In this industry, when you mention risk, the first thing that probably comes to mind is compliance. Increasing regulations and the resulting scrutiny requires advisors to expend countless time and energy protecting their businesses against compliance-related risks. Advisors must ensure that sufficient documentation is in place, disclosures are prominent, and that the best solutions to address clients’ needs have been put in place.
Advisors are mistaken, however, if they consider compliance their only risk area. Independent advisors face many areas of risk. This article presents a few salient but often overlooked examples.
You Model the Behavior
Take a look at how you and your employees behave. Do words or actions ever make someone in your office feel uncomfortable? That is the definition of harassment. Color, creed, gender, age, sexual orientation–you should be alert to all of these areas, to what you and your employees say and do.
Remember a principle of leadership: you set the tone for the office, and that tone is instrumental in creating office culture. There is absolutely no room for nasty jokes, swearing, or belittling someone. That type of action is risky and offensive.
Employees can misconstrue your words and actions, even if you meant nothing by them. A discrimination suit brought on by an employee is a time-consuming and emotionally depleting experience. Such cases, even if they are ultimately dismissed, are expensive for small business owners.
Seemingly innocuous comments sometimes produce more pain than ever imagined. In one example I know of, the lighthearted interplay between two spouses working in the same office caused another employee to resign. Make sure you are modeling the type of behavior you want your employees to adopt. Granted, legal cases of harassment are less common in the small business workplace, but don’t think that just because your business is small, you are exempt from good behavior.
Once you have done a check of your own behavior, bring the issue of sensitivity to your staff’s attention both through the employee handbook and through annual staff meetings (more frequently, if you deem it necessary). Use both avenues to emphasize how words and actions in the workplace must be exemplary.
Cooking Your Books
Compliance oversight is designed to ensure that fraudulent activities don’t occur and that clients’ monies are safe. But what about your money?
Small business owners often overlook the risk of embezzlement of the firm’s funds through unscrupulous bookkeeping. Although you seldom hear about these war stories, they do occur.
The owner of a small business advisory firm is typically busy and looks to delegate as much as possible. It is not uncommon for the firm’s bookkeeping to be one such assignment. Sometimes, a trusted employee is given the responsibility. Gone unchecked, that person can occasionally feel tempted.
At a minimum, it is a best practice to audit the books regularly so that you know where your hard-earned money is going. Think twice about having an employee keep the firm’s books. Perhaps subcontracting bookkeeping to a third party would be a better idea. In either case, auditing your financial records is a best practice.
On Insurance, Practice What You Preach
Financial planners are used to looking at their clients’ financial health from a risk management perspective and checking for adequate life, health, disability, and property insurance. When it comes to their own financial health, however, planners may not be so attentive–and are particularly shortsighted regarding the potential for their own disability. Consider these facts from the Society of Actuaries, the Council for Disability Awareness, and the health policy journal Health Affairs:
- Disability tables show that the likelihood of someone who is 25 years old becoming totally disabled for 90 days or more before age 65 is 44%.
- One in seven working Americans will be disabled for five or more years before age 65.
- Over 90% of disabling accidents and illnesses are not work-related.
In one informal industry survey of financial planners, 45% of the respondents acknowledged they had no disability insurance, and 31% said they had some but not enough. When asked why they took such a risk, one mid-career planner said, “I know I will die, so I need life insurance. But I don’t know for sure that I will have a disability.” True, but is this a risk you would recommend your clients take?
As we know, it will never happen to you–until it does.
The type and extent of business insurance required for a financial planning practice is as diverse as your own risk tolerance. Just as clients often overlook insurance in their financial lives, business owners also overlook business insurance needs. The need for protection undoubtedly grows as the sophistication, size, and reputation of a firm grows (see Learn and Buy sidebar for specific types of business insurance).
And if Disaster Strikes?