New Year Primer: What’s Your 2019 Fiduciary Risk Management Plan?

As the new year is underway, a resolution or two may have not made it through February! Every day is a new day and one key objective within the RIA practice could be to review one’s current strategy for fiduciary risk-transfer, or broader yet, one’s total Fiduciary Risk-Management Program.

The subject of risk-management can be categorized into four main strategy fields – let’s call them “The 4 Pillars of Risk-Management”. These “pillars” constitute the support for your risk-management plan. They are (1) Risk Avoidance, (2) Risk Control, (3) Risk Retention and (4) Risk Transfer. Every good RM plan will possess components from each field; some avoidable, some intentional.

Clearly, the presence of fiduciary risk to the RIA professional is manifest by law (1940 Act the primary framework). We may innocently believe the establishment of an entity, applying (2), shields and therefore completes either/and (1) and (4) by removing one’s personal liability imposed by fiduciary law – unfortunately, that would be a risk management plan missing an important “capstone”; entity protection is a common misconception. Thus, we move onward as we briefly review our 2019 risk-management program and determine proper strategies. We know… no fun… yet imperative, unless you take pleasure in “rolling the dice”. Last time we checked, most investment advisors avoid gambling.

Let’s examine the “4 Pillars” with some examples:

AVOIDANCE:
Client Selection – How are clients selected or de-selected? Prospective clients interview you, but what is your process for interviewing them? How are prospective clients suited to your investment philosophy? What might you hear in the interview process that causes concern? What about existing clients? Are there any names that arise more than twice-a-week during the lunch hour? Could it be time for a little client de-selection?! Think of your most difficult client, do they regularly disregard or counter your recommendations? Are they overly afraid of investment losses? Some of your clients might be better served elsewhere.
Investments – What investment types are off-limits/not used? Is it clear throughout the firm that certain strategies or investments are not approved for use?
Professional Services – What services have you decided not to roll out to clients? What exposures may new services bring to the firm?

CONTROL:
Documentation – (1)Concise notes of your client’s life circumstances, tolerance for risk, investment objectives and style, leading to a plan and/or broad (but brief) investment policy statement, (2) Contemporaneous notes on client interactions, which need not be extensive, but should contemporaneous with and capture the essence of the interactions, (3) at least an annual summary (quarterly is considered “best practice”) of activity or discussion signed by the client acknowledging their understanding, and (4) complete documentation of any changes in objectives, advice given, and those not heeded.
Trading Procedures – Are policies and procedures being carefully executed? Ensure redundancy within the process. Match every order against its return confirmation and promptly resolve discrepancies.
Personally Identifiable Information (PII) – The subject of cyber security/data breach is increasingly on the regulator’s radar and RIAs are a regular target of cybercriminals. Current cyber policies and procedures are a must for every RIA and in most cases, an outside technology professional is needed in this ever-changing landscape.

RETENTION:
Insurance Deductible (Retention) – What level can the firm realistically handle? Leading into Transfer, how does your contract of insurance (E&O) speak to “interrelated wrongful acts”? Might the deductible for “related acts” apply only once? Or individually to each claimant?
Excluded Activities – What activity within your firm is not insured? In effect, this risk is now fully retained (also known as self-insured or “naked”). Are you comfortable with this level of self-funding? What about insurance lines other than E&O such as Cyber, Crime, Employment Practices, Etc.? This leads us to transfer, in short, if you are not transferring the risk then you are retaining it!

TRANSFER:
Contractual – Many risks can be effectively transferred to another party by way of contract. Yet, U.S. case law has established that fiduciary liability cannot be contractually transferred to your client. This leads us to the primary transfer tool of insurance.
E&O Insurance – Insurance, by definition, is a transfer of risk from you to the insurer. Yet, buyer beware! Know that ISO (the Insurance Services Office), the insurance industry “body” writes and issues “commodity” standard forms of insurance for most types of insurance (such as General Liability, Auto and Property Insurance). Not so with RIA E&O, D&O, Cyber & Crime coverage lines. Each independent insurance carrier issues their own, manuscripted contract. Finally, think of your insurance as a not only a key risk-management tool, but as a business asset. Paid for and, if properly written, your “army” for defense and/or financial indemnification.

As always, we are honored to serve the RIA community and are here for expanded questions and discussions. May 2019 be a healthy and blessed year for you, your families, friends and your practice.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

At Golsan Scruggs, we believe it is incumbent upon us to earn the right to be appointed as your insurance and risk-management agent. Our RIASURE process exists to serve that purpose.

Our RIASURE Review will analyze your fiduciary exposures, provide rate details and comparisons, and provide a contract comparison. No application required.

To obtain your complimentary RIASURE Review, please provide the following information or contact us at (800)273-5883. Fields marked with * are required.