April 14, 2024
How can advisers avoid a PI claim?


A complex series of factors can cause financial advisers to get caught up in professional indemnity (PI) insurance claims – Numerisk’s Richard Silberman shares how to avoid such events.

Earlier this month, Adviser Ratings entered a strategic partnership with insurance broker Numerisk to launch a PI insurance product, aimed at opening up adviser supply and improving trust in the industry.

The offering will utilise the research firm’s insights as a foundation to underwriting and pricing, as well as Numerisk data on insurance broking. It seeks to solve a consistent challenge for advisers: accessing high-quality yet cost-effective PI insurance as an advice practice.

Speaking with Adviser Ratings, Numerisk managing director and founder Richard Silberman delved into the unforeseen challenges of navigating an unexpected claim as an adviser.

“For many advisers, PI insurance is a necessary evil required to obtain and maintain your Australian financial services licence (AFSL). If you haven’t had the need to make a claim or notify a circumstance, it may be difficult to understand how and where claims come from,” he said.

“It may sound obvious, but when they do happen, the situation is usually complex, involves a number of moving parts and isn’t linear as you might sometimes expect it to be.”

Silberman shared three scenarios which could lead advisers to get stuck in a claim event with their client: 

  • Poor advice
  • Operational risk 
  • Product or market failures

While poor advice happens less frequently, the founder defined it as when the advice falls outside of what may be expected in the context of a client’s circumstances and life stage.

“Aggressive investment allocations for clients in a phase of life that may be better served with low-risk strategies. Advice or implementing a strategy that isn’t compatible with their tax regime, or simply fails to consider factors that lead to additional costs, problems accessing insurance coverage, or just simply don’t deliver,” Silberman explained.

Operational risk could also cause a claim event, such as accidental platform allocations or errors in a statement of advice (SOA) document, and could lead to high costs in remediation.

Finally, product and market failures can pose significant risks, particularly regarding managed investment schemes which have experienced changing market conditions, the founder added.

To prevent these situations and avoid getting caught in a claim event, Silberman made three recommendations to better understand insurance requirements:

“Are all the entities in my business noted? Remember, related entities shouldn’t be assumed to be covered, CAR’s and subsidiaries may be automatically included, but those that only have common ownership with directors may need to be specifically noted to have cover.

“Are all your services covered? Do you offer accounting, consulting or provide an activity not captured in the description of services? As an example, if you have a separately managed account service, you may be noted as the investment manager – this needs special attention.

“Exclusions – commonplace for advisers, but careful attention is required to understand their impact; these can range from innocuous to critical. Spending time thinking about what is not covered and whether it should be can save you from life-changing consequences.”
 





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