If client trust is the nutrient that builds healthy financial-services careers, then conflicts of interest are the poison that kills them. Financial manufacturers have given lip service to this truism for decades, as have distributors. But the profits that come from conflicts are hard to deny in practice. However, with the fiduciary standard looming on the horizon for securities and insurance producers, advisors will be under greater pressure to better manage their conflicts—or put their careers in jeopardy.

Scare mongering, you say? Then consider these four points:

First, in October 2013, FINRA released its Report on Conflicts of Interest based on a survey of firm and representative conflict-management best practices. The report reviewed three types of systems the industry uses to minimize conflict: enterprise oriented, product manufacturing and distribution driven, and compensation related. Although FINRA said companies and advisors had made progress on all three fronts, it also called on them to do more. It even made a not-so-veiled threat: “If firms make inadequate progress generally,” it said, “FINRA will evaluate whether conflicts-focused rulemaking is necessary to enhance investor protection.”

Second, the SEC announced its enforcement unit will be focusing on conflicts of interest in 2015. According to news reports, the agency will spotlight several key issues, including undisclosed outside business activities and undisclosed bias toward proprietary products and investments. “Only through complete and timely disclosure can advisors, as fiduciaries, discharge their obligation to put their clients’ and investors’ interests ahead of their own,” said Enforcement Asset Management Unit Co-Chief Julie Riewe at an industry event.

Third, the Obama Administration recently gave the Department of Labor the permission to go ahead with rewriting its fiduciary standard for financial advisors involved with ERISA-governed retirement plans. Experts say this will likely have a big impact on commissions paid when clients roll over their 401 (k) or other pension assets into an IRA upon retiring or switching jobs. In justifying his decision, the President said that “conflicted advice” generates returns that are about 1 percentage point lower each year. Since IRA assets currently amount to $1.7 trillion, the aggregate annual cost of conflicted advice is roughly $17 billion per year. Although some have disputed this figure, the President’s fiduciary advocacy has put industry conflicts on stark display, increasing pressure on companies and advisors to respond.

Fourth, financial journalists are writing more frequently about the industry’s dueling standards of care (suitability vs. fiduciary) and about how consumers can avoid inherent conflicts in each model. For example, a Wall Street Journal article entitled, “New Financial Advisor? Check Out Fees and Conflicts,” cautions people to probe an advisor’s fiduciary status at the outset. The reporter, Peter Finch, cautioned readers to probe hard for underlying conflicts of interests. For example, he said an advisor might push mortgage refinancing in order to make more funds available for investing, not to save his client money. Or an advisor might recommend a particular brokerage firm for transactions in order to get referrals to new clients.

Put the pieces together and the conclusion is hard to deny. Consumers will soon prefer working with advisors who bring less conflict baggage. And financial professionals will feel greater pressure to become fiduciaries and to be more transparent about their conflicts, while hopefully reducing their errors-and-omissions insurance exposure. Are you ready for this new environment? If not, you’ll have to do two things rather quickly. First, become more aware of the potential conflicts in your business model and second, become more skillful at balancing and disclosing those competing interests.

For example, if you hold a securities license, you’ll need to become more careful about managing the following issues:

  • Engaging in outside business activities that give you an incentive to recommend a transaction that benefits you, but hurts your client.
  • Offering or accepting a gift or entertainment that colors your business judgment.
  • Advising a client to purchase a proprietary or preferred third-party product because your compensation is higher for such products, even though net returns might suffer.
  • Pushing mutual funds over individual stocks because you get paid more to sell mutual funds.
  • Avoiding index or exchange-traded funds because they pay you less than fully loaded products, even though studies suggest such vehicles are more affordable and tax efficient.
  • Selling securities your firm is underwriting to people for whom those securities are unsuitable.
  • Favoring equity investments over fixed-income products because product manufacturers generate more fees from the former and are willing to provide higher sales incentives, even though a client’s risk tolerance suggests a need for the latter.
  • Giving greater emphasis to a certain product type because you are nearing a compensation-plan threshold that will increase your total payout, again with no consideration of client suitability.

Advisors with insurance licenses face many of the same conflicts, as well as others such as:

  • Agreeing to become the designated beneficiary of an insurance policy you sold to a client, even though you have no insurable interest in the person’s life.
  • Becoming a collateral assignee of a policy or contract owned by anyone other than a close family member.
  • Becoming a trustee of a trust that owns a policy insuring someone other than your close family member.
  • Holding power of attorney over a client’s property, especially if it includes a life insurance policy or annuity you sold the person.
  • Lending money to a customer or borrowing money from a customer.

As for balancing and disclosing conflicts, always force yourself to consider the client impact. When pondering an action that appears to benefit you more than the client, always ask yourself these questions:

  • How will the client feel if he finds out you benefited from the transaction at his expense? Will he feel victimized? Might he pursue legal remedies?
  • What will self-dealing do to your perceived credibility? By favoring your own interests, will you permanently damage your ability to serve the client?
  • Will your action pose errors-and-omissions risk to your business? Are you adequately insured against such risks?
  • Finally, will an aggrieved client take her complaint online, thereby harming your professional reputation in perpetuity?

Hopefully, pondering these questions will persuade you to more effectively handle your conflicts of interest. Equally important is fully disclosing them. This is a key SEC requirement for investment advisors, who typically publish conflict disclosures on their web sites. But SEC-registered advisors shouldn’t just provide web boilerplate and call it a day. They should also discuss conflicts with clients to make sure they understand their fiduciary commitment.

For advisors with insurance licenses, perhaps it’s time to adopt a fiduciary mindset of their own, even though it is not yet required, and to increase disclosures and client discussions accordingly.

Bottom line, with heightened focus on conflicts of interest, why keep giving prospects a reason to mistrust you or worse, sue you? At the end of the day, if you want to build a healthy financial-services business that attracts new clients and retains existing ones, pills that poison trust are bad medicine, indeed.

For more information on ethical sales practices, 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&

Are human financial advisors engaged in a life-or-death struggle with Internet-based investment services, also known as “robo-advisors”? If you read the industry trade press, you’d be hard-pressed not to draw that conclusion. “Will Financial Advisors Become Obsolete,” asks one article. “Robo-Advisors Expanding Rapidly,” warns another. “Eliminate the Robo Threat,” commands a third. If you derive a significant portion of your income from investment strategy development and management, should you be worried about this trend? Yes . . . and no.

Yes, because the robo-advisors have clearly been on a tear of late. According to Clara Shih, CEO and Founder of Hearsay Social, online investment providers have raised some $82 million in venture capital in the last two years. And they’ve amassed more than $2 billion in assets under management. One of the leading services, Wealthfront, achieved its first $1 billion in AUM in about two-and-a-half years, something it took discount-broker Charles Schwab roughly six years to accomplish. Wealthfront currently has $1.8 billion in assets under management.

Based on the robo-advisors sales trajectory alone, traditional financial advisors should be concerned. But the numbers aren’t the main issue; it’s the reasons for the growth that should give advisors pause. And there are three of them:

First, robo-advisors have a strong value proposition. They are great proponents of simple, convenient, low-cost, and technology-savvy investing for people who have better things to do.

Second, the marketplace is receptive to their offerings. It’s no accident that robo-advisors are most popular among Millenial investors. In their 20s and 30s, these consumers have grown up with the Internet and have no or little patience for traditional salespeople or sales hype. Just give them a user-friendly interface on a laptop or mobile phone, and they’re ready to invest. If you plan on remaining in the business, losing these customers to online platforms is a stinging blow.

Third, automated investment services may outpace human investment managers due a number of factors, including:

  • Tax-aware asset allocations
  • Automatic rebalancing
  • Optimal allocation
  • Tax-loss harvesting
  • Cost advantage of investing in passively managed index funds

According to Wealthfront, these advantages add up to an estimated additional return of 4.6 percent, assuming a $100,000 investment over 20 years in a U.S. mutual fund.

Since robo-advisors in their purest form lack human salespeople, they must rely on their websites to tell their stories. They appear to do a superb job at this. For instance, take a look at Wealthfront’s site. The large home page visual features an animated GIF of a Millenial keying data into her smart phone. Superimposed on the visual is the following text: “Clients trust Wealthfront to manage over $1.9 billion of their assets.” Scrolling further down, the company encourages visitors to “be an investor” using its “sophisticated investment management & advice, without the hassle, high fees, or high account minimums.”

Then comes a performance chart, which spells out in great detail the incremental advantages discussed earlier. Next comes a discussion of its investment team, which includes Burton G. Malkiel, author of the classic investment guide “A Random Walk Down Wall Street” and Charles Ellis, author of “Winning the Loser’s Game: Timeless Strategies for Successful Investing.” The company then touts its low fees, saying it will manage a $100,000 portfolio for less than $20 a month, making sure that key tasks that many investors overlook—such as rebalancing or tax harvesting—get done on a timely basis.

The website sales pitch ends with a review of Wealthfront’s six investment features and photos of 16 Silicon Valley employees—all in the Millenial sweet spot—who have entrusted their money to Wealthfront.

Drilling down further into the site, you discover the company’s helpful investment-education content, along with its clearly written disclosures. Our overall impression? That Wealthfront is professional, client-driven, and careful to do business by the book. In fact, after spending about 15 minutes on the site, one NEA staffer was about ready to open an account and send in a check for $5,000, an account size that requires no investment-management fees (they don’t kick in until an account exceeds $10,000).

But would the staffer have sent in anything more than that? No, and the reason why is the same reason advisors shouldn’t overreact to the robo-advisor threat: the ethics card.

As alluded to earlier, robo-advisors appear to be careful to comply with SEC investment advisor regulations. So we’re not suggesting they are unethical. What we are saying is this: If ethics is the domain of thought that deals with the right way to behave (or invest), then robo-advisors may be ill-equipped to be ethical.

For example, a robo-advisor can’t tell a consumer he’s misguided for panicking during a market correction and converting all his holdings into cash. Or if he’s spending too much money on fine German cameras and optics. Nor can a robo-advisor guide a consumer who’s uncertain whether to invest $50,000 in her retirement fund or the same amount in her daughter’s 529 college savings plan.

Similarly, a robo-advisor will be hard-pressed to tell a consumer if he should reduce his credit-card debt before investing online. And clients looking for help converting their investment portfolio into a safe and secure retirement-income stream should definitely look elsewhere than a robo-advisor. And let’s not forget people who need advice about buying long-term care, who need estate-planning guidance, or who want information on high-quality, noncancellable disability insurance policy.

Then there’s the accountability factor. We all know that most people won’t willingly buy life insurance because they’d rather not contemplate their own demise. They need a human advisor to poke and prod them into doing the right thing. The same is true for people who have difficulty making and sticking with an expense budget. They need someone to remind them that profligate spending will have a large negative impact many years from now. And consumers who indulge in destructive behaviors such as speculative investing or Internet gambling need someone to deliver a pointed wake-up call before they lose everything they have.

In short, automated investment platforms lack the ability to guide clients on the right way to manage their finances because they are the product of software engineering and algorithms, not hard-won product expertise, street smarts, and ethical wisdom.

Thus, if you are a financial advisor who’s concerned about your future in this technology-driven marketplace, don’t be. Always remember that you have something that the robo-advisors will never have—the ability to detect worry on a human face, fear in a client’s voice, and confusion in a person’s eyes and to respond with reassurance, compassion, and integrity. Not only do these qualities serve your clients well, they serve your business well by preventing errors-and-omissions insurance claims.

By the same token, you don’t want to ignore the advance of the robo-advisors. Experts suggest adding financial-planning services that don’t lend themselves to commoditization and ramping up the “high-touch” support you provide to clients. Most important, don’t try to compete on the robo-advisors’ terms (automation, low cost, etc.). Stress your ability to assess complex problems and deliver highly customized solutions, all with an ethical human touch. That’s a card you can (and must) play—and we’re sure it’s a winning one.

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



Are you your own boss? “Of course,” you reply. But even independents have bosses—those who attempt to “lead” them to success. These include IMOs, carrier reps, and even professional mentors. And all of these bosses either wear white hats (play totally by the book), black hats (burn the book if it impedes sales), or gray hats (read only those pages that fit their purposes).

If you have a white-hat boss, consider yourself fortunate. You’ll  probably never be asked to compromise your ethics, creating potential errors-and-omissions exposures. But if your bosses wear black or gray hats, watch out; they will be more focused on the ends, not the means. And “black-hatters” especially will have no qualms asking others to lie for them or to break the law as long as it advances their interests.

How do you “manage” a black-hat boss? Consider the case of Tom, an advisor who just signed on with a large senior-market IMO. After providing him with some initial training, the IMO sends out hundreds of direct mailers for a hot new insurance product. Problem is, the response rate is weak. So the IMO rep suggests the advisor simply call each person instead.

“What about the federal Do-Not-Call law?” the advisor responds. “Wouldn’t it be illegal to approach these names without first scrubbing them?”  Her response: “Call anyway, since the probability of consumers complaining is very slight, and even if they did, the FTC lacks resources to pursue small violators.” Plus, she advises him to lie – to tell anyone who complains that the government has granted a DNC exemption for this particular product.

How would you handle this black-hat situation? Clearly, you must refuse to break the law. But the question is how. Do you point out that the IMO’s position is illegal? What if the rep insists there’s no problem doing it her way? Do you then offer an alternative such as having the IMO scrub the list or buy a legal one? What if she still refuses to budge? Should you just end the relationship and start looking for a new IMO?

Clearly, we can’t point to a single best answer because it will depend on the circumstances of each advisor. But here’s what we can recommend: Resolve this (and all) black-hat boss dilemmas using the National Ethics Association’s SMART decision-making model. Here’s what to do:

  1. Study your options carefully.
  2. Make a mental note of everyone affected by each option.
  3. Assess who benefits or suffers from each option.
  4. Reflect on whether you’d be able to live with yourself after making each choice.
  5. Total up all the factors and reach a decision.

But what if your boss dilemma is less clear cut? That means you’re dealing with a “gray-hat” boss, a challenging scenario we’ll discuss in Part 2 of this series.

For more information on reducing your errors-and-omissions insurance risks, visit our E&O Headquarters at

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