Beware Illegal Gifts . . . and Not Just During the Holidays

Not all gifts are wise, especially if you’re an insurance agent. That’s because giving something of value to prospects and clients can lead you to violate your state’s anti-rebating statutes. And this can land you a state insurance department fine regardless of whether your intent was innocent or not.

Although you no doubt learned about rebating in Compliance 101, it can’t hurt to review key concepts. Let’s start with what rebates actually are. Most regulators consider rebates to be giving value in various forms to a customer relating to a purchase of insurance. For example, all of the following would be considered an illegal rebate in most states:

  • Any gift designed to induce an insurance purchase, especially when the value of the gift is significant in relation to what the prospect will pay in premiums.
  • Any return of agent commissions to the buyer.
  • Any offer of free insurance that is contingent on buying insurance.
  • Any agent or agency premium payment on behalf of a prospect.
  • A refund of premiums resulting from favorable policy persistency.

The key point: regulators will normally view anything an agent introduces into the purchase process that is not defined in the contract as either a rebate or an inducement. What is the difference between the two? The former involves returning a part of a person’s premium payment after the sale, whereas the latter provides for the delivery of value in order to motivate someone to buy. In either case, regulators enforce anti-rebating statues in order to create a level, competitive playing field for all producers and companies and to assure that all consumers have access to the same policy terms.

So how do you know when you’re in danger of violating your state’s anti-rebating statutes? According to the white paper[1], “Understanding Concepts of Rebates, Gifts, and Inducements,” by Currin Compliance Services, Inc., start by answering the following five questions. A “yes” to any of them suggests you may be on dangerous ground.

  1. Are you giving, paying for, allowing, or offering anything of value that is not defined in the insurance contract?
  2. In considering the items in #1 above, would prospects be more likely to purchase the insurance on offer?
  3. Are you offering value in order to acknowledge or reward your existing client base?
  4. Is the offer unrelated to the insurance offer you’re making?
  5. Does your offer include a game of chance such as a raffle or lottery?

Although a “yes” answer points to a rebating violation, this is not a foolproof conclusion. That’s because two states—Florida and California—do not prohibit rebating at all. For example, in Florida, you can offer a rebate to one customer as long as you do so for all customers. Similarly, California agents can engage in rebating as long as their carriers allow it. There are other regulatory nuances in these two states, which the Currin white paper explains in greater detail.

The paper goes on to list a number of do’s and don’ts when it comes to the topic of rebates and inducements. It will be well worth your time to adhere to the following guidance:

  • Don’t make offers of cash or cash equivalents, even if the payments are nominal. The closer you get to cash payments, the more likely you’ll run into trouble.
  • Do check with state rules about item giveaways to attract prospects. These are often permitted, especially if they carry a company or agent/agency logo.
  • Don’t make offers contingent on an insurance purchase. That is a huge red flag to insurance departments.
  • Do try to make offers as far away from the sales process as possible.
  • Don’t make them specific to individual consumers or groups of consumers. The broader your scope, the better.

The point is, whenever you’re tempted to give something of value to a prospect in order to close a sale, think twice. And since insurance departments treat this issue differently, be sure to consult your own state’s anti-rebating statute before going ahead with a promotion. Still uncertain? Check with your agency, FMO, or carrier compliance department.

You can read more on ethical practices and tips at

A former Michigan life insurance agent will be taking an extended vacation behind bars for stealing $800,000 from his senior clients. According to state authorities, Paul Garceau, Jr., 51, of Grosse Point Park, pleaded guilty to perpetrating a Ponzi scheme against his mostly elderly customers. For his role embezzling money from a dozen Detroit-area clients, he was sentenced to a minimum of six years jail time and ordered to pay more than $600,000 in restitution.  A single complaint of embezzlement and forgery in October 2014 sparked a Michigan State Police investigation that uncovered a larger pattern of crime. Following the Ponzi template, Garceau approached his clients with promises of higher returns. After convincing them to cash out their legitimate investments, he pocketed the proceeds rather than invested them as promised.

A former University of Virginia athlete graduated from defending against opposing teams’ ground games to perpetrating a Ponzi scheme that won him a 40 year-prison term. According to federal prosecutors, Merrill Robertson, Jr., a former college linebacker, defrauded more than 60 investors to the tune of $10 million. His victims included his former coaches, fellow college alumni, and people he knew at his church and in his community. His scam took shape in the spring of 2016, when he began telling investors he could provide them with returns of between 10 to 20 percent in low-risk unregistered debt securities. He backed up his claims by publishing a website that displayed sham investments. He also convinced them to buy shares in a fake public energy company that purported to own technology that energized water and in a minority-owned investment firm that didn’t exist. After amassing $10 million in investor funds, Robertson and his co-conspirator Carl Vaughn, spent $6 million on expensive cars, residences, college tuition, shopping extravaganzas, and spa treatments. When earlier investors requested their money back, he used new-client money to cover the redemptions.

A former Pennsylvania life insurance agent was arrested for submitting 29 fraudulent life applications to three insurance companies. As a result of his crimes, Keynan Kinard received approximately $8,000 in commissions. After receiving insurer complaints, the Pennsylvania Criminal Law Division pulled Kinard’s license and referred the matter to Pennsylvania’s Criminal Law Division. According to its complaint, the agent used the personal information of friends, acquaintances, and former clients to produce applications he then sent to life insurers. He also included phony bank account information on the applications to make sure the policies would not be issued or would lapse when premium-payments failed to go through. Kinard was charged with one count each of identity theft, theft by deception, criminal solicitation, insurance fraud, and forgery.

­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.

­The good news is agents and advisors have two powerful avenues of self-defense: insurance and security best practices.

Now, if  you thought E&O insurance didn’t protect against cyberattacks, you’re not alone. Many financial professionals assume they need dedicated cyberinsurance 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). However, it’s important to realize that standalone cyberinsurance offers much more comprehensive protection.

What about common-sense security 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. This 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 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, criminals 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. Install  software patches (updates). As the latest cyberattacks are foiled, computer and system vendors typically update their software to fix bugs and close back doors 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 cyberinsurance policies as backstops, they should be well protected against potentially devastating cyberattacks. Good luck!

Building Client Trust

Are you focused on increasing client trust as a business success strategy? If not, you should be, two recent industry reports suggest.

The first, a Vanguard study entitled “Trust and Financial Advice,” strongly confirms the relationship between deeper consumer trust and positive business outcomes for financial professionals. Based on a mix of qualitative and quantitative research with some 4,000 U.S. investors, the research identified the top drivers of advisor trustworthiness.

Interestingly, the Vanguard researchers found that behaviors that strengthened the advisor/client relationship and highlighted an advisor’s professional integrity were more commonly viewed as trust drivers than were an advisor’s functional business strengths (i.e., his or her ability to successfully complete financial transactions or plans).

For example, of the top ten drivers of financial advisor trustworthiness, only one related to functional skills. The remaining nine fell either into the emotional realm (6 drivers), and three dealt with the advisor’s perceived ethical characteristics. Conversely, of the least effective trust drivers, six were functional, one was emotional, and two were ethical.

The point is, if your goal as a financial advisor is to build trust, then it’s important to engage in explicit trust-building behaviors, especially those that deepen trust most efficiently. According to the Vanguard study, which was conducted by Anna Madamba, Ph.D., and Stephen P. Utkus, those 10 drivers include:

  1. Serving as an advocate for your clients—i.e., pursuing their goals as if they are your own.
  2. Acting in your clients’ best interests at all times.
  3. Relating well with your clients; connecting with them on a personal basis.
  4. Deliver a tangible sense of personal relief and heightened security.
  5. Providing products and services that are in tune with their financial goals and risk profiles.
  6. Acting with integrity and morality.
  7. Being generous with your time.
  8. Conveying to clients that their portfolio is important, regardless of its size.
  9. Knowing how to conceive, execute, and reassess client financial plans.
  10. Being compensated in a fair and reasonable matter.

The most important takeaway of the Vanguard study? Trust building isn’t just a feel-good exercise. Rather, it’s a way to generate more positive business outcomes for advisors.  For example:

  • 97 percent of clients with high levels of trust were satisfied with their advisors vs. only 2 percent of those with low trust levels.
  • 94 percent of high-trust clients recommended their advisors to someone else vs. 0 percent for low-trust clients.
  • 70 percent of highly trusting clients were highly likely to give their advisors extra money to invest vs. only 11 percent for clients lacked trust.
  • 70 percent of clients with low levels of trust said they were extremely or somewhat likely to switch financial advisors. However, only 2 percent of high-trust customers said they were extremely or somewhat likely to defect.

If those aren’t strong business reasons to raise your trust-building game, we don’t know what is. In short, if your goal is to increase customer satisfaction, grow referrals, capture additional client funds to invest, and minimize customer defections, then increasing your trust drivers is extremely important, especially those that fall into the emotional or ethical domains.

A second industry report highlights another trust building driver—adhering to fiduciary principles in your client work. According to an article in Financial Advisor magazine, brokerage firms, which are regulated under the so-called suitability standard, are selling for perhaps 1 times revenue. This compares with investment-advisory firms, which operate as fiduciaries, typically selling for 1.5 to 2.5 times revenue.

It’s not hard to see why buyers are willing to pay more for investment-advisory firms. Since they are required to put client interests first, their customers have more faith in them and are more willing to invest additional funds with them, for longer periods of time. Securities broker-dealers, on the other hand, do not benefit from this level of trust. Consequently, their clients are more prone to take their assets to other firms when they have a falling out with their broker. As a result, a broker-dealer’s deposits are much less sticky, making them less valuable to a purchaser.

Any way you look at it, assuming an advisor stays in the business or is planning to sell out, behaving in ways that grow consumer trust makes a tremendous amount of sense. In fact, it could well be the ultimate way to grow your firm or transfer your business to the next generation.