Fiduciary Standard Refuses to Die; Should You Modify Your Sales Practices in 2018?

Many in the financial-services industry assumed that the election of Donald Trump as president in November 2016 would spell the end of the Department of Labor’s recently enacted Fiduciary Rule. And in part, they were right, since the agency has put important parts of the standard on hold until July 2019.

Despite this, the movement toward a uniform fiduciary standard apparently continues along three fronts: state securities departments, the Securities and Exchange Commission (SEC), and state insurance commissioners. Whether these efforts reinforce each other or produce a uniform standard is anyone’s guess. But it’s becoming clear that putting client interests first is becoming a core financial-services sales practice that may be difficult to water down. If you are an insurance agent or securities broker, 2018 may be the year to adopt a fiduciary orientation even though you aren’t legally required to do so.

One impetus for this is a movement among state securities administrations to require broker-dealers to uphold a fiduciary standard when recommending investment products. States such as Nevada took this position after they saw the federal government back away from the DOL standard after years of rule making. In April 2017, the Nevada securities department passed a law that expanded which financial professionals will be held to a fiduciary standard. Before April, only so-called “financial planners” were.

After the bill was enacted, broker-dealers and registered investment advisors were subject to the standard, as well. Nevada joined four other states that now require broker-dealers to operate as fiduciaries (through case law, not statute). These include California, Missouri, South Carolina, and South Dakota. An additional three states are currently developing fiduciary rules: New York, New Jersey, and Massachusetts.

The second impetus is that the SEC has announced it will be developing its own fiduciary standard, which may harmonize with the rule revision in process at the Department of Labor. This rule will not be confined to investment advisors in the retirement marketplace. It presumably will cover any entity providing investment advice and products in all contexts, not just retirement.

The third impetus is underway at the National Association of Insurance Commissioners, which guides individual insurance departments on the development of insurance statues. Its Life Insurance and Annuities Committee is now working on revising its Suitability in Annuity Transactions Model Regulation. One potential addition will be adding a best-interest standard to all agents selling annuities.

The current annuity suitability model law was approved in 2010 and is now in effect in 39 states and the District of Columbia. However, after members of the Annuity Suitability Working Group learned that President Trump intended to delay implementation of the DOL’s fiduciary rule, it decided to add a best-interests component to the annuity model law.

Broadly speaking, this would require life insurance agents to verify that the annuities they sell meet the needs of their clients. Based on language now being considered, they would have to “at the time the annuity is issued (act) with reasonable diligence, care, skill, and prudence in a manner that puts the interest of the consumer first and foremost.”

The draft rule revision would not require agents to sell annuities with the lowest possible commissions or the highest possible stated interest rates. However, it would prohibit agents from receiving “more than reasonable cash compensation.  In a potentially explosive move, the measure will require agents to disclose their annuity commissions if they exceed a three percent threshold.

As these regulatory strands wind together over the coming year, how should financial professionals respond? Conservatively, says the National Ethics Association, sponsor of EOforLess. Even if you don’t sell annuities or other retirement products, it’s advisable to comply with the DOL’s best-interest standard, which went into effect this year. This involves always:

• Giving one’s clients advice that serves their best interests.
• Charging only “reasonable” compensation.
• Never making misleading statements.

Keeping your client’s best interests in mind at all times not only should keep you out of regulatory hot water in 2018, it should also help you to avoid damaging E&O insurance disputes. Bottom line: until the DOL, SEC, and state securities and insurance administrators determine their respective fiduciary postures, make sure your sales practices always align with the interests of your clients. As long as you’re sitting on the same side of the table as your customers, you should be fine wherever the regulators land.

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.

Insurance policies are the hallmark of a professional startup

When people launch a financial or real-estate startup, the temptation is to start doing business with as few fixed costs as possible. This might involve leasing lower-grade office space, hiring 1099 virtual assistants rather than a full-time salaried staff, or skimping on insurance and employee benefits. This makes sense for companies that have yet to generate significant revenue. But it can also generate its own problems. Here’s why.

One of the challenges of starting a new firm is making the right impression with prospects, clients, other businesses in the community, and potential employees. Acting with professionalism is the way to do that. How so? By conveying a strong brand, having well designed procedures, and implementing a safety net for your business in case something goes wrong.

Part of having a safety net is establishing a cash reserve. The other part is having a full menu of business insurance to protect you against just about any risk. This includes having . . .

  • general liability insurance,
  • property insurance,
  • workers’ compensation coverage, and
  • E&O insurance.

The latter form of insurance may be the most important of all for financial and real-estate professionals who provide professional services. Making the wrong client recommendations or failing to do something important can result in clients suffering large financial losses. E&O insurance provides funds for a legal defense, as well as cash to pay for legal judgments should the professional lose in court. Having E&O insurance is the hallmark of a well managed startup. It shows . . .

  • that you take your business seriously,
  • that you understand the risks of doing business, and
  • that you are committed to make good on legitimate claims against you.

In short, it conveys that you are a real pro committed to running your business the right way,

Avoid Mistakes in the Beginning

Just as startups want to minimize overhead at the outset, they also want to avoid making mistakes in the beginning that can cripple their firms. One way to do this is to make a serious commitment to assuring compliant business practices and ethical values. Learn all  relevant regulations that affect their business and strive to adhere to them. This is the minimum commitment a startup should make in order to do business responsibly. But it doesn’t stop there. They must also go beyond compliance requirements and commit to ethical values in every domain of their business. Values are the “rules of the road” that startups follow when there aren’t black-and-white compliance guidelines to follow.

Another way to view the distinction between compliance  and ethical values is to consider the difference between  a commodity product or service and one that’s differentiated by higher-level benefits or services. In most financial and real-estate startups, the owners will just try to meet the minimum compliance requirements, which unfortunately positions them as a commodity provider. The more sophisticated and creative entrepreneurs will try to exceed the minimum and imbue every facet of their firms with client-centered ethical values. This results in a stronger brand positioning as well as a lower risk potential from an E&O insurance perspective.

Avoiding mistakes in the beginning also involves putting the time in to learn all aspects of your business model: the features and benefits of our products, the steps in the sales process, the details of customer service, and the workings of your office technology and procedures. The time to master all of these details is before you launch the business, not after. Doing the latter is an invitation to making a mistake and getting sued.

E&O Insurance Covers the Cost Associated with Lawsuits

Of course, getting sued is exactly what an entrepreneur doesn’t want to happen in the startup phase. Having a client sue you is not only traumatic, it can distract you from doing the essential tasks your new business needs to grow. And if you lose in court, a legal judgment can amount to tens of thousands, if not hundreds of thousands of dollars. There aren’t many start-up businesses than can incur a six-digit financial hit and not go under. Fortunately, E&O insurance can come to the rescue in times like this because it covers the cost associated with lawsuits.

What does it actually provide?

  • First, your E&O insurance will recommend an attorney to defend you and pay for that person’s fees and expenses.
  • Second, your insurer will appoint a claims adjuster to handle your case so you can focus on working in your startup.
  • Third, your insurer will provide cash for legal judgments should you lose in court. As we just mentioned, having to pay for six-figure legal judgments, as well as court costs, may well put your promising startup six feet under.

In short, if you are contemplating starting up a new financial or real-estate business, strive to act professionally in every aspect. This involves:

  • Projecting a strong image.
  • Having a cash reserve.
  • Implementing well-designed procedures and policies.
  • Instituteing a financial backstop in the form of E&O insurance so that one client lawsuit doesn’t put you out of business.

Another reason to protect yourself? Launching a startup is a lot of fun. It’s wonderful creating something that never existed before. Every day will literally be a new adventure. But if you’re uninsured against the errors and omissions you might make,  you won’t be able to fully enjoy the ride, since you’ll always be second-guessing your decisions and worrying about which client relationship will go bad. Don’t let this happen to you. Insure your startup today with affordable, high-quality E&O insurance. And since time is literally money for busy entrepreneurs, consider buying your coverage  from a convenient online provider such as EOforLess.com. In most cases, you’ll be able to shop, apply for, and print your insurance binder within just a few minutes.

Protection from Everyday Mistakes

E&O Insurance“Protection from everyday mistakes.” It’s a prosaic phrase with profound meaning once you start thinking about it. “Everyday mistakes” refers on the surface to the small errors & omissions that nearly every business professional makes at one time or another.

  • Failing to fill out a form correctly.
  • Forgetting to return a client’s phone call.
  • Not scheduling a follow-up client meeting as promised.

None of these mistakes sounds particularly ominous. And most will have no practical consequences except, perhaps, for dinging a business owner’s reputation.

But—and this is a big “but”—a small percentage of these common errors can lead to serious consequences that harm a client financially and that may eventually lead to a big-ticket lawsuit. Think about it. Your mistake in filling out an insurance application isn’t a huge deal until it delays the issuance of a client’s insurance coverage, leaving the person uninsured for a catastrophic illness. Or your failure to return a phone call is irrelevant until a client’s business insurance fails to perform as expected because you failed to conduct a much-needed risk analysis. And not scheduling a client review session is inconsequential until a client dies shortly afterward with no life insurance in force.

In short, everyday mistakes happen all the time, but their impact can be anything but routine. Protecting against these situations is what E&O insurance is all about. It provides the cushion against everyday errors that allow financial professionals to continue in business even after getting hit with—and losing— a massive client lawsuit.

Coverage of Fees and Lawsuits

Once a financial professional’s mistake sparks a devastating lawsuit, business professionals will likely react with shock and confusion.  Shock because it inevitably surprises people that a client with whom they have served for months or years—and who seemed perfectly content—is now suing them. The reality is that not all client relationships are what they seem. They may appear to be amicable on the surface, but a series of minor errors—or one large one—can eventually undermine the relationship. Even though receiving a notice of lawsuit may come as a surprise to the defendant, the plaintiff, despite having a smiling face, might have been unhappy and planning to take legal action for months, if not years.

Confusion is another common reaction, particularly for financial professionals who’ve never been sued before:

  • What do I do?
  • What should I tell my aggrieved client?
  • Should I try to negotiate a settlement before the matter even gets to court?
  • What information do I need in order to prove my innocence?
  • How will I do all this while still handling my regular duties in the business?

All of these questions will be swirling in a financial professional’s mind in the hours and days after getting sued. Worse, making another mistake in responding to the lawsuit can compound the financial damage of getting sued in the first place.

This is why having E&O insurance is so important. Professional liability insurance policies are designed to minimize the shock, confusion, and financial impact of getting sued. Within days of you filing an E&O claim with your insurer, it will select and pay for an attorney to defend you. This person will guide you in terms of what information will be needed to marshal your defense. He or she will also handle all communications with the plaintiff’s attorney so that you don’t have to worry about what to say and do.

What’s more, your insurance coverage will also provide access to a professional E&O claims adjuster, who will manage the process of resolving your claim. This person will co-ordinate with your attorney and with the opposing parties to make sure the matter is resolved as quickly as possible.

But getting help from an attorney and E&O claims adjuster isn’t the only benefit of having E&O insurance. Your policy will also pay for a number of ancillary charges that can add up, especially with complicated lawsuits. These include:

  • Expert witness charges,
  • Copying, filing, and software-related expenses,
  • Arbitration or mediation costs,
  • Expenses related to settling the claim.

Most importantly, E&O insurance will provide a financial backstop to you should a judge find you guilty of negligence. If the judge sides with the plaintiff and orders you to pay damages, your E&O policy will cover that payment, up to the limits of your policy. Since this payment can total thousands if not hundreds of thousands of dollars, the ability to transfer this liability to an insurer is literally worth its weight in gold.

In short, operating a business can be an inherently risky proposition. In most cases, everyday mistakes will have no financial impact. But in rare cases, they can generate substantial financial demands that uninsured business professionals will be hard-pressed to meet. This is why having E&O insurance can not only preserve your personal financial security but, also ensure the very survival of your business.

For more information about securing E&O insurance for your business, visit EOforLess.com today for more information.