Business professionals, especially those who provide financial advice and services, face this risk every day. Which insurance and investment companies do they represent? What field marketing organizations (FMOs) should they sign up with? What estate planning attorneys or accountants should they refer their clients to? What technology firms should they hire? And for those who don’t get leads from their FMOs, what lead-generation providers should they retain? All of these decisions require due diligence not only regarding the partner’s competence, but also regarding its commitment to ethics and compliance. That’s because liability for partner errors and omissions, like all nasty things, flows downstream.
Ethics and compliance can be especially challenging for financial advisors, because they’re so focused on generating results from their inventory of time and money. This focus can cause them to lose sight of the implications of their actions. In other words, some think that as long as a marketing tactic is effective, there’s nothing else to worry about. They forget that in the real world of aggrieved clients, aggressive regulators, and litigious attorneys, ethics and compliance are always a concern.
Hiring lead-generation vendors is a perfect example. It’s no surprise advisors are anxious for their mailers to generate qualified leads. So when the mailing works, they may gloss over the fact that it relies on deceptive language or illegal solicitation practices. This can lead to regulator scrutiny, fines, and potentially non-compliant sales down the road.
The Kansas Department of Insurance recently levied a $5,000 fine and issued a cease and desist order against an Ohio lead-generation firm. The problem? The company was mailing post cards to Kansas residents suggesting they were financially at risk because their annuity surrender periods were ending. Furthermore, the department ruled that the post card’s disclaimer did not outweigh the card’s deceptive intent.
Why would agents permit this mailing? Doesn’t the ending of surrender periods benefit clients? Agents apparently valued the lead-generation firm’s ability to generate leads more than its inability (or unwillingness) to comply with the law. With the firm now in hot water, agents who closed sales from those non-compliant leads are at risk.
However, getting fined several thousand dollars for abusive sales practices is nothing compared to getting embroiled with unregistered investment offerings or phony insurance products. Ask investment advisors unwittingly ensnared in Bernie Madoff’s Ponzi scheme whether they should have done more research. Our best advice? Always affiliate with the highest quality partners. Look for those with strong ethical values, demonstrated competence, compliant business practices, and an exemplary focus on long-term success rather than short-term revenue. Here are some points to consider before signing any deal:
1) Know whom you’re dealing with. Make sure you know a company’s owners, street address and phone number. Avoid working with companies operating out of post-office boxes. If an online merchant fails to display contact info, watch out!
2) Make sure the company is properly licensed. Is the company subject to state or federal regulations? If so, check with its regulatory agencies to make sure it has a clean compliance record.
3) Verify its BBB grade. The Better Business Bureau (BBB) has reworked its grading system after it came under fire several years ago. But don’t put too much credence on grades alone. Instead, look for large numbers of unresolved complaints.
4) Verify its business address. Does the company have a home-based office or does it operate out of a bricks-and-mortar location? Home-based businesses aren’t necessarily riskier. But they may lack capacity to meet your needs over the long term. And don’t forget to search Google Street View for a company’s address. You may be surprised at what you find.
5) Ask for a written contract. Always put agreements in writing. This will help you avoid scammers who have no intention of delivering a legitimate service.
6) Watch out for arbitration clauses. These are becoming more common and thus hard to avoid. Still, read the fine-print disclosures so you know what to expect.
7) Understand recurring billing policies. If you agree to pay a recurring bill, check your ability to cancel without prior notice. Also, make sure the company sends you a hard copy or e-mail notice of bills coming due.
8) Check out online reviews. Phony online reviews have been in the news. So don’t place complete faith on them. Still, a preponderance of negative reviews should give you pause.
9) Evaluate a company’s transparency. Has the firm encouraged and answered your questions during the sales process? Has it provided full documentation on its background, principals, and practices? If the company ignores your questions or gets hostile about answering them, take your business elsewhere.
If this sounds like a lot of work, well, it is. But it’s a sensible investment to make in order to protect your business from inept or unethical partners. And if it helps you to avoid lawsuits (and errors-and-omissions insurance claims), all the better. Good luck!
Sources: National Ethics Association and National Organization of Life & Health Agents.
For more information on reducing your errors-and-omissions liability, please visit our E&O Headquarters atE&OforLess.com.
