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Financial Planning > Behavioral Finance

Litigation Is Public Enemy #1 For Agents

By Barry Higgins

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Charlotte, N.C.

Agents in the business today have many fears. Trying to keep current clients happy, continuously looking for new clients, and the fear of some type of disability rendering them unable to work have all been found to be top concerns with agents in the field.

But the biggest fear of all is the fear of litigation, said Robin Kern, president of the Financial Advisors Legal Association, Las Vegas, in a breakout session at this years National Association of Insurance Financial Advisors annual meeting here.

“You are the number 1 litigious target today,” she said. “It can ruin your reputation, it can ruin your business.”

Kern explained that claims against financial advisors are increasing at a dramatic rate, while at the same time, legal defense costs are also skyrocketing.

Probably the most frustrating statistic, Kern noted, is the fact that 86% of these claims against financial service professionals are groundless claims. “The majority of claims are groundless, yet you still have to defend yourself,” she said.

The cost for representation can be staggering, usually because in the current highly regulated equity-based products environment, agents need to hire a specialized securities attorney, something that comes at a very high price.

“There are a lot of different specialties with securities law,” Kern noted.

Also, she said that these lawsuits usually come in multiples. “All of a sudden, someone has 5 claims filed against them and they have to come up with $20,000 for legal fees.”

One of the reasons Kern cites for the excessive number of lawsuits is the fact that there are several attorneys marketing their services specifically to clients of financial advisors. These attorneys often advertise themselves in consumer investing magazines like Money, which, according to Kern, is where more than 90% of the investing public looks for information.

Kern said the mainstream public is becoming more aware of the opportunities to sue their financial advisors. She explained that several consumer publications have actually published articles with step-by-step instructions on how to sue your financial advisor.

“A lot of people are also getting their information on the Internet,” she said.

Kern gave one example of an attorney located in Florida who specialized in suing financial advisors. “He was advertising on the Web to solicit your clients,” she explained to the group of agents. “Last year, he had about 400 hits a month. Today, hes getting over 19,000 hits a month.”

Even though this is just an example of one attorneys experience, Kern explained that this is a growing concern. Just four months ago, there were about 800 Web sites dedicated to the service of suing financial advisors; today that has already grown to more than 1,200 sites.

“Right now, you [financial advisors] surpass doctors in terms of being a litigious target,” she said.

While many agents may feel safe with the coverage their Errors and Omissions (E&O) insurance policy provides, Kern warns that there are a few misconceptions regarding the coverage and that agents should be aware of its shortcomings.

“E&O is extremely lacking when it comes to legal defense; it does not cover SEC [Securities and Exchange Commission] and NASD [National Association of Securities Dealers] attacks. It is not retroactive and it usually doesnt pay for individual representation,” she explained.

Another shortcoming of E&O that agents should be aware of is the fact that it may not be available in all the states in which agents operate, she said.

“E&O coverage can even make you an easy target,” Kern continued. “The first question the opposition asks is whether you have E&O insurance.” Kern added that E&O carriers will tend to settle a claim, rather than battle it out in litigation. Many times, litigation can go on for two or three years.

“So, while the majority of claims are groundless, people will settle them and thats extremely unfortunate,” she said. “Anytime you settle a claim, even though youre innocent, people can look that up and see these marks against you.”

But despite its shortcomings, Kern doesnt advise agents to get rid of their E&O coverage. Instead, she said, a solution may be to work with a pre-paid legal association to help fill in the gaps.

Kern explained that affiliating with some kind of legal association might help agents minimize their costs when facing litigation. Agents may even be able to head off potential litigation with continuous legal consultation.

“One of the approaches were taking is that when we see a groundless claim, were counter-suing the opposition,” she said. “Were seeing a lot of those claims dropped or dismissed.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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