The end of a business year is a perfect time for self-reflection. That’s because you just spent the prior 12 months highly focused on the world, the economy, clients, regulators, your FMO and product manufacturers, and your staff (if any). What you may not have done is think much about you . . . about whether you have lived up to your potential as a professional (and ethical) financial advisor. Well, now’s a good time to do just that!

By flipping your camera or phone around to take an ethical selfie, you can evaluate your conduct to make sure you’re upholding high standards. If you are, then congratulate yourself and raise the bar a bit higher for next year. If you’re not, then resolve to do better in 2018.

To help guide this self-assessment, please answer the following 10 questions. After you finish, reflect on the ten value-added questions that follow. The more honest you can be about your 2017 performance, the more useful this exercise will be. Good luck!

10 Basic Questions about Your Ethics

1. Do you serve your clients’ best interests even if it may not be to your financial advantage?

2. Are you totally up-front in how you explain your business history and professional background to clients?

3. Do you carefully explain the features and benefits of the products you sell, including explaining for whom those products are best suited?

4. Do you provide full disclosure on product risks and costs, even when they might scare off a prospect?

5. Do you set appropriate expectations about the potential investment returns of a product or service?

6. Do you engage in comprehensive fact-finding with every prospect in order to understand each person’s financial needs and risk appetite?

7. Do you respect people’s need for confidentiality, even when third parties demand information?

8. Are your marketing and sales materials totally accurate and compliant with state and federal law?

9. Do you refer clients to third-party experts when their needs exceed your own capabilities and/or license authority?

10. Are you well read about economic and industry developments, and do you share that knowledge with your clients?


10 Value-Added Questions about Your Professionalism and Integrity

1. How transparent are you about your fees and commissions (if any)? Do your clients know exactly how you’re paid?

2. Do you effectively safeguard your clients’ assets and information against hackers and fraudsters?

3. Do you have a written code of ethics and client bill of rights? Are your actions consistent at all times with the content of these documents?

4. Have you added to your knowledge base and skill set this past year? If so, are you confident your qualifications now address the needs of your clients?

5. How proactive are your client communications? Do you stand behind your clients during times of market volatility or natural disaster?

6. Do you have a succession plan for providing ongoing client service in the event something happens to you? A business-continuity plan in the event a natural disaster incapacitates your firm?

7. Do you let your income needs color your product recommendations?

8. Are you ego-driven or client-centered as a financial advisor? In other words, do you make decisions about your business and clients that make you feel good rather than make your clients feel secure?

9. Do you have a manageable client list or do you have more customers than you can handle (for financial reasons)?

10. Do you make recommendations based on your deep knowledge of your clients’ financial needs and personal circumstances or do you make recommendations based on unsupported assumptions?

FINRA has fined a Northport, N.Y. stock broker for slamming a blind, elderly widow’s account with excessive fees. According to regulators, Hank Mark Werner convinced the woman to buy an unsuitable variable annuity and then used the account to generate excessive trades and fees for himself. Werner began churning the widow’s account in 2012 after her husband, who was also blind, died. Werner had served both clients until that point. Regulators say the broker bought and sold securities every week or so, generating more than 700 trades from October 2012 to December 2015. His churning produced $210,000 in commissions for himself and $175,000 in losses for the widow.

A California insurance broker has been sentenced to 60 months in jail for stealing $1 million from a widow’s trust account.  The broker, Gary Thornhill, of Santa Clara, was convicted of wire and mail fraud, according to U.S. attorneys on the case. Prosecutors say Thornhill sold life insurance to a married couple in 1998. The husband died seven years later, leaving the wife as the only insured on the policy. In 2008, the agent was named trustee of the entity that became legal owner of the policy. Using that position, Thornhill withdrew $1.5 million from the policy’s cash value without securing the widow’s permission. As part of his punishment, Thornhill was ordered to pay $1.4 million in restitution and serve three years of supervised release after completing a 60-month jail term.

A New Jersey financial advisor has been arrested for selling clients more than $1.8 million in fake securities, annuities, and life insurance. According to federal authorities, the advisor, William E. Fitzpatrick, was charged with one count each of mail, wire, and securities fraud. The advisor’s crime was long-standing in nature. Starting in 2007, he owned and operated at least three financial advisor and tax-return firms. After persuading clients to invest with him, typically in non-traditional investments such as a video-game production company and a movie financing firm, as well as in traditional mutual funds, annuities, life insurance, and money market funds, he failed to invest their money as promised, Fitzpatrick used their checks, which were made out to him personally, for his own purposes. The advisor is currently facing a maximum jail term of 30 years and a $1 million fine for the mail and wire fraud counts. He’s also facing a maximum penalty of 20 years in prison and a $5 million fine for the securities fraud count.


Financial institutions, advisors, and regulators can all do more to protect America’s seniors against financial fraud. That’s the conclusion of a new survey of state securities regulators by the North American Securities Administrators Association (NASAA).

According to its survey of 36 state regulators, most (97 percent) believe the majority of cases of senior financial fraud go undetected rather than get discovered before they cause serious problems.

The same percentage—97%—say there’s a greater awareness of senior investment fraud today than there was a year ago. However, that hasn’t translated into a widespread decrease in senior fraud complaints. Sixty-nine percent said they have experienced about the same rate of senior fraud, while 29 percent said their cases have increased and 3 percent said they’ve decreased.

The results come from NASAA’s recent Pulse Survey conducted on member regulators from July 24 to August 4, 2017.

The survey also uncovered broad support for the notion that broker-dealers and investment advisors should do more to help prevent senior fraud, with 75 percent agreeing with that statement. The survey respondents also said state legislators could play a larger role since only 48 percent of jurisdictions had adopted NASAA’s Model Act to Protect Vulnerable Adults from Financial Exploitation. Yet those who had enacted the rule said they’d had success stopping the disbursement of senior funds to scammers using the law’s provisions.

What more can securities brokers and investment advisors do? A prior NASAA study provides an action blueprint for securities brokers and their broker-dealer firms to consider:
• Institute a formal policy defining senior clients and, if so, what age designates senior status.
• Create a department, committee, task force, or other group or person responsible for identifying and addressing senior-related issues.
• Devise a policy to collect information about trusted or emergency contacts.
• Determine what additional documents required when opening or updating accounts for senior customers.
• Establish a policy that sets frequency standards for reviewing, updating, and documenting senior investment objectives.

• Define a process for reporting concerns regarding potential diminished capacity and/or elder financial abuse.

The National Ethics Association also suggests that advisors consider it their fiduciary duty to take extra care when working with senior clients. They should do their best to act prudently regarding their resources, to do rigorous due diligence before any proposed actions, and to act in good faith at all times. Related to this is a special duty to help seniors stay safe in a dangerous marketplace.

The protective role suggests a more aggressive educational and counseling stance with senior clients than might be warranted with younger clients. The National Adult Protective Services Association suggests advisors watch for the following scams that strangers, financial/business professionals, and family members often perpetrate on seniors.

Common Scams by Strangers
Lottery & sweepstakes scams—“You’ve already won! Just send $2,500 to cover your taxes”

Home repair/traveling con men—“We’re in your area and can coat your driveway/ roof really cheaply”

Grandparent scam—“Your grandchild is in jail and needs you to send money immediately”

Charity scams—Falsely soliciting funds for good causes; very common after disasters

Utility company scams—“I need you to come outside with me for a minute” (while accomplice steals valuables)

House scams—Overpriced or unneeded roof or driveway repairs, yard work, or other maintenance items.

Phone scams—fraudulent telemarketing appeals, phony IRS accusations, or other threats

Money-transfer schemes—Pitches to have senior send money via PayPal or other means to fraudster accounts.

Common Scams by “Professionals”
Predatory Lending—seniors pressured into taking out inappropriate reverse mortgages or other loans

Annuity sales—seniors pressured into using the equity realized from a reverse mortgage (or other liquid assets) to buy an expensive annuity which may not mature until they are well into their 90s or older.

Investment/securities schemes—pyramid schemes; unrealistic returns promised; dealer is not licensed

Internet phishing—false emails about bank accounts

Identity theft—credit cards opened fraudulently

Medicare scams—which can be the costliest in terms of the dollar amounts

Common Ways Family Members and Trusted Others Exploit Vulnerable Adults
Using a Power of Attorney—given by the victim to allow another person to handle his/her finances, as a license to steal the victim’s monies for the perpetrator’s own use

Joint bank accounts—taking advantage in the same way

ATM cards and checking accounts—using those vehicles illegally to access and withdraw a senior’s money.

Violence—threatening to abandon, hit or otherwise harm victims unless they give the perpetrators what they want

Medical Blocks—refusing to obtain needed medical care and personal services for the victim in order to keep the senior’s assets available for theft

In-home care providers—Charging for services, keeping change from errands, asking the vulnerable adult to sign falsified time sheets, spending work time on the phone and not doing what they are paid for

Finally, according to EOforLess, an online provider of E&O insurance for financial professionals, failing to detect obvious signs of senior financial exploitation might raise legal issues for advisors should their clients’ money be stolen. As always, EOforLess urges life insurance agents and investment advisors to identify and mitigate the risks of working with older clients and their families.

The Difficult Task of Finding E&O Insurance

Buying errors and omissions insurance is no walk on the beach. Of course, since when is buying any type of insurance easy? Although online insurance purchasing has made shopping more convenient, you’re still left with the time-consuming task of doing your due diligence on the policy before you can either purchase it for yourself or recommend it to your clients. As a result, it can be tempting to take shortcuts when shopping for your own errors and omissions insurance. Don’t!

The problem is, there’s too much riding on that purchase to not give it your full attention. If you’re sued without insurance, you’ll have to self-fund your legal defense and pay for any ensuing judgments. Handling these expenses can end up only being an annoyance or can literally put you out of business or take a big hunk, or even all, of your personal assets.

So how should you tackle the difficult task of finding E&O insurance? Start by considering the following three questions:

1. Will the policy adequately protect your finances if you get sued?

2. Will coverage be there in the future when you need it most?

3. Is your E&O insurance policy a good value or are you paying too much for it?

We will cover the first question in this article and the second two in future ones.

Three Keys to Adequate Protection

First, we can’t overstate the importance of making sure your policy has sufficient coverage limits. Limits are typically expressed in terms of per-individual claim and of aggregate claims. In the former case, there may be a limit of $1 million, $2 million, or more for each incident. Aggregate limits mean an E&O policy caps total benefits to a predetermined amount. For example, if you lose two lawsuits worth $1.5 million a piece, but you only have a $2 million aggregate limit, you will be responsible for the remaining $1 million.

If you’re insured under a group master contract, there may also be limits on claim payouts for the entire group. So if it has a run of claims, it may exhaust the total pot available for all members. If you’re considering joining such a plan, ask about the group’s historical loss experience and whether it has ever bumped up against its group aggregate limit.

In either case, you want to be certain to buy sufficient per-incident and aggregate limits to protect you in the event you lose one or more lawsuits. There’s no hard and fast rule about how high, though. But give some thought to the financial status of your typical clients, the average size of the products they purchase, and their potential litigiousness when their expectations are not met.

Second, make sure the policy covers you for the actual duties you perform in your job. These will be defined in the policy section that covers professional services. For example, a typical definition might list:

“1. The sale, attempted sale or servicing of life insurance, accident and health insurance
or managed health care organization contracts (that does not require a securities

2. The sale, attempted sale or servicing of disability income insurance (if purchased as
indicated on the Certificate of Insurance).” Etc.

The key is to be sure the professional services listed match up with your activities and license type. And if you perform duties that don’t appear, make sure to ask if they’re covered. For example, some registered investment advisors also serve as their firm’s chief compliance officers, a duty that may not be mentioned in the policy’s professional services definition. In such a case, if the advisor gets sued as a result of a mistake he makes as his firm’s CCO and his policy only covers his duties as an investment advisor, he might not have any E&O protection in this case.

Third, determine if you are responsible for a certain amount of the loss before the insurer begins to pay benefits. Errors and omissions insurance deductibles can range from $0 to $1,000 per incident for insurance products and up to $5,000 for securities products (variable annuities, mutual funds). However, watch for two nuances regarding deductibles. Some policies (i.e., first-dollar defense policies) only apply the deductible to actual paid claims, not to defense costs. That means if a client files a frivolous claim that gets dismissed, you won’t be responsible for paying your deductible. Alternatively, so-called defense-and-loss policies have deductibles that kick in when legal fees are incurred. This forces you to pay out of your own pocket even with nuisance claims. The former policy type is more expensive, but may be worth it if you often get hit with frivolous lawsuits.

Another deductible nuance arises in the case of multiple claims. Normally, you would be responsible for paying the stated deductible on each loss. This can add up fast if you get sued frequently. However, if you have an aggregate deductible, which typically costs extra, your total deductible will be capped at, say, two or three times the normal deductible. If your business model is risky or the investment climate is volatile, it might make sense to purchase this feature.

By carefully reading a prospective E&O insurance policy, you will be able to determine where it stands on the three issues we just reviewed. There are other features to consider as well, but thinking about these three will be a great start. Even more important is the likelihood that the coverage will be there when you need it most. We’ll address that in a future article. Until then, if you wish to learn more about how E&O insurance works, please visit our E&O insurance product detail pages at EOforLess.