5 ways financial advisors can avoid errors-and-omissions insurance claims

By Steven McCarty

I’m a financial advisor who just purchased errors-and-omissions insurance. How can I prevent a future claim?

Start by incorporating this short list of ethical considerations into your financial practice:

1. Never misrepresent yourself

Honesty is one of the most important ethical standards for any professional in the insurance and financial services industry. But the temptation is always there to attract more clients and referrals by exaggerating your abilities, background and experience.

Whether you’re a greenhorn recruit or a 20-year veteran, always be completely forthright with your experience and education. There is nothing wrong with highlighting your special abilities and skills as long as they pertain to your main job of serving clients and their best interests. For instance, before becoming a licensed agent who sells annuities, you may have worked for a time as a retirement plan specialist in a major insurance company. Don’t hesitate to share such information, as it is relevant and can help you convince others of your competency.

2. Update your knowledge

Rules and regulations regarding financial exchanges and investments can evolve on a continuous basis, especially whenever a new president takes office. You need to keep abreast of all changes that affect your industry so you can better represent your clients and offer the most current advice.

In addition, there is always more to learn about best practices in your industry. Join a trade association and become an active member. Attend seminars. Take additional college classes. The more you learn, the better you will serve your clients.

3. Educate clients

To help your clients make the best choices and avoid problems later, educate your clients the best you can about the products you sell to them. Always explain the benefits, as well as the potential risks, of a product. Go over regulations and policy provisions that affect how your client can invest money or make a withdrawal from investments such as IRAs or retirement annuities. Give your clients all the information they need to make informed decisions.

4. Write everything down

Any time you meet a client to discuss policies, investments or other financial transactions, keep a written record of what was discussed and the outcome. When a client comes to you in the future claiming you sold him the wrong product, you will be able to defend your decision by referencing the extensive discussion you had about product features, investment risks and suitability. If you ever face an errors-and-omissions claim, having a paper trail can spell the difference between winning the case and paying a substantial judgment.

5. Don’t let clients push you into unethical behavior

Sometimes a client may ask for your help in perpetrating a fraud or other unethical behavior. Never agree to “look the other way” to benefit a client, even if the person proposes to share the profits with you.