complicated.

Tasson described some common claims allegations:

  • failure to assess client risk tolerance and explain risk;
  • unsuitability, with an increase in claims associated with leveraged loans;
  • breach of fiduciary duty, as when one product is recommended over another to the advisor’s benefit;
  • misrepresentation of how a product works; and
  • failure to understand a client’s ongoing personal objectives, including after life changes such as divorce or job loss.

“Be in continual contact with your clients to make sure you are aware of any key life situations,” Tasson said.

While some allegations are black and white, like the change-of-beneficiary form described above or where the advisor is clearly negligent and the client experiences losses, others are more nuanced. For example, allegations of misrepresentation can result from advisor-client misunderstandings or allegations can be unclear because the advisor’s and client’s recollections differ, Tasson said. Because claims often emerge months, even years, after the transaction in question is complete, documentation of advisors’ due diligence is key.

She also noted the higher standard to which advisors are held. “If both parties are equally believable, 100% of the time the court will side with the client over the professional,” who has the duty of care, she said. Proper documentation can help the court better provide an assessment of the claim.

Highlighted action items 

Here are just a few of the issues Tasson discussed to help independent advisors develop a standard practice to help mitigate potential claims.

  • To help head off problems from the start, Tasson said advisors should ascertain whether prospective clients are a good fit with their businesses and values. For example, consider asking prospective clients about past insurance and advisor history. Has the client previously developed lasting relationships with professionals or changed advisors frequently?
  • Clearly explain to clients the nature of your services—what you do and don’t do—and that you can refer them to other professionals.
  • Determine client needs and objectives for investments and insurance, instead of assuming that previous professionals have that information.
  • Ensure clients understand their investor profiles, which can require time spent on client education.

What to do when a claim arises

E&O insurance often covers legal costs but typically not fines and penalties, Tasson said, adding that insurance coverage should fit your practice—for example, it should cover any tax preparation work you do.

Advisors should contact their E&O providers if they’re contacted by a regulator about a complaint or investigation, Tasson said, in case legal costs are incurred but also so no late reporting issues arise if, for example, the client pursues a civil suit.

When an advisor receives a letter from a lawyer or is served with a statement of claim, the advisor should make no admission of error or offer of compensation, which could result in the E&O insurance being voided or cancelled. Only the insurance company can settle the matter, Tasson said.