With the clock ticking on the U.S. Department of Labor’s proposed fiduciary standard, financial professionals have become increasingly nervous about the rule’s impact on their business models and revenues. But advisors who hold only insurance licenses and who don’t pursue 401(k) rollover business may think the impending storm will leave them largely unaffected. Think again.

That’s because a Pennsylvania judge ruled last September that an insurance agent can create a fiduciary obligation simply by conducting a financial analysis or plan prior to selling insurance. If a client accepts the agent’s recommendations and buys a policy and then is unhappy with some aspect of the purchase, he or she can then sue the agent for failing to uphold fiduciary duty.

This is important because in Pennsylvania and other states, the courts have held that buying insurance is an arm’s length transaction in which the insurer and agent are obligated only to uphold the promises embodied in their policy contracts. However, they are not held to a fiduciary standard if something goes wrong later, says William Mahoney and Brandon Riley, securities attorneys in the Philadelphia office of Stradley Ronon Stevens & Young LLP. In their view, the Pennsylvania case creates a new liability for insurance agents who do financial planning or create financial analyses prior to selling a life insurance policy, annuity, or other form of insurance.

Attorneys Mahoney and Riley analyzed the case in detail for Law360.com. But to summarize, an Ameriprise financial planner persuaded a couple (the Yenchi’s) to purchase a financial analysis for $350. After submitting information about their financial standing, the agent worked up a financial plan that purported to help them better manage their money and prepare for retirement. One of the recommendations was to surrender several existing life insurance policies and use the proceeds to buy a new policy. The agent claimed the premiums would never increase and end after 11 years. The advisor also recommended the purchase of a variable annuity that would mature when the couple turned 65.

Fast forward several years. The couple retained another advisor to review their holdings. That person not only discovered that the life insurance policy was under-funded, but also that its premiums would never cease. Furthermore, the advisor found that the variable annuity wouldn’t mature until the insured turned 84 and that if funds were withdrawn funds before then, there would be a substantial surrender penalty.

Feeling aggrieved by these findings, the couple filed suit claiming the initial advisor failed to uphold his fiduciary duty. Ameriprise made the standard argument—that buying a life insurance policy or annuity does not automatically create a fiduciary relationship unless a consumer cedes all decision-making authority to the insurer, which did not happen in this case. The trial court granted the defendant’s motion, but the plaintiffs appealed to Pennsylvania Superior Court . . . and won.

The nub of the appellate court’s decision was as follows. The advisor initiated the client relationship by selling them a financial plan. The couple considered that plan to be independent, financial-planning advice, which they trusted and upon which they based their purchase decisions. The court decided those facts established a fiduciary relationship. Furthermore, the court found that the existing blanket rule applied to insurance transactions was too rigid since it didn’t allow the court to consider cases where evidence existed of a broker’s “over-mastering influence” on a client or of a client’s “weakness, dependence or trust, justifiably reposed” in the broker.

According to Attorneys Mahoney and Riley, this case represents a significant expansion of liability for insurance companies and the insurance agents who sell their products. In cases where “a supposedly independent financial plan is prepared,” they write, “the financial planner is now open to a breach of fiduciary duty claim, together with its potential for punitive damages.” How should advisors protect themselves? The attorneys suggest a six-step mitigation approach:

  1. Have an in-depth knowledge of the products being sold.
  2. Establish a solid understanding of every client’s financial situation and needs.
  3. Have a thorough and honest discussion about how the financial plan will be implemented.
  4. Have a candid and explicit discussion about potential conflicts of interest.
  5. Explain that insurance agents and their customers have traditionally had non-fiduciary relationships.
  6. Maintain a written record of all customer interactions and communications in order to defend against specious claims of fiduciary duty.

Although this case occurred in Pennsylvania and will presumably impact advisors operating there, it may eventually affect those in other states. Consequently, if you do business outside Pennsylvania and use financial planning as the front end to life insurance, annuity, or other insurance-product sales, caution is the watchword. Because when all is said and done, you don’t want your sincere efforts to help clients with their finances turn into a nasty lawsuit and resulting E&O insurance claim. Good luck!

For more information on affordable E&O insurance for low-risk financial advisors, visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center


How many times have you read a personal finance article in a major magazine or newspaper and tossed it on the table in disappointment. Or watched a show from a financial “superstar” such as Suze Orman and turned off the TV in disgust. Sadly, much of what purports to be financial advice in the media or on the Internet is inaccurate, biased, and self-serving.  But occasionally one finds content that’s worthwhile, especially because it offers a contrarian perspective that sparks new ideas about an issue. The Motley Fool site does just that.

A case in point is an article it ran a few years ago called ​“The 10 Habits of a Good Financial Advisor.” Any consumer who read that article was forced to think hard about whom to hire as an advisor—and was able to ask that advisor challenging questions. Here are the 10 habits or advisor characteristics the author urged consumers to look for:

  1. Your advisor acts as a fiduciary at all times, whether by law or by principle.
  2. Your advisor charges a standard fee for services rendered (as opposed to commissions).
  3. Your advisor fully discloses, in writing, his experience, conflicts of interest, and compensation up-front.
  4. Your advisor considers the big picture of your financial situation before advising on products or recommending specific actions.
  5. Your advisor holds the Certified Financial Planner designation, a bachelor’s or master’s degree in financial planning, or another substantial certification.
  6. Your advisor is experienced.
  7. Your advisor follows a process for discerning your needs and offering recommendations.
  8. Your advisor has a clean regulatory record or a plausible explanation for prior citations.
  9. Your advisor is a member of a leading professional organization.
  10. Your advisor embraces continuing education and attends conferences. 

Now, many of these points are just common sense that any advisors could wholeheartedly support, especially things like being experienced and having no black marks on your regulatory record. But others betray a bias toward a certain kind of advisor—for example, toward a fiduciary-standard RIA, a fee-only NAPFA member, a transparency-driven advisor, an investment-analyst type advisor—as opposed to a commissioned salesperson such as a life insurance agent or securities broker.

Advisors in those latter camps might rightly respond they are not legally required to be a fiduciary (at least not yet anyway). Or they might argue there’s nothing inherently wrong with accepting commissions as long as they adhere to regulations, especially those relating to product suitability.  And they might object to being expected to disclose their commissions and conflicts up front, something required of investment advisors, but again, not of securities reps and insurance agents.

But here’s the problem. When consumers read such an article, they believe what they read and actually use the points when searching for an advisor. They have no clue about the nuances of being life licensed vs. being an investment advisor vs. being a securities broker. So when a life agent says he’s not a fiduciary in a legal sense, the consumer will immediately become suspicious. Even though the author suggests that being a fiduciary in principle only is acceptable, that may come across as suspect. And advisors who lead consumers to believe they’re fiduciaries but really aren’t may be looking at errors-and-omissions claims in the future.

So apparently the author created a consumer checklist with lots of great advice, but also with a strong underlying bias. Problem is, he positions his advice as fact, and consumers will likely accept it as such, putting commissioned advisors on the defensive. So what should agents and brokers do? Here are a few tips that might help.

  • Don’t be too quick to disregard personal finance experts who tell you what you don’t want to hear. You may have discounted their content as being biased, but your prospects won’t have. You need to be familiar with what prospects are reading and then respond to the implicit challenges the content raises. In effect, you need to elevate your game to meet the challenge of today’s media, however biased it might be. And even biased content might contain elements of truth. For example, after reading article after article touting the importance of being a fiduciary, you might finally see the merits of the argument and get licensed as an investment advisor representative held to the fiduciary standard.
  • Explain to prospects that legal requirements are important, but so are ethical values. For example, a licensed life insurance agent, though not held to a fiduciary standard, can operate with a strong commitment to ethical sales practices. It’s not the license held that makes a good advisor; it’s the commitment to integrity, along with experience and wisdom, that makes a great advisor.
  • Point out that many authors and so-called experts have their own axes to grind. For example, experts who agitate against annuities almost always stand to gain from the sale of annuity substitutes.
  • When a consumers point to a biased article, react calmly, not dismissively. If you come off overly aggressive or emotional, you will automatically validate the author’s position and neutralize your own.
  • Don’t write off all personal finance journalism and stop reading or listening to what appears in the leading magazines and programs. The only way you can rebut what’s out there is to know what’s out there.
  • Finally, treat consumers quoting biased media content as you would a sales objection. Understanding where they’re coming from, preparing an answer in advance, practicing your answer, and delivering it confidently and with no apologies is the best way to meet the challenge of biased journalism.

Because when all is said and done, people hire flesh-and-blood advisors who impress them with their experience and integrity, not famous advisors, experts, or authors who provide great, but sometimes slanted, advice.

For more information on affordable errors and omissions insurance for low-risk financial advisors, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.