Can you prove your clients are informed?

Advisors need to make sure their clients understand the products and services they are receiving, or they could face trouble down the road, according to a pair of experts who are well versed in courtroom proceedings.

Jim Bullock, an insurance industry veteran with more than 30 years experience, teamed up with lawyer Harold Geller this week to address a special Peel Institute Disclosure Symposium in Toronto, entitled “Industry Insiders De-Claw Disclosure.”

Bullock finds himself acting as an expert witness in advisor suits and he finds adherence to best practices can be appallingly lax, with regulators doing little to encourage compliance.

Geller is among the estimated 2,500 lawyers in Ontario alone who now specialize in financial services suits. Sometimes Geller is retained by the advisor, but more often he is contacted by an unhappy client first.

The advisor’s responsibilities extend far beyond the applicable industry regulations, according to Bullock. Under Common Law, client decisions must be based on informed consent, making the advisor responsible for ensuring the client fully understands the consequences of each decision.

For example, if the client withholds information while applying for life insurance, the advisor could be held responsible for not ensuring the client understood the consequences of that omission.

Bullock points to the first question on most applications, summarizing it as “Have you ever had a symptom of any known disease?” Despite the fact that a runny nose or a headache are clearly symptoms of a disease, he says clients will routinely answer “no” apparently only thinking about life threatening illnesses.

To the carrier, this patently false answer opens the door for nullifying the contract after collecting premiums for decades. That headache the client told his doctor about could have been a symptom of a brain tumour — never mind the fact that the client was hit by a truck and the state of his health had no bearing on his death.

Bullock says the insurer usually has no right to the medical history of the deceased anyway, as the beneficiary has no legal right to consent to its disclosure.

“A lot of what clients are looking for is your common sense,” said Geller, a partner at Milton Geller LLP in Ottawa, pointing out that it is also the first thing lawyers will look for in any proceedings against an advisor.

It’s not just opposing lawyers that advisors need to worry about, he says. The entire industry is structured to make the broker the fall guy in virtually any contingency.

“Insurance companies are going to come after you whenever their contract allows them to do it,” Geller says.

And it doesn’t stop there. Geller recounts a case he was involved in where the dealer agreed to accept 33% liability if the client and the advisor would accept the same level of responsibility.

Geller’s client accepted, as did the advisor, who was comfortable with his E&O insurance. The dealer’s lawyer then turned to the advisor and reminded him that he had a contract accepting liability for any settlements the dealer made. This third-party contract was outside of the E&O coverage, and the advisor was on the hook for the entire settlement.

“The dealer set the agent up for a third of the cost personally, plus the lawyers,” Geller said. “It’s hundreds of thousands of dollars. You have to sell a lot of product to cover that one.”

Of course, there is no surefire way to avoid getting sued, but there is a lot an advisor can do to limit their liability in that suit. Being sued is bad enough, but losing that case is what will cost you.

“Good communications is the essence of good compliance. I look at paper. It’s the first thing you’ll hear from me,” Geller said. “The client’s entitled to all information in your possession in any written form, electronic or otherwise, that relates to them and is personally identifiable.”

He says maintaining proper documentation is a hallmark of professionalism that advisors must learn to live with.

“I used to say ‘I’m your worst nightmare.’ Now let me revise that. You’re my worst nightmare if I’m defending you, because you don’t give me the materials to work with,” he said “You’re professionals and you’re held to a really high standard that relates to professionals.”

Plain language will go a long way in defending a claim, Geller says, since the average investor’s literacy level is only on par with a Grade 8 student, while numeracy ranks even lower, around Grade 4.

“If you give me something in your file like a delivery letter — there are so many examples — I will back off,” Geller said. “No plaintiffs lawyer wants to come up against a document that in plain English explains the risks to the clients, that the client received, and answers the fundamental question: Did the client make and informed decision?”

“Do you really want to be on the hook for a CI policy that was never sold because your client didn’t want to hear from you about it?” he asked.

To avoid liability on issues like this, Geller recommends the advisor ask the client to sign a waiver, acknowledging that they declined information on certain products. This is becomes increasingly important as the advisor’s level of expertise increases. For example, a CFP or RFP bears more responsibility than advisors with no designations.

“Don’t confuse a form that is one step in the process, with ‘compliance’,” Geller said. “Compliance is a whole process from beginning with meeting with your client, to the day the relationship ends. It is communications at its very essence.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(05/16/06)

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