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Non-Compete Agreements: Keep or Break?

There’s so much confusion about two simple verbs: “can” vs. “should.” Just because you can drive 125 miles per hour on the highway—or leap from one rooftop to the next for sport—doesn’t mean you should.

Apparently, Martha Stewart, the home fashion magnate, has confused these verbs, too. After she got out of prison for obstruction of justice and lying to investigators, she persuaded Macy’s to bankroll her renaissance by giving it exclusive merchandising rights. But then she signed a similar deal with J.C. Penney.

How’d she double-dip these two arch rivals? By getting Penney to set up Martha Stewart-branded boutiques inside its stores. This allowed her to dive through a contract loophole that permitted selling goods from “her own stores.” Should she have done this to to an invaluable business partner? From an ethical perspective? Probably not. But the fact she could do the Penney deal blinded Stewart to the ethical impropriety of doing it.

In a similar vein, we recently heard an advisor ask colleagues whether it was OK to break a non-compete contract with a former general agent. In fact, the questioning agent had been asked to do so by his new general agent. The majority argued for compliance. But some counseled breaking the agreement since non-competes are hard to enforce.

Our reaction to their advice?

  • Even though non-competes may be difficult to enforce, former employers can easily bring action in court. They may lose, but you will, too (in terms of legal fees).
  • Do you want to work for a GA who pushes you to do unethical things? First he (or she) wants you to break a valid agreement. Then he wants you sell unsuitable products. Where does it end?
  • Breaking a non-compete in order to flip existing contracts is bad business. As we’ve discussed in the past, churning with no regard for suitability or surrender penalties is illegal. Get caught and you may well lose your license.

So here’s the deal. When asked to sign or break a non-compete agreement, get legal advice first. After signing it, follow these ethical guidelines:

  • Always demonstrate that you are a person of your word. Walking away from prior commitments conveys you are not to be trusted.
  • Never dare a former employer to sue you. It simply isn’t worth the stress, worry, or expense of defending yourself in court.
  • But don’t let anyone hold you hostage. Sometimes a GA or IMO will promise over-the-moon service in return for access to your book. But then they’ll fail to deliver. if you try to walk, they’ll use your non-compete as a club. When someone uses an agreement in this fashion, don’t hesitate to defend yourself.
  • Finally, remember that your reputation is fragile. All it takes is one bad decision to smash it. Sure, Martha Stewart can get away with it, but should you?

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

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The Butterfly Effect: How Bad Partners Can Crash Your Firm

Reputation is as delicate as a butterfly’s wings. It follows that a small event distantly related to your business can have a huge impact on your reputation and even create errors-and-omissions insurance problems. You may recognize this as the “butterfly effect”—named after the possibility that a butterfly flapping its wings in Belize can generate a tornado in Texas.

Advisors are always launching their own unintended consequences. They make decisions about what products to sell, which FMOs or broker-dealers to affiliate with, what selling systems to use, etc. According to chaos theory, which underlies the butterfly effect, one such decision can produce potentially devastating consequences. Here are three events relating to advisors hiring lead-generation firms, each with unforeseen negative effects on their reputation:

Case #1:  A direct-mail firm suggests the end is near for Social Security in a business-reply card mailer to the senior market. Butterfly effect: the consumer is actually a retired professor of healthcare finance. He knows the postcard is fraudulent, but agrees to an appointment to confront the advisor. He does more than that . . . he reports the person to the state insurance department, which issues sanctions. The action gets posted to the department’s web site, picked up by local media, and sent aloft by Google . . . forever.

Case #2. A vendor telemarkets to non-English speakers. Consumers say “yes” just to get the telemarketer off the phone.  Butterfly effect: an agent arrives at the appointment to find an elderly non-English speaking Hispanic woman with early-stage dementia. She becomes anxious about the unknown visitor, calls her son, who summons the police. The police arrive to investigate and the agent’s name gets mentioned at the station, triggering a damaging rumor in his close-knit community.

Case #3. An Internet quote sells leads generated by another lead firm.  Butterfly effect: the first lead firm collects confidential information from the consumer, then sends the lead to a second firm, who sells the lead to the advisor. Now the advisor’s sale is potentially non-compliant because he got the lead from a firm that wasn’t technically authorized to have the client’s personal information.

Here’s our point. Butterfly wings are fragile, but they can also unleash tornadoes. Similarly, the people you decide to partner with can easily destroy your reputation if you let them. How to prevent this? The National Ethics Association, sponsor of EOforLess.com, recommends you…

  1. Affiliate only with marketing partners who share your ethical values. Your reputation is only as good as the reputation of everyone you work with.
  2. Do your due diligence before you decide on who to partner with. Never take verbal promises on faith.
  3. Use the power of the Internet to check out potential partners before you do business.

In short, be protective of your fragile business reputation. Yes, with the right sales and marketing programs, it’s not hard to fly high. But one flap of a butterfly’s wings can trigger a mighty downdraft.

For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center at ethics.net. For information on affordable errors-and-omissions insurance for low-risk financial advisors, please visit EOforLess.com.

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Avoid Fear-Based Selling to Reduce Buyer’s Remorse and Complaints

When asked whether fear or greed was the stronger human motivator, famed investor Warren Buffet answered unequivocally: “There is no comparison between fear and greed. Greed is slower. Fear is instant, pervasive, and intense.”

No wonder many agents use fear to close sales. And why not? Consumers should be afraid of running out of money in retirement or leaving their spouse penniless when they die. By making fear explicit, advisors help clients take needed steps to enhance their financial security.

But here’s the problem. Many agents also spread lies about Social Security, Medicare, or FDIC insurance in order to move prospects from CDs into annuities. This increases the odds of consumers coming down with buyer’s remorse or filing an insurance-department complaint.

Here are three common misrepresentations used by fear-mongering agents.

Misrepresentation No. 1: The most a consumer can have insured is $250,000.

Fact: The $250,000 FDIC limit is per insured bank, for each account type. So, consumers can have more than $250,000 in protection if they have multiple account types in several banks.

Misrepresentation No. 2: If a bank fails, the FDIC could take up to 99 years to reimburse depositors.

Fact: Federal law requires the FDIC to remit the insured’s deposits “as soon as possible” after an insured bank fails. This usually happens within a few days, not years.

Misrepresentation No. 3: The FDIC only pays a fixed amount per dollar in each insured account.

Fact: Federal law requires the FDIC to pay 100 percent of insured deposits, up to the federal limit, including principal and interest.

The problem with fear mongering? It’s an anemic sales tactic and the lowest form of selling. Highlighting the benefits of a product makes customers really want to buy. People who buy out of fear feel they have been forced to buy. When weak agents resort to this tactic, their sales lack depth and staying power, often resulting in buyer’s remorse and potential errors-and-omissions problems.

Think about it. What happens when an advisor lies to a prospect about the FDIC (or another government program)? The prospect is overcome with fear and forgets about the benefits of the product. So he goes to the bank to withdraw the money, but can’t defend his purchase to the bank customer service rep. Then he learns from the rep that everything the advisor told him about the FDIC was wrong. Whoops. Goodbye sale, so long credibility, see you later reputation.

Even worse, prospects who are coerced into buying often come down with buyer’s remorse and back out under the policy’s 10-day free-look provision. Or if they don’t back out, their discontent builds until they ultimately file a complaint about their agent. You may have errors-and-omissions insurance, but who needs this headache?

Wouldn’t you rather be an advisor who sells from a position of strength? Here’s how to become one:

  • Use fear constructively in order to assess and neutralize legitimate risks.
  • Never make false statements about government benefits just to make a sale. It’s unethical, inhumane, and wrong.
  • Instead, become an expert on government programs so you can proactively educate clients about the program’s weaknesses and help them take protective steps.

Finally, don’t just position yourself for your next sale. Do what’s required to survive long-term in this business. Sell truthfully!

For more information on reducing your errors-and-omissions insurance risks, visit National Ethics Association’s E&O Headquarters at EOforLess.com.

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Top 20 Ways to Lower Your E&O Risk in 2014

As a financial advisor, you’ve no doubt read a compliance manual or three in your time. These documents are typically rule-driven, which means they can be long and dense to work with. The good news: You can also lower your errors-and-omissions insurance risk by adopting ethical values and business practices. This article (Part 1) provides 20 quick pointers for doing just that. Watch for Parts 2 and 3 in our E&O HQ in the coming weeks.

Tip #1: Sell Straight

Make sure your solicitation materials play it straight. You never want to misrepresent who you are, what you do, or what you sell.

Tip #2: Dig for Needs

Do a complete fact-finder and document the needs you find. Then link your recommendations to the client’s documented needs.

Tip #3: Enlighten Your Clients

Educate your clients about what they bought. Make sure they understand what it covers and doesn’t cover, as well as all moving parts, fees and expenses, and risks and guarantees.

Tip #4: Stick to Your Expertise

Always stay in your area of expertise. Dabbling in products you don’t understand is an invitation to trouble.

Tip #5: Document Your Decisions

Put everything in writing. Make sure your client file documents every contact.

Tip #6: Document the “No’s”

Make sure to document when clients decline insurance (example: long-term care). This will protect you from a litigious beneficiary if a client dies without key protection.

Tip #7: Put Companies Under the Microscope

Always do your due diligence on the insurers and investment companies you recommend. Don’t do business on faith alone.

Tip #8: Never Outsource Due Diligence

Read the fine print yourself. If you don’t like what you see, don’t do business.

Tip #9: Transparency is Good

When in doubt, disclose more information to a client than less.

Tip #10: Hedge Ratings

Don’t place too much weight on any one financial rating agency. Rather, weigh the preponderance of data from multiple sources.

Tip #11: Trust But Verify

Don’t trust blindly. Make sure the products you sell have track records—and that your carriers and marketing firms are strong enough to fulfill their promises.

Tip #12: Get Serious About Risk

Challenge clients to defend their need for aggressive returns. And don’t proceed until both of you are clear about the amount of reasonable risk they—and you—are willing to take.

Tip #13: Be an Honest Broker

When recommending products, always lay out the advantages and the disadvantages of each alternative. Use facts as your main sales tool, not fear or deception.

Tip #14: Get Real about Expectations

Many clients have difficulty adjusting to economic realities. If your clients still believe unrealistic results are likely, adjust their attitudes.

Tip #15: Lose the Hype

Don’t publish hype on your web site. Stick to hard-core facts, and let understatement rule.

Tip #16: Never Lie

Never lie to or for a client. Once you compromise “your word,” clients will never fully trust you again.

Tip #17: Be Authentic

The more time you spend in authentic client interactions, the more clients will sense you have their best interests at heart.

Tip #18: Scrub Your Web Site

Verify your online content. Be sure it’s current and in compliance with regulations.

Tip #19: Embrace Transparency

Fully disclose your licenses and experience. However, rely on the substance of your character, not just the flash of your credentials.

Tip #20: Take Your Time

Accept a longer sales process. The more time you spend in discovery, the stronger your client relationships will be. And since your recommendations will be more suitable, the less likely you’ll find yourself entangled in an errors-and-omissions insurance complaint or lawsuit.

For more information on reducing your errors-and-omissions insurance liabilities, please visit our E&O Headquarters at EOforLess.com (financial professionals only). For more information on ethical selling practices, visit National Ethics Association’s Ethics Center.

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