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Advisor Alert: Rogue Broker Gets the Boot!

­A Cautionary Tale: After 50+ Disclosure Events, Rogue Broker Gets the Boot

For years, we’ve been preaching to financial professionals about the importance of keeping their compliance records free of black marks. Our argument: that all it takes is one bad disclosure to besmirch your record. And now that sanction reports live forever on the Internet, one event can make it impossible to generate new business . . . for years, if not decades to come.

However, sometimes we run across news that makes us question this advice. For instance, Financial Advisor IQ recently reported the case of a renegade broker who racked up more than 50 disclosure events over a 14-year-time period, all easily found on his FINRA BrokerCheck record. The fact that the broker operated beyond the regulatory pale for years makes one question whether government agencies are capable of protecting consumers against rogue advisors. In this particular case, the answer, apparently, is no.

The more you learn about this broker’s track record, the more shocking his story becomes. According to Financial Advisor IQ, FINRA recently threw Anthony Diaz, a Pennsylvania broker last registered with IBN Financial Services, Inc., out of the business. But it took him repeatedly selling unsuitable securities to at least 17 clients since 2000 for FINRA to act. To its credit, FINRA ordered him to refund $4.3 million to his clients, including $1 million in compensatory damages, $2.9 million in punitive awards, and $413,000 in legal fees. But it tolerated his behavior for years.

Over the course of his career, Diaz repeatedly made inappropriate recommendations. He pushed clients to make variable annuity exchanges with no reasonable basis. He misrepresented products to clients. He lied about their net worth so he could sell them alternative investments. He deceived his product firms and broker-dealers. He falsified signatures on annuity applications. He also got embroiled in numerous client disputes, including a 2017 complaint alleging he made poor recommendations, had a client sign a blank form, and put false information on their documents.

During his career, Diaz worked for 11 different securities firms and was fired from five of them. Apparently, the broker-dealers didn’t care about his atrocious disclosure history; they were more impressed with his sizable client list. And regulators only got serious about policing him over the last couple years, when FINRA finally barred him and the New Jersey and Pennsylvania securities agencies revoked his license.

But think about the impact he had on those 17 clients—how much they must have worried about losing their money, how aggravated they were filing FINRA claims, how much they shelled out in legal fees. If regulators had done their jobs years ago, clients could have entirely avoided this vexing situation.

Now, surely the broker-dealers and the clients themselves share culpability. Why did firms keep hiring and firing this guy? And why did consumers retain the guy when even a cursory BrokerCheck read would have revealed his true nature? His track record should have disqualified him from holding even a janitorial position in the securities business.

So what are the lessons learned from the Diaz case?

  • First, if you’re insurance licensed and refer clients to a broker to purchase securities, please do careful due diligence on that person. Eliminate those with anything more than a trivial complaint in their past. And given the number of brokers who have flawless records, perhaps adopt a zero-tolerance posture regarding customer disputes.
  • Second, encourage your friends, family members, and colleagues to do serious research on potential brokers. The BrokerCheck system is user-friendly. There’s absolutely no excuse for a consumer not to do a deep dive into a broker’s compliance history to see if the person is trustworthy.
  • Third, if you’re securities licensed, supplement your BrokerCheck file with other sources of information your prospects might find useful. For example, give your prospects access to a comprehensive background check on you, available through the National Ethics Association. Also, consider joining the Better Business Bureau. And as long as you don’t have an investment-advisory license, give your prospects the names of several clients who can vouch for your integrity.
  • Finally, as disappointing as the Diaz story is, it highlights the tremendous opportunities financial professionals with clean records have. With so many ethically flawed competitors in the marketplace, those committed to doing business ethically and legally will have a huge competitive advantage over those who are devoid of ethical values. When consumers finish checking you out, they will know you’re the real deal—a financial professional who will serve their best interests and in whom they can entrust their financial futures.

To read more about ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess. 

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Cyberattacks and How to Make Sure Your Business is Safe

­Whatever your license type—life or health insurance, securities broker, registered investment advisor, property-casualty agent, or real estate broker owner—cybersecurity should top your list of risk-management concerns. As recent news has repeatedly shown, financial professionals of all stripes face increasing cyber risks. And those who continue doing business as usual are setting themselves up for potentially catastrophic outcomes.

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The good news is agents and advisors have two powerful avenues of self-defense: purchasing

Now, if you’re saying, “I didn’t know E&O insurance protects against cyberattacks,” you’re not alone. Many financial professionals assume they need dedicated cyber-insurance to receive the most comprehensive protection. And they’re correct. However, you can still receive basic coverage through your E&O insurance policy. Here’s how that works.­

Today’s E&O insurance policies not only protect you against the standard risks of making a mistake or failing to do something important, they now also cover you against certain cyberrisks. For example, EOforLess’s life insurance agent E&O has a client network damage and privacy claim endorsement. This means you will have protection against plaintiff lawsuits relating to an alleged electronic infection that harms a client’s network. The loss must result from you providing covered professional services to the client. In other words, if a client picks up a computer virus (and sustains a financial loss as a result) from having accessed your computer network, your E&O policy can indemnify that person or entity within the limits and definitions of your policy (and the specific wording of its network endorsement).

What about common-sense defensive practices? Actually, implementing a surprisingly short list of measures can go a long way toward keeping you and your clients safe. Here are some of the best measures to implement:

    1. Threat awareness. Part of having secure computers and networks is being aware of the threats you face. To this end, follow industry trade publications to stay current on the cyberattacks and breaches financial entities have suffered recently. Also, visit the Financial Services Information Sharing and Analysis Center to learn more about recent incidents.
    2. Secure passwords. Even in this day and age, a surprising number of people still have poor password hygiene. They use their names and birthdays, rely on simplistic words and phrases, and fail to lock down their passwords against prying eyes and thieving hands. By mandating the use of a password management application, you can vastly augment your firm’s cybersecurity. Such apps simply ask you and your staff to remember one master password. Then through an Internet browser extension, they automatically serve up longer, more complex passwords when you visit websites. This means you’ll no longer need to know or save potentially hundreds of passwords.
    3. Multi-factor authentication (MFA). MFA is a security approach that depends on two or more methods of authenticating a user’s identity before allowing a log-in or other transaction. It typically combines what the user knows (i.e., a password), what the user has (a security token or code), and what the user is (biometric verification as in a smartphone’s built-in fingerprint reader). Having multiple security layers makes it harder for intruders to break into a device or network, since they need to have not only your password, but also your token device and biometric data.
    4. Security best practices. A large number of cyberbreaches occur due to employees’ unsafe computing practices. For example, they often fall prey to e-mail phishing attacks in which they clink on a URL within an email, which then infects their computer with a virus or other code that can lead to unauthorized break-ins. Even worse, online criminals now use increasingly plausible approaches to dupe employees into clicking on malicious links. Solution? Constant employee training on security awareness and best defensive practices.
    5. Data encryption. Make it your business to learn how to encrypt all client data before sending it over e-mail or via other channels. This is a critical element for safeguarding all business and customer data.
    6. Destroy old hardware. If you are disposing of obsolete computers or other devices, make sure to magnetically erase the equipment. Otherwise, hackers may find a way to access the data on the computers or devices and use it to perpetrate a breach to your current hardware and networks.
    7. Update your software regulatory. As the latest cyberattacks are foiled, computer and system vendors typically update their software to fix bugs and close backdoors that lead to breaches. However, if you don’t take advantage of those updates, your data will remain susceptible to attack.

The point is this: cybersecurity is no longer the province of information technology (IT) professionals. Insurance and financial advisors need to stay abreast of the latest threats and adopt protective measures as soon as possible. By keeping informed, adopting best practices, and relying on their E&O and cyber-insurance policies as backstops, they should be well protected against potentially devastating cyberattacks. Good luck!

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The E&O Dangers of Selling Health Insurance

Health Insurance Agents: The Claims You Should Protect Against

Although the advent of the Affordable Care Act (ACA) gave millions more Americans access to health insurance, it resulted in dramatic shrinkage in the commissions insurance companies pay to agents. This has resulted in large numbers of agents fleeing the business to sell other forms of health insurance or allied products such as Medicare-related insurance or final expense. However, whether you have left the individual health insurance market or have re-focused your efforts on Medicare insurance or some other product, you still need to protect yourself against E&O lawsuits.

It’s no wonder the risk of selling health insurance is still high. According to various experts, the per-capita cost of providing healthcare to America’s citizens is roughly $10,000 per year. Consumers either pay for all of that if they’re uninsured or a portion of it if they’re insured. In either case, purchasing medical services is a common event for them. For those without insurance, it can also be a challenging, even frightening, event. For this reason, buying healthcare—and health insurance—is a high-involvement purchase. People care a lot about the care they receive and pay great attention to its results and costs. As you can imagine, when something goes wrong, either with their healthcare or their bill, they can get extremely upset. If they don’t receive a fair outcome, they may take legal action against their medical providers and their health insurance agents—against you!

For this reason, it makes sense for life and health insurance agents to carry comprehensive E&O insurance to pay for legal fees and for legal judgments or settlements in the event they get sued. What are the claims they should protect themselves against?

One of the most common E&O insurance claims is for misrepresentation. This might occur when you suggest a health insurance product has a feature it doesn’t actually have. You don’t have to do this with fraudulent intent. If you mislead a customer through ignorance, you are still on the hook for misrepresentation. Case in point: say you mistakenly tell a prospect that she is covered for a year’s worth of skilled nursing care via her Medigap insurance policy. The women ends up getting sick, hospitalized, and then needs six months (or 180 days) of skilled nursing. Unfortunately, 80 days of that care will go unreimbursed since Medigap policies limit coverage to only 100 days of skilled nursing. Given the daily cost of this care—about $250 a day for a private room—the client would need to come up with $20,000 out of pocket to cover her bill. Do you think she will be a satisfied customer or one itching to sue?

Another common cause of health insurance E&O claims is what’s known as “failure to explain.” Unlike misrepresentation, in which you either accidentally or deliberately misstate a policy’s provisions, failing to explain means you just overlook a policy detail or explain it poorly. In either event, your client will buy something he or she doesn’t understand. For example, most health insurance policies have complex interplays of premiums vs. cost sharing. Prospects can either elect to have the lowest initial premium (assuming they never get sick), but with high-cost sharing via deductibles, co-pays, and co-insurance. However, a policy with low premiums may actually generate substantial out-of-pocket costs for a consumer who does get sick. If you stress the attractiveness of the low premiums without discussing the risks of high out-of-pocket costs in case of illness, then you’re creating a potential E&O liability for failure to explain.

A third frequent cause of claims relates to inadequate fact-finding. If you don’t take the time to fully understand a prospect’s needs, the chances of recommending an inappropriate solution increases markedly. For example, imagine trying to help someone fill the gaps in traditional Medicare coverage. As you may know, Medicare does not cover services such as routine eye exams and glasses, dental care and dentures, outpatient prescription drugs, custodial care, and most chiropractic services, among other things. However, there are five potential insurance strategies to fill these gaps, each with underlying options. If you don’t fully understand the prospect’s situation, the odds of recommending the wrong Medicare option are high. Hello, lawsuit!

Finally, the fourth frequent cause of E&O claims are, well, claims. In fact, this is where the rubber meets the road. That’s because whenever a prospect develops a serious illness likely to generate hundreds of thousands of dollars in medical expenses or more, you are automatically looking at a potential E&O problem. Why? Because if the insurer mishandles the transaction (i.e., delays payment or pays the wrong amount) or denies the claim entirely, your customer may end up suing the insurance company and you for having sold the policy. Whether the insurance company was justified in denying the payment is a moot point. You will still need an attorney to get the case thrown out. Without E&O insurance, that expense will be on you.

In short, selling health insurance (especially Medicare products) can be emotionally and finally rewarding in the ACA era. But it can also be risky if you make a mistake or forget to do something important. If your error or omission results in a substantial financial loss to the client, watch out! You may be on the receiving end of a life and health insurance agent E&O lawsuit. But the good news is, having comprehensive E&O protection in place before you get sued will mitigate most or all of the lawsuit’s financial impact. Protecting yourself in this manner will not only provide you with peace of mind, it will also keep your assets out of the grasp of an angry client.

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Avoid Lawsuits with This Checklist

Would you prefer to spend time and money on growing your business or on protecting it? Yup, we thought so. And that’s because it’s human nature to focus on positive things and to avoid dealing with negative matters.

Yet preventing bad outcomes from harming your business can have as large a beneficial impact on your firm as launching a shiny new marketing program or buying new computer equipment or furniture.

In fact, spending money on E&O insurance may spell the difference between your company surviving a nasty client lawsuit or succumbing to it. But if you fail to buy E&O insurance and you get sued, you’ll have the aggravation of hiring and paying for your own attorney and then paying for any settlements or judgments out of pocket, with all of the opportunity costs that will entail.

So how to best avoid E&O lawsuits? By scrubbing your sales process of high-risk behaviors. This checklist shows you where to focus your mitigation efforts.

  • Only purchase sales leads from marketing firms that use compliant practices.
  • Properly identify yourself and your products in all pre-approach solicitations.
  • Conduct comprehensive fact-finding with all prospects.
  • Use a valid profiling instrument to understand your clients’ appetite for risk.
  • Only recommend suitable insurance and investment products to clients.
  • Never misrepresent the features, benefits, fees, or penalties of a recommended product.
  • Make sure clients understand what they’re buying, both at the time of sale and at policy delivery.
  • Review every client’s changing personal circumstances on an annual basis.
  • Execute all client service requests as quickly as possible.
  • Don’t disappear during times of market volatility; make yourself available to reassure nervous clients.
  • Establish reasonable expectations regarding the benefits of owning an insurance or investment product.
  • Document in writing when a client decides not to follow one of your recommendations.
  • Build a relationship with your clients’ children so they understand the nature of the work you do with their parents.
  • Memorialize in the client file all key plans and implementation steps.
  • Stay within your area of expertise; refer “outside” product sales to highly skilled third parties.
  • Do your own due diligence on product or insurance/investment firms before recommending them to clients.
  • Standardize your office policies and procedures, train your staff on them, and have printed copies on file.
  • Have a process for documenting and responding to client complaints.
  • Stay on top of regulatory and rule changes affecting your business.
  • Adopt a defense posture in every facet of your business; try to anticipate problems and eliminate risks whenever possible.