From the March 2006 issue of Investment Advisor • Subscribe!

March 1, 2006

It Was Time

After 20 years, one firm decided to buy coverage. From its founding in 1983 until last year, L.J. Altfest & Co., an advisory firm based in New York, didn't bother with E&O coverage. The reticence arose partly because the principals weren't sure they needed the coverage and partly because they weren't quite sure what being insured would entail. One fear was that the insurer would begin telling the firm what they could and couldn't do if they wanted coverage. But with an estimated $370 million under management for more than 300 clients, and a staff that includes two principals, three other planners, and an investment department with four professionals, it was a move that could be put off no longer.

"E&O was something we had thought about for the last 20 years," explains one of the firm's principals, Karen Altfest. "We would make a few false starts and then go on our way without it, partly because it seemed to be such a difficult process and we weren't sure what it was doing for us. Now we think that maybe we were a little slow in jumping on this bandwagon."

Ultimately it was the urging of its custodians--Schwab and Waterhouse (now TD Ameritrade)--that helped spur the firm toward finally purchasing coverage. "We're on the Schwab Advisor network and they were asking all their advisors to have this coverage. We had been considering it anyway, so last year we thought that it was time to finally do it," Altfest continues. "Over the years, fortunately, we've had very few times when that would have come up, but like everybody in the business, you're always aware that it could."

One of the firm's other planners, Mike Prendergast, was assigned to work with Altfest on preparing an extensive review of the E&O coverage that was available. He found that they were of sufficient size to have a number of options available.

"We looked at the programs that were available through our membership in the FPA, through NAPFA, through our custodians, through [firm president] Lew [Altfest]'s affiliations, because he's a CPA and a CFA, in addition to being a CFP. We looked at all the bases," he says.

Although the firm may have had a number of options, the staff quickly narrowed the field down to the two or three firms that were most suitable. As with most advisory practices, the crucial question concerned what the policy would cover and what it would cost. "One of the reasons we ultimately went with the company that we did is that they were willing to cover us for alternative investments, and the firm, where appropriate, puts a certain percentage of our clients' portfolios into various types of alternatives," Prendergast explains. "A very big [insurance] firm which was very close in the running, just didn't want to do it [cover the alternatives], but that coverage was very important to us."

According to Prendergast, it wasn't a matter of paying more from the large carrier for alternative investment coverage. The coverage just wasn't available at any price. "The prices were relatively similar, but one [insurer] was offering alternative investment coverage and the other wouldn't touch it.

"It is definitely expensive," he says of the insurance cost, "but the leadership of the firm thought that it was the right thing to do. The firm had gotten to a certain level of experience and we wanted to make sure that everything was covered."

Although it may have taken more than two decades to reach this point, Karen Altfest breathes a lot easier knowing that her firm is covered if anything should go wrong. "It's a litigious environment and it's always out there," she says of the possibility of being sued by a disgruntled client. "I can't say that I know of my colleagues actually having things like this happen to them, but it's in the air, and you feel it could happen to the people you know. Having the E&O policy feels a bit like a safety net and I'm very comfortable with it now."--RFK

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