© 2011 The Magnes Group Inc. HOW CAN I PROTECT MYSELF FROM AN E&O LAWSUIT?

© 2011 The Magnes Group Inc. Financial advisors are increasingly the target of E&O claims, particularly in the wake of the financial crisis There are more complex transactions and there is more reliance on the advisor as the professional in the relationship There is also more willingness to sue Deep pocket theory – advisors have E&O insurance Financial Advisor/Client Relationship

© 2011 The Magnes Group Inc. Client Allegations Allegations commonly heard are: Failure to assess the clients true risk tolerance and failure to adequately explain the risks Failure to determine and understand the clients personal circumstances and objectives Unsuitability of product or investment Breach of fiduciary duty - advisor putting own interests ahead of those of the client Misrepresentation of how a life insurance/investment product works causing a financial loss to the client

© 2011 The Magnes Group Inc. Client Allegations (contd) Certain allegations are fairly easy to deal with – advisor made an error, causing the client a financial loss. Much more common and complex are claims where a client alleges misrepresentation, but on investigation: either there was no such misrepresentation made, there was a misunderstanding, or the determination as to whether there was or was not a misrepresentation is unclear, usually because the advisor and the client have differing versions of what happened and what was discussed

© 2011 The Magnes Group Inc. Client Allegations (contd) For example, our claims department often hears clients say that they were conservative investors when they complain about their investments going down in value, yet their KYC documentation reveals they were 100% high risk investors On the life side, we hear that clients have disclosed their full medical histories to their agent, and then there is a surprise when the claim is denied by the insurer In hearing both sides, sometimes it is hard to understand that the advisor and the client were at the same meeting because their recollections vary so much.

© 2011 The Magnes Group Inc. So What Should You Do? Technical compliance is no longer enough to protect yourself Following a standard practice and effective communication and documentation is critical in such situations BUT WHERE DO YOU START?

© 2011 The Magnes Group Inc. The Answer: E&O Checklist Claims often emerge months if not years after the transaction in question Old saying documents never lie – very difficult for a disgruntled client to complain that the advisor did something wrong or failed to provide candid advice on an issue, when the paper trail clearly shows that everything was done appropriately and is documented Memories fade – people dont necessarily lie, they just have their own version of what happened, and they believe their recollection to be true

© 2011 The Magnes Group Inc. The Answer: E&O Checklist A court is not a level playing field between the advisor and client. If all things are equal, and both are equally believable, 100% of the time the evidence of the client will be preferred over the evidence of the advisor – documentation helps level the playing field Having a tested and proven written standard practice that is followed with every client can be the key tool in protecting yourself from an E&O lawsuit LETS GET STARTED…..

© 2011 The Magnes Group Inc. CHECKLIST ITEM 1: PROSPECT/CLIENT MEETING Have you inquired on past insurance/investment history and advisor history? Have you clearly explained to your client the nature of services that you offer? Have you determined alongside your client their needs and objectives in investment and insurance? Are you confident that your client understands his/her investor profile?

© 2011 The Magnes Group Inc. From your analysis of their current coverages/portfolio, have you recommended additional or different products or investments to your client which you deem to correspond best to their needs? And have you documented these recommendations in the client file? Have you completed all the forms in full in the clients presence without omitting any sections? Have you supplied all requested documents to your client? Have you given your client a copy of all forms signed at your meeting? Have you noted all declarations from the client regarding risks, with the clients signature and proof of transmission to the insurer? CHECKLIST ITEM 1: PROSPECT/CLIENT MEETING (contd)

© 2011 The Magnes Group Inc. Have you provided a written summary to your client of the meeting, including but not limited to: Date of meeting and location Advisor coverage/product recommendations Client instructions, especially on every order, request, modification or declination made Have you indicated in the file that you have made an inventory of the clients assets and investments? Have you obtained within 24 hours written authorization for orders or significant changes to investments or insurance coverage for the client, signed by the client? CHECKLIST ITEM 2: POST MEETING DUE DILIGENCE

© 2011 The Magnes Group Inc. Have you documented your communications with each client, including date and nature of communication? If communication is for a transaction, have you confirmed the investment transaction in writing, particularly if the investment requested does not correspond with the clients profile? If applicable, have you completed an updated KYC form with your client, and is it in the file? CHECKLIST ITEM 3: FILE MAINTENANCE DUE DILIGENCE

© 2011 The Magnes Group Inc. CHECKLIST ITEM 4: COMPLIANCE Do you keep all your files, even those of inactive clients? Do you keep a copy of all documents signed by your client in a secure location or secure computer system? Do you have a standard conversation record sheet to be completed for the paper/online file if communication is via phone? If using a third party for administration of client files, do you have an indemnity agreement in place should there be a loss to these documents? Do you have a procedure in place to protect personal, physical, and computer information?

© 2011 The Magnes Group Inc. CHECKLIST ITEM 4: COMPLIANCE Do you have a computer system that forbids users from modifying clients files after the data is saved? Have you trained your employees to follow your administrative practices and recording systems? Do you consult rules and regulations that govern your compliance, on a regular basis? Do you know your responsibilities and requirements of your E&O insurance policy with respect to: What is covered? Who is covered? What should you do in the event of a circumstance, notice of potential claim, or if you have been served with a lawsuit?

© 2011 The Magnes Group Inc. CHECKLIST ITEM 5: WHAT TO DO IF ONE OF THE FOLLOWING OCCURS: You have an uncomfortable feeling about a transaction/conversation with a client You detect an error has been made even if unbeknownst to the client Your client complains about the services you have rendered or the way the investment has been performing Your client states something to the effect of I am going to seek legal advice / contact my lawyer You are in receipt of a letter from a lawyer or you have been served with a statement of claim…

© 2011 The Magnes Group Inc. CHECKLIST ITEM 5: ANSWER Do not admit your error and do not offer compensation – this may lead to your E&O insurance being voided or cancelled Advise your client you will refer his/her complaint to the legal advisor of the agency or to the compliance officer, who will look into the matter and provide a reply Contact your E&O broker/insurer immediately following any knowledge of a circumstance, error, receipt of informal notice, or receipt of formal legal notice

© 2011 The Magnes Group Inc. CHECKLIST ITEM 5: ANSWER (contd) Both yourself and your staff should cease all conversations with the client in question (or their attorney) and refer them to your E&O insurer Check whether the file concerning a client that is suing you is complete and up to date Take measures to secure the file of a client that is suing you (make a duplicate copy and store it in a secure place)

© 2011 The Magnes Group Inc. Questions Disclaimer: The E&O checklist enclosed is strictly a guide; it is not a legal document nor is it an exhaustive list of the duties and responsibilities of financial advisors.