When leaving another firm to become independent, advisers should consider errors and omission insurance with prior acts coverage.
The decision should be evaluated on a case-by-case situation and is dependent on the adviser’s previous responsibilities, says Rosa Ybarra, a CFP and senior financial planner at Tranquility Financial Planning in McAllen, Texas.
For instance, at her previous firm, she prepared and maintained client financial plans, managed the firm’s operations and client services in addition to serving as the company’s liaison for all divisions. Ybarra also provided client recommendations and assisted in client meetings, but her boss would have the last word and wouldn’t allow her to present these recommendations alone.
“In essence, nothing was official unless he signed off on it or relayed the final recommendations,” she says. “Although a little upsetting, I am thankful for that as this ultimately protected me from having to worry about needing this additional protection as I moved onto helping establish our firm.”
Helen Ngo, a CFP and principal and chief compliance officer of Capital Benchmark Partners in Atlanta, purchased E&O insurance when she opened her registered investment adviser because she had sold insurance and annuity products at her prior firm, in which there was still a commission trail for another six months and she was still the agent of record on those products.
“That means clients from that firm could still claim that I mis-sold them those products and demand a refund, and an E&O policy would cover that,” she says.
P. Jeffrey Christakos, a CFP and the lead adviser at Westfield (N.J.) Wealth Management, says he was able to find an insurer that priced his exposure based on his lower-risk practice at his previous firm, primarily fee-only as opposed to primarily selling higher-risk commission products.
He received a proposal from the carrier that his prior firm uses for E&O and then saved 40% by getting coverage that matched his specific prior practice.
Julie Ford, a CFP, was unable to get an E&O policy that covered prior acts when she founded Ford Financial Solutions in New York this year.
“This would have been preferable to me because I'm pretty risk adverse. However, I think my risk exposure without prior acts coverage is minimal,” Ford says.
“The number of people I was serving was small, and I've only had positive experiences with clients,” she says. “The services I was providing were pretty basic, level-one planning for the most part, and I did not provide any investment management.”
Josh Bannerman, managing partner at Bannerman Wealth in Plano, Texas, says that though prior-acts coverage can cost money, it has provided him with “huge peace of mind.”
“Just as we advise our clients to have adequate liability insurance for unforeseen issues, I've found it good practice in my business to have similar coverage for unforeseen circumstances,” he says. “In short, I practice what I preach.”
This story is part of a 30-30 series on transitions.