As we write this article, the media is abuzz with accounts of the U.S. Affordable Care Act’s flawed enrollment website. Testifying before Congress, contractors blamed the government and each other, but shed all accountability for the site’s shortcomings (what else is new?). Only time will tell how long the problems will persist. But one lesson is clear: a government or business is only as strong as its weakest partner. If any one element is incompetent or unethical, the entire enterprise can topple, smashing everyone’s reputation and creating errors-and-omissions liabilities.

Financial professionals face this risk every day. Which carriers do they choose to represent? What field marketing organizations (FMOs) do they sign up with? What estate planning attorneys or accountants do they refer their clients to? What technology firms do they hire? And for those who don’t get leads from their FMOs, what lead-generation providers do they use? All of these decisions require due diligence not only regarding the partner’s competence, but also regarding its commitment to ethics and compliance. That’s because liability for partner errors and omissions, like all nasty things, flows downstream.

The ethics and compliance issue can be especially challenging for financial advisors. That’s because they’re so focused on generating results from their inventory of time and money, that they often lose sight of the implications of their actions. In other words, some think that as long as a marketing tactic is effective, there are no ethical or compliance issues to worry about. They forget that in the real world of aggrieved clients, aggressive regulators, and litigious attorneys, ethics and compliance always trump ROI.

Hiring lead-generation vendors is a perfect case point. It’s no surprise advisors are anxious for their mailers to generate qualified leads. So if the mailing works, they may gloss over the fact that it uses deceptive language or relies on illegal practices. This can lead to regulator scrutiny, fines, and potentially non-compliant sales down the road.

For example, the Kansas Department of Insurance recently levied a $5,000 fine and issued a cease and desist order against an Ohio lead-generation firm. The problem? The company was mailing post cards to Kansas residents suggesting they were financially at risk because their annuity surrender periods were ending. Furthermore, the department ruled that the post card’s disclaimer did not outweigh the card’s deceptive intent.

Why would agents permit this mailing? Doesn’t the ending of surrender periods benefit clients? Agents apparently valued the lead-generation firm’s ability to generate leads more than its (in)ability to comply with the law. With the firm now in hot water, agents who closed sales from those non-compliant leads are at risk.

However, getting fined several thousand dollars for abusive sales practices is nothing compared to getting embroiled with unregistered investment offerings or phony insurance products. Ask investment advisors unwittingly ensnared in Bernie Madoff’s Ponzi scheme whether they should have done more research. Our best advice? Always affiliate with the highest quality partners. Look for those with strong ethical values, demonstrated competence, compliant business practices, and an exemplary focus on long-term success rather than short-term sales. Here are some points to consider before signing any deal:

  1. Know whom you’re dealing with. Make sure you know a company’s owners, street address, and phone number. Avoid working with companies operating out of post-office boxes. If an online merchant fails to display contact info, watch out!
  2. Make sure the company is properly licensed.  Is the company subject to state or federal regulations? If so, check with its regulatory agencies to make sure it has a clean compliance record.
  3. Verify its BBB grade. The Better Business Bureau (BBB) has reworked its grading system after it came under fire several years ago. But don’t put too much credence on grades alone. Instead, look for large numbers of unresolved complaints.
  4. Verify its business address. Does the company have a home-based office or does it operate out of a bricks-and-mortar location? Home-based businesses aren’t necessarily riskier. But they may lack capacity to meet your needs over the long term. And don’t forget to search Google Street View for a company’s address. You may be surprised at what you find.
  5. Ask for a written contract. Always put agreements in writing. This will help you avoid scammers who have no intention of delivering a legitimate service.
  6. Watch out for arbitration clauses. These are becoming more common and thus hard to avoid. Still, read the fine-print disclosures so you know what to expect.
  7. Understand recurring billing policies. If you agree to pay a recurring bill, check your ability to cancel without prior notice. Also, make sure the company sends you a hard copy or e-mail notice of bills coming due.
  8. Check out online reviews. Phony online reviews have been in the news. So don’t place complete faith on reviews. Still, a preponderance of negative reviews should give you pause.
  9. Evaluate a company’s transparency. Has the firm encouraged and answered your questions during the sales process. Has it provided full documentation on its background, principals, and practices? If the company ignores your questions or gets hostile about answering them, take your business elsewhere.

If this sounds like a lot of work, well, it is. But it’s a sensible investment to make in order to protect your business from inept or unethical partners. And if it helps you to avoid lawsuits (and errors-and-omissions insurance claims), all the better. Good luck!

Sources: National Ethics Association and National Organization of Life & Health Agents.

For more information on reducing your errors-and-omissions insurance liabilities, please visit our E&O Headquarters at

Deciding which broker-dealer (BD), financial marketing organization (FMO), or registered investment advisor (RIA) with whom to affiliate is never a trivial matter. Typically, financial advisors and insurance agents choose to contract with those organizations that provide the optimal mix of payout, product choice, marketing support, technology prowess, sales/marketing assistance, and compliance expertise. However, many advisors fail to consider the errors-and-omissions coverage provided by (or referred through) their partners. This can be a costly mistake.

The good news is most such organizations provide access to some form of E&O coverage. If the partner is ethical and committed to building a long-term relationship with you, the E&O protection should be affordable and of high quality. Yet, not all organizations are ethical or committed to their producers. Do your due diligence to confirm you’re getting a good deal.

As with all things financial, complexity rears its head quickly when discussing E&O coverage. Practices vary based on whether the entity is a BD, FMO, or RIA. Further, within each type of organization, there’s no standard way of delivering E&O coverage. Here are some broad guidelines to consider.

If you’re a registered securities representative, selecting a broker-dealer means you’re required to buy the firm’s errors-and-omissions coverage. The BD arranges for a block of coverage from an insurance company. Then, it divvies up the block among its contracted reps, charging each one a fee. Now, here’s where things get complicated. Some BDs will simply charge their reps their cost. Others will view E&O as a profit center, “marking it up” to a greater or lesser degree. What’s more, some will treat all reps the same, charging a standard rate. Others will vary the rate based on the rep’s production. Still others might play favorites, charging a better price to reps whom they “favor.”

Despite these complexities, getting E&O from your broker-dealer makes more sense than not. Selling securities in volatile times, especially to high net-worth clients, creates substantial risk for advisors. Getting covered through your BD simply makes good business sense. And since the BD wants you to be covered in order to minimize its own risk exposure, it will hopefully do its best to procure high-quality and affordable coverage. In the rare event a BD overcharges for E&O, registered reps will have to factor that into their overall BD assessment. If the firm is lacking in other areas—say, its product portfolio is weak or its computer support is lacking—then it might make sense to shop for another BD.

But be careful. A BD that charges a low amount for E&O might be capturing profits elsewhere in the relationship through higher securities transactions costs (or other costs). Evaluate the BD’s E&O offering in the context of its total product and service quality.

In the insurance world, agents have more flexibility to source their own E&O protection. As with BDs, FMOs typically require agents to have E&O insurance as a condition of contracting. However, unlike BDs, FMOs don’t access a block of coverage for agents to draw upon. Instead, they often research the market and make referrals to one or more “preferred” E&O providers. Since agents aren’t required to follow the FMO’s recommendation, they should evaluate them on their merits:

  • Do the recommended E&O policies provide high enough coverage limits?
  • Do they cover your specific products and business activities?
  • Is the insurance company highly rated and financially stable?
  • Does the company have a solid track record of paying claims?

As with BDs, the good news is that FMOs are unlikely to refer you to a grossly inadequate E&O insurer. That’s because they want to reduce their own financial liability by creating a risk buffer at the agent level. Once again, price may become an issue for some agents. If the recommended policies are too expensive, be sure to shop around for better deals.

Avoid the common practice of simply signing up for E&O insurance in order to provide the FMO with a coverage certificate, then dropping the coverage at the first opportunity. According to E&O experts, this may save you money in the short run, but will create potential financial problems in the long run due to coverage gaps. If you’re committed to staying in financial services, don’t just buy E&O to generate a certificate.

For investment advisor representatives, the options depend on the type of RIA selected. If the RIA is a wirehouse type, then advisors will be required to purchase the RIA’s E&O (see earlier BD discussion). If the advisor is affiliated with an independent RIA, then E&O practices will mirror those of insurance FMOs. So the onus again will be on the RIA to shop for a reasonable deal. In either case, it is crucial to fully review the coverage supplied and make sure it’s suitable to your business model.

Finally, when it comes to errors-and-omissions insurance, our best advice is perhaps the simplest. Do your due diligence before buying E&O insurance, make sure you’re not overpaying for it, and keep it in force continuously. Also, do business in such a way that you will never need to use it. That’s the savviest E&O decision you can make in today’s litigious environment. Good luck!

For more information on reducing your errors-and-omissions insurance liabilities, please visit our E&O Headquarters at