Even the best-intentioned financial advisor can fall prey to the temptations of unethical conduct. How? By giving in to these common seductive pressures that can lead to mistakes, crimes, and lawsuits.

  1. Living beyond your means. You go for the big house, pricey toys, and exotic vacations. You wind up with a huge mortgage and a mountain of credit card debt. Because you’re under pressure to increase your income, you cut corners, push customers to buy products they don’t need, and even misrepresent your offerings. You do whatever it takes to preserve your desired lifestyle.What can happen: Clients complain to regulators. Suppliers red flag you. Clients sue you. You develop a reputation as an unethical and possibly criminal advisor.How to avoid: Don’t chase the big lifestyle; live within or slightly below your means. Keep your life in balance . . . not overly focused on money and material goods.
  2. Running with the wrong crowd. You begin working with suppliers that cut compliance corners. They encourage you to weaken quality control benchmarks or hire representatives with questionable backgrounds. Doing business the right way no longer matters. Pushing more product becomes your only objective.What can happen: You lose your ethical focus. You start selling products that are unsuitable for your clients. Your regulatory authority sanctions you. Your clients start to wonder about your ethics and warn their friends about you. Unhappy clients sue you, forcing you to file an errors-and-omissions insurance claim.How to avoid: Screen your partners not only for their products and support, but also for their commitment to professional ethics and compliance. If they don’t measure up, get new partners.
  3. Growing too fast. You started out as a solopreneur. But in the last several years, you’ve added so many new clients you decided to bring on several new employees.What can happen: Your overhead soars. Your revenue doesn’t. Trapped like a gerbil on a treadmill, you lose sight of your quality focus. Customer experience starts to suffer. You also start ignoring your current client base in order to bring in new clients. You begin making mistakes. Loyal clients defect; others file complaints.How to avoid: Manage your growth so you never have to abandon the practices that made you successful.
  4. Getting comfortable. You went into business because you wanted to help people. You used to love the work, but now it’s getting old. Clients keep asking the same questions. Suppliers are a pain. You’d rather be fishing than putting in long hours at work.What can happen: Rather than find a new career, you just hunker down until retirement. Your edge slowly rusts. Many of your best clients notice—and take their business elsewhere. Your reputation suffers and new business dries up.
    How to avoid: Keep learning about new products or techniques. Get involved with a professional trade association, ideally in a leadership position. Network extensively with others in the business. Get active in non-business pursuits that stoke your energy and creativity. If you can’t stay excited, find something else to do.

The point is this: Ethical lapses are more likely to happen when business owners make bad life decisions. And when they make such decisions, they open themselves up to client lawsuits and errors-and-omissions insurance claims. Don’t let this happen to you. Here’s how:

  • Keep your life in balance,
  • Don’t hang with a bad crowd,
  • Manage your business growth,
  • Keep your professional edge sharp, and
  • Buy and maintain a high-quality errors-and-omissions insurance policy.

Do all this and your journey as a financial professional will remain enjoyable, productive, and profitable.

Protect yourself, and your business, with Errors & Omissions Insurance.

Ask National Ethics Association…

Q: I am a financial advisor who’s required to have errors and omission coverage. What do I need to look for in an  policy?

A: Before we give you the answer, here’s a short introduction on E&O that may be helpful.

Errors-and-omissions insurance, or E&O, is an important business expense for financial professionals such as financial advisors, CPAs, and life insurance agents.  In our litigious society, where responsibility is consistently pushed onto another party, one in seven of these professionals will face a lawsuit[1].

Fortunately, most financial professionals are ethical and responsible and take great care managing the details of their work.  With proper focus, advisors can avoid a potential lawsuit.  However, even the most careful are not immune to a legal attack from a former or current client.  Without the benefit of errors-and-omissions insurance, a lawsuit can be financially devastating.

What You Need to Look for in an E&O Policy

Not all E&O policies are the same.  And depending on your specialty, there are certain elements you may need that others do not.  Here are some of the features you should look for in a high-quality E&O policy:

Adequate liability coverage

All E&O policies include liability coverage that protects you from financial loss due to a lawsuit arising from your error or omission.  Liability coverage has two parts:

  • Per Individual Claim – Usually, there is a limit per incident or claim.  The typical individual limit is $1 million.  This means that any single liability claim resulting from a lawsuit will pay no more than $1 million.
  • Aggregate – Each E&O policy has an annual aggregate that limits how much an insurance company will pay each year.  The usual annual aggregate is $2 million.  That means the insurance company will pay for multiple claims up to, but no more than, $2 million.  Some insurance companies state a lifetime policy aggregate limit rather than an annual aggregate.  Be sure the lifetime limit is adequate if you go this route.

Remember, a general liability policy only covers incidents that affect bodily injury due to negligence from property or product safety.  It does not cover financial loss to clients.  Be sure to get adequate professional liability coverage from a high-quality E&O policy.

Legal and court costs

Whenever you are served legal papers that name you in a lawsuit, it will cost money just to defend yourself.  Legal fees and potential court costs add up quickly and can turn even a small claim into a giant financial burden when you consider the total court and legal fees involved.  Look for this important provision in your E&O policy to shield you from these damaging expenses.

Post-retirement claims coverage

E&O claims do not always arise while you are in business.  They may surface years later after you’ve retired and a past client files suit against you.  Your E&O insurance policy should have a provision to cover any claims that occur post retirement. This assures you will not be exposed to great financial risk after you stop working.

Employee or administrative coverage

Most financial professionals have employees or staff who serve clients directly.  When they make a mistake or fail to carry out a required task, you will be held accountable. Employee or administrative coverage protects you from employee E&O risk.

Coverage extension to spouses, domestic partners, legal representatives, or beneficiaries

Nobody wants to have their family or other loved ones affected by a lawsuit.  Some cases may name spouses as an actual defendant, even though they had nothing to do with the main financial professional’s business.  Protect your loved ones with this important coverage feature.

Coverage flexibility

Make sure your E&O policy can be adjusted for whatever products and services you provide. Basic policies cover you for the sale and servicing of life, accident, and health products. But also look for optional coverage for fixed and indexed annuities, variable products and mutual funds, disability insurance, and RIA Series 65.

Brought to you by National Ethics Association, sponsor of Preferred Risk E&O insurance for qualified financial professionals.


[1] Source: Errors and Omissions Insurance Resource Center

Ask National Ethics Association…

Q: It seems like advisor/client relationships are getting more adversarial these days. How can I protect myself from getting sued?

A: You’re smart to be thinking about this. Here are ten ways you can lower your odds of getting sued

Tip #1: Be a Consummate Professional.

There is no short cut to professionalism. Do your homework and know what you’re recommending. Keep investing in your knowledge base by earning appropriate designations and attending professional development courses. Stay current on regulatory requirements.

Tip #2: Do Your Own Due Diligence.

Never delegate due diligence to any other person or company. Make sure to investigate the financial standing of all companies whose products you are selling. Plus, make sure all products and investment programs you offer are registered with the appropriate regulatory authority.

Tip #3: Stay In Your Expertise Area

Only recommend products you fully understand and are licensed to sell. If you refer clients to other providers, make sure you can vouch for their competence and integrity.

Tip #4: Solicit Business Properly.

Make sure your solicitation materials are above board. You never want to misrepresent who you are, what you do, or what you sell. And if required to, have your insurance company and/or broker-dealer approve your solicitation materials.

Tip #5: Practice Full Disclosure.

Make sure to disclose all required information and be totally up front about your track record, business practices, and affiliated advisors and companies.

Tip #6: Do Thorough Fact-Finding

When you first meet the client, take time to fully understand the person’s situation. Uncover and document all relevant facts. Do a careful job of assessing risk tolerance. Then set appropriate expectations for future results.

Tip #7: Link Your Recommendations to Documented Needs

Make sure to present only suitable recommendations (preferably more than one). After the prospect agrees to buy, review the reasons for buying the product and get the prospect to agree in writing.

Tip #8: Educate Clients about What They Bought.

Make sure clients understand what their product covers and doesn’t cover, as well as all moving parts, fees and expenses, and any underlying risks and guarantees. You can never over-educate a client.

Tip #9: Leave a Paper Trail.

This is crucial. Always document the outcomes of key client conversations, decisions made, and coverages declined. And remember, no client interaction is irrelevant. Document every call or conversation no matter how trivial the subject matter. Doctors and attorneys do this, and so should you.

Tip #10: Promptly Resolve Client Complaints.

If a client is unhappy with you, find out why. Then do your best to resolve the person’s complaint before it turns into a regulator sanction or lawsuit.

Brought to you by National Ethics Association, sponsor of Preferred Risk E&O insurance for qualified financial professionals.