Friday, February 27, 2009
Time to Call a Certified Risk Manager?
Today's degenerating business circumstances have forced companies to examine their risk management programs to identify the significant risks that were minimized or overlooked. The financial free fall brought attention to six primary risks: short-term investments, financial firms, business associates, insurance providers, emerging risks, and costs. Short-term investments were revealed to carry high liquidity risks. Financial institutions neglected to limit their exposures only to their capital, entered into agreements that placed credit lines in peril, and enacted policies that placed a concentrated portion of financial risk onto individual institutions. The collapse of Bear Stearns demonstrated why businesses must pay more attention to their business-partner-related exposures and monitor the financial health of affiliated institutions. The near-collapse of American International Group pushed companies to consider alternative means of limiting exposures, such as self-insurance and captives. Sixteen months ago, businesses paid less attention to emerging risks related to changing business conditions, overall economic conditions, and governmental policies. Finally, businesses failed to garner a return-on-investment in risk management spending by drafting policies that were reactive instead of proactive in nature.
Monday, February 23, 2009
Where Were All The Investment Evaluators and Actuaries?
At the height of the Watergate scandal, Judge Scirica was reported asking, "Where were all the lawyers?" Now as we are embroiled in a financial breakdown especially of the America's pension and retirement assets, someone should start asking, "where were those experts who evaluated pension funds about their investments and the actuaries? Bernie Madoff has become a household name, investment advisors are closing shop, and pension trustees are calling lawyers and notifying their fiduciary carriers. Yet the same old crowd is out there advising pension and health and welfare funds offering "one store shopping." "Buy fiduciary insurance from us when we wear one hat, let us evaluate your investment portfolio wearing another hat, and we will also be your actuary and give you assurances of your plan's stability with your insurance carrier and to your members with another hat," they advertise. They even tell the fiduciaries they can "save them a little money if we do it all." Try telling your spouse you have to move out of your home because you saved a few bucks for the Pension Fund you used to sit on their Board.
Reports of over $1 Million dollar losses involving Bernie Madoff are common place these days. Individuals, charities, and pension funds were enticed by someone selling them something that seemed to be "to good to be true." Plan fiduciaries should be looking at those multiple hat firms with the same skepticism as if Bernie Madoff came in their office today offering them a guaranteed return on their investment. We have written for years advising to be careful of "Cowboys wearing multiple hats" regardless of where they are headquartered. As a fiduciary whose personal assets are at risk, we recommend in this time of uncertainty employ a certified risk management expert to do an evaluation of your plan from top to bottom. Listen to them and heed their advise. You will sleep better and so will your plan participants.
Footnote: The author of this is employed by Creative Risk Management and The McLaughlin Company who are both proud to say we did not have one client invest with Madoff. This footnote is more disclosure and transparency then you will ever have received from "the cowboys above described."
Reports of over $1 Million dollar losses involving Bernie Madoff are common place these days. Individuals, charities, and pension funds were enticed by someone selling them something that seemed to be "to good to be true." Plan fiduciaries should be looking at those multiple hat firms with the same skepticism as if Bernie Madoff came in their office today offering them a guaranteed return on their investment. We have written for years advising to be careful of "Cowboys wearing multiple hats" regardless of where they are headquartered. As a fiduciary whose personal assets are at risk, we recommend in this time of uncertainty employ a certified risk management expert to do an evaluation of your plan from top to bottom. Listen to them and heed their advise. You will sleep better and so will your plan participants.
Footnote: The author of this is employed by Creative Risk Management and The McLaughlin Company who are both proud to say we did not have one client invest with Madoff. This footnote is more disclosure and transparency then you will ever have received from "the cowboys above described."
Bad Timing?
401(k) plan sponsors, unable to persuade employees to enter into plans in the 1980s and 1990s, were finally seeing broad participation in 2008, just before the financial markets all but collapsed. Now, employers are in the unenviable position of defending workers' investment in high-return, risky assets. According to Greenwich Associates' new U.S. Defined Contribution (DC) Pension Plan Research Study, enrollment of eligible employees into corporate 401(k) plans was 79 percent in 2008, up several percentage points from 2006. More than four out of 10 large DC programs and almost 50 percent of smaller programs automatically enroll workers into corporate 401(k) plan unless they opt out. As businesses have begun adopting automatic enrollment, they have also been changing default investment options from conservative funds to target retirement date funds that frequently expose the funds' equity to more risk. Participants in these plans are hit particularly hard by recent economic failures, as many employees have a large chunk of their personal equity--and in some cases, their total retirement savings--bound up in a DC plan.
Tuesday, February 03, 2009
Investment Performance Leads to Claims
When investments don't perform well, clients get upset. Here are the professional liability insurance claim ramifications and how to guard against claims.
"The potential for investment-related claims in the current, de-leveraging economy will probably be highest for investments that have significant exposures to leveraged transactions such as real estate deals, hedge fund programs, and collateralized transactions," says Ric Rosario, CEO of CAMICO Mutual Insurance Co. (camico.com). "The more traditional direct exposures would include raw land developments, residential and commercial projects underway, which are always a little risky in the first place. Also, any activity or entity that pools invested funds in an unregulated environment is very problematic."
The current economy spurs some investors to blame the financial planner or investment advisor for having recommended an investment that ended up being disappointing, he adds. "It may be that the general partner or president of an investment entity was reassuring investors through newsletters that the investment was still performing when the investment was actually going south. The client may see the planner or advisor as the trusted professional who was responsible for exercising due diligence over the client's entire financial picture."
Tough Economy's Effects
"In the current economy, it will be very difficult for clients to make successful claims alleging that their investment advisor guided them into bad investments, as opposed to other, safer choices that might have been selected by a more prudent professional," says Michelle Duffett, executive VP for Insight Insurance Services (insightinsurance.com). "Virtually all investments have declined in value and all investment advisors are in the same situation to varying degrees. That said, we expect that claims will increase. Clients are more likely to sue in tough economic times," she adds.
Gary Sutherland, CEO of insurer NAPLIA (naplia.com), likewise believes that the current downturn won't produce "a significant amount" of additional claims against CPA investment professionals. "This obviously assumes that these advisors have advocated a conservative portfolio management strategy and have kept their clients fully informed of market developments," he adds. "There is the possibility of claims arising from the use of non-standard or alternative investments, because of the potential for consumers to allege that they were mislead or poorly informed about the risks involved in such investment vehicles. Additionally, we've encountered situations where claims have arisen because the advisor didn't update the original risk assessment worksheet and failed to reflect appropriate investment strategies or risk tolerance for current market conditions."
Investment fraud is always a problem that can cause claims, says Rosario, and it can encompass: 1) financial statement fraud; 2) fraud perpetrated though other forms of false information (e.g., e-mail, newsletters); and 3) Ponzi, pyramid, and other schemes like the recent headline scandals involving financier Bernard Madoff.
"It can strike in large dollar amounts and affect a variety of engagements such as reviews, audits, tax advice, and investment advice," Rosario adds. "The more time that a CPA has been associated with fraudulent activity before it is uncovered, the more likely the CPA will be perceived by juries to have 'validated' the fraud, unwittingly or not." Jury research, he adds, also shows that the public, including clients, perceive that the CPA's fundamental job is to advise clients of opportunities and warn them about risks.
"Also, looking at a situation in hindsight means that the history of it can be rewritten in a manner that benefits the client and portrays the CPA as having failed to warn the client," Rosario says, adding this can also happen in any financial statement services or even non-attest or consulting engagements.
Bill Thompson, president of CPA Mutual (cpamutual.com), says that so far investment performance-related claims are "no worse than other accountants' claims. Most of our members are sophisticated enough to obtain client agreements with their investment clients, in which the client assumes some responsibility for their investment selections," he says. "Most of their clients also realize that the CPA can't guarantee investment performance and that markets are cyclical. Our folks do a pretty good job educating their clients, and, for the most part, have investment-savvy clientele. A lot of our insureds are fee-for-service, too, so this helps mitigate losses as opposed to commissioned-based investment advisors."
Speaking for CNA (cna.com), assistant VPs Joseph Wolfe (risk control), Jeffrey Day (underwriting), and Melissa Thomas (claims) point out that most accountants don't have investment advisory practices. "Investment advisors will experience some claims to the extent they recommended investment in derivative securities or auction rate securities "which lost substantial value or could not be readily sold in the marketplace." The general dip in the markets, however, "is less likely to result in increased claims activity unless investment advisory clients are retired or close to retirement, and their portfolios incurred significant losses. Risks are elevated for trustees and accountants providing family office services based upon the fiduciary duties assumed in these roles," they say.
Duffett says she anticipates that claims will also arise against the CPA firms involved in the headline Madoff fraud. "Although this situation is extreme in the dollar amounts involved, this type of fraud isn't new," she points out. "When government regulations fail to keep investments safe from criminals, it's typical for investors to sue the directors, officers, lawyers, and accountants who reviewed the company's activities. Already investment advisors who didn't promote the Madoff funds are claiming to have been skeptical of the prospectus. Other experts are stating that the fraud should have been apparent, as the investor statements reflect option transactions beyond the total market activity for the day. With hindsight, clients will find a myriad of small cracks and hints to find fault with the accounting professionals that reviewed the criminal's work."
Typical Claims
Many of these claims allege that the accountant was negligent in referring the client to a specific investment advisor, and in many cases allege that while the accountant wasn't the primary investment advisor, they should have recognized that a particular investment wasn't suitable for that client and advised the client of that. Additionally, when an accountant mentions a particular investment opportunity to a client, the client generally will assume that this is equivalent to a recommendation.
One typical claims scenario, Rosario says, involves an older client who has a lot of funds to invest but does not want to be bothered with details. The client is successful in his or her own profession, is demanding, but has little patience for, or understanding of, financial concepts, rather just wanting the financial planner to handle all of the decisions. "The planner recommends a significant portfolio shift from fixed income to equity at a time when equity investments are doing well. The planner also recommends an investment advisor," Rosario says. "The client is so pleased with the returns first produced by the equity investments that they invests even more of the fixed income funds into equity. When the next economic downturn comes along, the client's portfolio loses over one-third of its value, and the client is extremely disappointed. The planner's engagement letter mentions investment risks, but it was never signed or acknowledged by the client, whose files only include the planner's recommendation to invest more aggressively. The client sues the planner, alleging that the planner had a total responsibility for his overall financial well-being and should have warned him of all the risks he had taken. A good risk management technique is to refer the client to more than one investment advisor, thus avoiding the appearance that the planner made the decision for the client."
Thompson likewise says he's seen several types of investment-related claims based on:
1. Allegations of "churning," or recommending allegedly inappropriate investments which generate commission income;
2. Allegations of lack of appropriate investment diversification;
3. Alleged failure to identify or follow (often perhaps more a failure to properly document than follow) a client's risk tolerance; and
4. Alleged confusion regarding how independent entities are affiliated and the services the client thinks they are providing.
A common cause of financial planning and investment management claims is the allegation of a conflict of interest, Duffett says, which "will arise from the referral fee or commission collected by the CPA firm for sending a client to a particular investment advisor. We've found these types of conflicts to be nearly impossible to defend. Once a CPA is paid in any form by an investment firm, 'independence' is a myth. A conflict of interest may also arise from directing the client into a private investment managed by another client, or in which the CPA has invested personally. Even with disclosures, clients and third parties have a tendency to disown knowledge of the conflict, deny their understanding of the conflict, or claim they were unduly persuaded by their professional accountant's involvement.
"It's difficult to be a competent CPA and an accomplished securities broker," Duffett adds. "The body of knowledge is simply too great. Many CPA firms have hired investment professionals to help bridge the knowledge gap. But compared to standard investment advisors, CPAs have more professional liability risk. It's common for professional liability claims against CPAs to include an allegation that the accountant's personal knowledge of the client's finances should have required the CPA to take additional precautions to protect the client's assets. A full-time securities broker on staff or in a wholly-owned subsidiary doesn't protect the CPA firm from claims that there was a need for the firm to analyze the client's ability to absorb risk and guide their investments."
Impact on Premiums?
While voicing no current plans to raise premiums, insurers hold out the right to bump up rates if claims from the down economy escalate. "A key factor is that the largest 'cost of goods' for an insurance company is claims and the related defense costs, which will usually be 70 to 80 cents on the premium dollar collected," Rosario points out. "If claims tick up significantly further than we have currently planned for, it's inevitable that carriers will have to raise rates. The wild card is the loss prevention activity that CPA firms have taken in advance of the recession. A CPA firm may not be able to stop clients from filing lawsuits to cover their own losses, but if the firms have taken the right actions, the overall severity (cost of claims) could be significantly reduced, taking some pressure off rates."
Adds Sutherland, "There's a move by the more forward-thinking firms to purchase separate coverage for financial planning to isolate the potential of claims from this area of activity from eroding coverage for the traditional practice areas. The trigger seems to be about 15 percent of revenue from PFP. The advantage over adding coverage by endorsement to an accountants' professional liability policy is the separate limit of coverage, and any claims won't adversely impact the core practice."
Encouraging Feedback During a Downturn
Advisors often let fear rather than client feedback take hold during uncertain markets, says Julie Littlechild, president of Advisor Impact, a New York-based consultancy to financial advisors and accountants. "Market downturns," she says, "are when advisors need to step up and identify opportunities that result from gathering feedback from clients. The recent downturn has created an environment in which many investors need and want more frequent and reassuring contact with their advisors." Pinpointing what is most important personally to clients often occurs only when times are tough, she claims, and "client feedback" means more than asking clients to rate satisfaction. It's also a chance to understand what's most important to them and the additional services they need.
Best Practice Tips
Insurers offer these tips in a troubled investment landscape:
* Monitor clients and make sure investment allocations are as agreed in the client file (Bill Thompson, CPA Mutual).
* Don't make unusual offers or "sell away" from your broker/dealer's standard menu of investments. No private offerings or derivatives, for instance (Thompson).
* Obtain signed engagement letters yearly for all financial planning and investment advisory engagements. These letters should clearly define the timing and scope of services and client responsibilities, and include loss-limitation and alternative-dispute resolution clauses and disclaimers regarding investment performance and the volatility of market conditions (Joseph Wolfe, Jeffrey Day, and Melissa Thomas, CNA).
* Document all client conversations, even "casual" inquiries that may come up in social contact with clients. Respond to ad hoc requests for financial planning or investment advice by recommending that the client or prospect contact your office to set up an in-office consultation (Wolfe, Day, Thomas).
* Document who's authorized to provide instruction to you on behalf of the client. If you don't have discretionary authority over the investment of client funds but transmit instructions to others on the client's behalf concerning investments, create a form the client is required to complete and convey to you containing their instructions and approval to request the completion of the transaction. Conveying investment instructions to others on behalf of clients creates a fiduciary duty to the client (Wolfe, Day, Thomas).
* Accountants who perform administrative services for employer-sponsored benefit plans should avoid providing investment advice to plan participants (Wolfe, Day, Thomas).
* Regarding state and federal licensing rules applicable to investment advisory services, consider situations wherein services may be rendered in jurisdictions other than where your firm is domiciled, and research applicable state securities laws (Wolfe, Day, Thomas).
* Background, credit, and reference checks should be obtained before accepting any significant engagements. Risk factors can be determined in interviews or by checking with the client's prior accountant. If the CPA doesn't perform due diligence work regarding the investments, he or she should determine who's taking responsibility for performing the work (Ric Rosario, CAMICO).
* Meet with clients quarterly to make sure they understand new developments impacting their financial and investment plans. Periodic re-balancing of asset allocation also can be conducted. Update the documents to reflect changes and obtain client signatures (Rosario).
* Insist that any professionals involved in related financial planning functions have errors and omissions insurance to help insure the client against losses and help protect you from claims directly related to their work. Some accountants' professional liability policies don't provide coverage if a commission is involved, so additional coverage may be needed. When dealing with a high-value trust, consider higher limits. In any event, ask for coverage clarification in writing from your carrier to avoid misunderstandings (Rosario).
* Don't provide referrals to relatives, to financial advisors with whom you have personal investments, or from one client to another. Refer at least three fully independent options to your client and document that you aren't recommending any one of them specifically. Never accept any type of remuneration from any investment firm (Michelle Duffett, Insight).
* Utilize a strongly worded contract that specifically identifies out the services, costs and administrative items, and utilize a risk-tolerance worksheet and update it annually or when a customer's personal circumstances change (Gary Sutherland, NAPLIA).
"The potential for investment-related claims in the current, de-leveraging economy will probably be highest for investments that have significant exposures to leveraged transactions such as real estate deals, hedge fund programs, and collateralized transactions," says Ric Rosario, CEO of CAMICO Mutual Insurance Co. (camico.com). "The more traditional direct exposures would include raw land developments, residential and commercial projects underway, which are always a little risky in the first place. Also, any activity or entity that pools invested funds in an unregulated environment is very problematic."
The current economy spurs some investors to blame the financial planner or investment advisor for having recommended an investment that ended up being disappointing, he adds. "It may be that the general partner or president of an investment entity was reassuring investors through newsletters that the investment was still performing when the investment was actually going south. The client may see the planner or advisor as the trusted professional who was responsible for exercising due diligence over the client's entire financial picture."
Tough Economy's Effects
"In the current economy, it will be very difficult for clients to make successful claims alleging that their investment advisor guided them into bad investments, as opposed to other, safer choices that might have been selected by a more prudent professional," says Michelle Duffett, executive VP for Insight Insurance Services (insightinsurance.com). "Virtually all investments have declined in value and all investment advisors are in the same situation to varying degrees. That said, we expect that claims will increase. Clients are more likely to sue in tough economic times," she adds.
Gary Sutherland, CEO of insurer NAPLIA (naplia.com), likewise believes that the current downturn won't produce "a significant amount" of additional claims against CPA investment professionals. "This obviously assumes that these advisors have advocated a conservative portfolio management strategy and have kept their clients fully informed of market developments," he adds. "There is the possibility of claims arising from the use of non-standard or alternative investments, because of the potential for consumers to allege that they were mislead or poorly informed about the risks involved in such investment vehicles. Additionally, we've encountered situations where claims have arisen because the advisor didn't update the original risk assessment worksheet and failed to reflect appropriate investment strategies or risk tolerance for current market conditions."
Investment fraud is always a problem that can cause claims, says Rosario, and it can encompass: 1) financial statement fraud; 2) fraud perpetrated though other forms of false information (e.g., e-mail, newsletters); and 3) Ponzi, pyramid, and other schemes like the recent headline scandals involving financier Bernard Madoff.
"It can strike in large dollar amounts and affect a variety of engagements such as reviews, audits, tax advice, and investment advice," Rosario adds. "The more time that a CPA has been associated with fraudulent activity before it is uncovered, the more likely the CPA will be perceived by juries to have 'validated' the fraud, unwittingly or not." Jury research, he adds, also shows that the public, including clients, perceive that the CPA's fundamental job is to advise clients of opportunities and warn them about risks.
"Also, looking at a situation in hindsight means that the history of it can be rewritten in a manner that benefits the client and portrays the CPA as having failed to warn the client," Rosario says, adding this can also happen in any financial statement services or even non-attest or consulting engagements.
Bill Thompson, president of CPA Mutual (cpamutual.com), says that so far investment performance-related claims are "no worse than other accountants' claims. Most of our members are sophisticated enough to obtain client agreements with their investment clients, in which the client assumes some responsibility for their investment selections," he says. "Most of their clients also realize that the CPA can't guarantee investment performance and that markets are cyclical. Our folks do a pretty good job educating their clients, and, for the most part, have investment-savvy clientele. A lot of our insureds are fee-for-service, too, so this helps mitigate losses as opposed to commissioned-based investment advisors."
Speaking for CNA (cna.com), assistant VPs Joseph Wolfe (risk control), Jeffrey Day (underwriting), and Melissa Thomas (claims) point out that most accountants don't have investment advisory practices. "Investment advisors will experience some claims to the extent they recommended investment in derivative securities or auction rate securities "which lost substantial value or could not be readily sold in the marketplace." The general dip in the markets, however, "is less likely to result in increased claims activity unless investment advisory clients are retired or close to retirement, and their portfolios incurred significant losses. Risks are elevated for trustees and accountants providing family office services based upon the fiduciary duties assumed in these roles," they say.
Duffett says she anticipates that claims will also arise against the CPA firms involved in the headline Madoff fraud. "Although this situation is extreme in the dollar amounts involved, this type of fraud isn't new," she points out. "When government regulations fail to keep investments safe from criminals, it's typical for investors to sue the directors, officers, lawyers, and accountants who reviewed the company's activities. Already investment advisors who didn't promote the Madoff funds are claiming to have been skeptical of the prospectus. Other experts are stating that the fraud should have been apparent, as the investor statements reflect option transactions beyond the total market activity for the day. With hindsight, clients will find a myriad of small cracks and hints to find fault with the accounting professionals that reviewed the criminal's work."
Typical Claims
Many of these claims allege that the accountant was negligent in referring the client to a specific investment advisor, and in many cases allege that while the accountant wasn't the primary investment advisor, they should have recognized that a particular investment wasn't suitable for that client and advised the client of that. Additionally, when an accountant mentions a particular investment opportunity to a client, the client generally will assume that this is equivalent to a recommendation.
One typical claims scenario, Rosario says, involves an older client who has a lot of funds to invest but does not want to be bothered with details. The client is successful in his or her own profession, is demanding, but has little patience for, or understanding of, financial concepts, rather just wanting the financial planner to handle all of the decisions. "The planner recommends a significant portfolio shift from fixed income to equity at a time when equity investments are doing well. The planner also recommends an investment advisor," Rosario says. "The client is so pleased with the returns first produced by the equity investments that they invests even more of the fixed income funds into equity. When the next economic downturn comes along, the client's portfolio loses over one-third of its value, and the client is extremely disappointed. The planner's engagement letter mentions investment risks, but it was never signed or acknowledged by the client, whose files only include the planner's recommendation to invest more aggressively. The client sues the planner, alleging that the planner had a total responsibility for his overall financial well-being and should have warned him of all the risks he had taken. A good risk management technique is to refer the client to more than one investment advisor, thus avoiding the appearance that the planner made the decision for the client."
Thompson likewise says he's seen several types of investment-related claims based on:
1. Allegations of "churning," or recommending allegedly inappropriate investments which generate commission income;
2. Allegations of lack of appropriate investment diversification;
3. Alleged failure to identify or follow (often perhaps more a failure to properly document than follow) a client's risk tolerance; and
4. Alleged confusion regarding how independent entities are affiliated and the services the client thinks they are providing.
A common cause of financial planning and investment management claims is the allegation of a conflict of interest, Duffett says, which "will arise from the referral fee or commission collected by the CPA firm for sending a client to a particular investment advisor. We've found these types of conflicts to be nearly impossible to defend. Once a CPA is paid in any form by an investment firm, 'independence' is a myth. A conflict of interest may also arise from directing the client into a private investment managed by another client, or in which the CPA has invested personally. Even with disclosures, clients and third parties have a tendency to disown knowledge of the conflict, deny their understanding of the conflict, or claim they were unduly persuaded by their professional accountant's involvement.
"It's difficult to be a competent CPA and an accomplished securities broker," Duffett adds. "The body of knowledge is simply too great. Many CPA firms have hired investment professionals to help bridge the knowledge gap. But compared to standard investment advisors, CPAs have more professional liability risk. It's common for professional liability claims against CPAs to include an allegation that the accountant's personal knowledge of the client's finances should have required the CPA to take additional precautions to protect the client's assets. A full-time securities broker on staff or in a wholly-owned subsidiary doesn't protect the CPA firm from claims that there was a need for the firm to analyze the client's ability to absorb risk and guide their investments."
Impact on Premiums?
While voicing no current plans to raise premiums, insurers hold out the right to bump up rates if claims from the down economy escalate. "A key factor is that the largest 'cost of goods' for an insurance company is claims and the related defense costs, which will usually be 70 to 80 cents on the premium dollar collected," Rosario points out. "If claims tick up significantly further than we have currently planned for, it's inevitable that carriers will have to raise rates. The wild card is the loss prevention activity that CPA firms have taken in advance of the recession. A CPA firm may not be able to stop clients from filing lawsuits to cover their own losses, but if the firms have taken the right actions, the overall severity (cost of claims) could be significantly reduced, taking some pressure off rates."
Adds Sutherland, "There's a move by the more forward-thinking firms to purchase separate coverage for financial planning to isolate the potential of claims from this area of activity from eroding coverage for the traditional practice areas. The trigger seems to be about 15 percent of revenue from PFP. The advantage over adding coverage by endorsement to an accountants' professional liability policy is the separate limit of coverage, and any claims won't adversely impact the core practice."
Encouraging Feedback During a Downturn
Advisors often let fear rather than client feedback take hold during uncertain markets, says Julie Littlechild, president of Advisor Impact, a New York-based consultancy to financial advisors and accountants. "Market downturns," she says, "are when advisors need to step up and identify opportunities that result from gathering feedback from clients. The recent downturn has created an environment in which many investors need and want more frequent and reassuring contact with their advisors." Pinpointing what is most important personally to clients often occurs only when times are tough, she claims, and "client feedback" means more than asking clients to rate satisfaction. It's also a chance to understand what's most important to them and the additional services they need.
Best Practice Tips
Insurers offer these tips in a troubled investment landscape:
* Monitor clients and make sure investment allocations are as agreed in the client file (Bill Thompson, CPA Mutual).
* Don't make unusual offers or "sell away" from your broker/dealer's standard menu of investments. No private offerings or derivatives, for instance (Thompson).
* Obtain signed engagement letters yearly for all financial planning and investment advisory engagements. These letters should clearly define the timing and scope of services and client responsibilities, and include loss-limitation and alternative-dispute resolution clauses and disclaimers regarding investment performance and the volatility of market conditions (Joseph Wolfe, Jeffrey Day, and Melissa Thomas, CNA).
* Document all client conversations, even "casual" inquiries that may come up in social contact with clients. Respond to ad hoc requests for financial planning or investment advice by recommending that the client or prospect contact your office to set up an in-office consultation (Wolfe, Day, Thomas).
* Document who's authorized to provide instruction to you on behalf of the client. If you don't have discretionary authority over the investment of client funds but transmit instructions to others on the client's behalf concerning investments, create a form the client is required to complete and convey to you containing their instructions and approval to request the completion of the transaction. Conveying investment instructions to others on behalf of clients creates a fiduciary duty to the client (Wolfe, Day, Thomas).
* Accountants who perform administrative services for employer-sponsored benefit plans should avoid providing investment advice to plan participants (Wolfe, Day, Thomas).
* Regarding state and federal licensing rules applicable to investment advisory services, consider situations wherein services may be rendered in jurisdictions other than where your firm is domiciled, and research applicable state securities laws (Wolfe, Day, Thomas).
* Background, credit, and reference checks should be obtained before accepting any significant engagements. Risk factors can be determined in interviews or by checking with the client's prior accountant. If the CPA doesn't perform due diligence work regarding the investments, he or she should determine who's taking responsibility for performing the work (Ric Rosario, CAMICO).
* Meet with clients quarterly to make sure they understand new developments impacting their financial and investment plans. Periodic re-balancing of asset allocation also can be conducted. Update the documents to reflect changes and obtain client signatures (Rosario).
* Insist that any professionals involved in related financial planning functions have errors and omissions insurance to help insure the client against losses and help protect you from claims directly related to their work. Some accountants' professional liability policies don't provide coverage if a commission is involved, so additional coverage may be needed. When dealing with a high-value trust, consider higher limits. In any event, ask for coverage clarification in writing from your carrier to avoid misunderstandings (Rosario).
* Don't provide referrals to relatives, to financial advisors with whom you have personal investments, or from one client to another. Refer at least three fully independent options to your client and document that you aren't recommending any one of them specifically. Never accept any type of remuneration from any investment firm (Michelle Duffett, Insight).
* Utilize a strongly worded contract that specifically identifies out the services, costs and administrative items, and utilize a risk-tolerance worksheet and update it annually or when a customer's personal circumstances change (Gary Sutherland, NAPLIA).
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