Lawsuits Hurt!

When investments do not perform as expected, unhappy investors will turn to the lawyers for advice. Even if you have done nothing wrong, hungry lawyers may press lawsuits simply because your client’s investments have not performed as well as industry leaders.

While plaintiff’s attorneys work on a contingency basis, costing your former client little up-front, defense attorneys typically charge by the hour. Your costs can escalate quickly. Even if there is no merit to the case, by the time discovery is complete and your attorney makes a motion for summary judgment, you will have spent tens of thousands of dollars.

As an Investment advisor or Financial Planner, you are exposed to many sources of claims. And, your biggest threat is a dissatisfied investor. When you provide services, you have an implied warranty, especially when you have full discretion over your clients investments, that you will deal with your clients fairly and in accordance with the standards of skill and care customary to your profession. Therefore, your clients may expect you to develop a suitable financial plan that address’ their needs, level of sophistication and investment objectives. You will need to implement the financial plan, placing orders in a timely manner consistent with plan goals. Further and most importantly, you must disclose any conflicts of interest that may influence your recommendations.

Even the appearance of not complying with these expectations can lead to malpractice claims. Such claims lead to costly litigation (shrinking your bank account), require you to reallocate valuable resources to nonproductive activities (diminishing your receipts) and damage your reputation (reducing your future earnings potential).

Like many professionals, you also face frivolous claims. Plaintiff’s attorneys will make every effort to structure frivolous claims to their client’s advantage. This may include exaggerating the services you perform and calculating losses based upon overstated suppositions.

So How Do I Protect My Firm and Myself From Such Losses?

 

Begin With Good Client Selection

It is only human nature to get excited when a new prospective client calls you. After all, a new client means more revenue and more profit, or does it? Not if a client presents a high likelihood of making a frivolous malpractice claim. As explained above, professional liability claims cost you money – big money. Therefore, prudently considering each new client and making a critical assessment of the possibility that they might bring a malpractice claim against you could potentially save you money and protect your reputation.

Maintain Good Client Communications

Clients become discontent not so much when investment does poorly, but when your advice does not perform to their expectations. You set the stage for those expectations when you prepare their financial plan. Having regular discussions with your clients about their financial plan is the key to preventing misunderstandings.

Buy Professional Liability Insurance

Professional liability insurance, sometimes called errors and omissions or E&O, is available for registered investment advisors and other investment professionals from a number of insurers. Coverage and pricing vary based on the insurer and the investment professional's profile. Key underwriting information for underwriters includes:

· Assets under management

· Asset types

· Manager Experience

· Fund Results

· Financial Reporting

· Any prior claims

Coverage is written on a claims-made basis. Limits and deductibles vary with the size and type of insured. You should discuss the particulars of your practice with your broker to determine the appropriate limits and deductibles for your firm based upon cost.

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