Professional Indemnity Insurance For Financial Advisors
As an Independent Financial Advisor you want to offer your customers the best possible service. You work hard to provide the right advice for every situation and find the right product for each individual customer.
However, with the best will in the world, things sometimes go wrong. You only have to look at recent problems, such as the mis-selling of PPI, to realise that further down the line there can be difficulties. So how do you protect yourself from something coming back to haunt you? The answer is Professional Indemnity Insurance.
Why do I need PII?
The first reason you need PII is because it's a requirement of the Financial Conduct Authority. All IFAs must be registered with the FCA so you can't operate your business without it. However, PII also makes total sense for you as well. It offers you protection against all kinds of issues, letting you get on with running your business without worrying about each decision you make.
What does PII cover?
PII is designed to cover you if a client or former client sues you for perceived negligence, as well as protecting you against other possible mistakes. The main areas of cover are usually:
•Protection in the event of being sued for wrong advice, including damages and legal fees
•Cover for loss of earnings e.g. if you have to attend court hearings, legal meetings etc.
•Unintentional libel, slander or defamation
•Breach of copyright, intellectual property and patents •Cyber cover e.g. your laptop is stolen and confidential information lost
•Losses arising from the failure of an insurer or similar financial institution recommended by you which subsequently fails or is involved in malpractice
How do I know which policy is right for me?
A number of specialist insurance companies offer PII. A reputable broker will take time to find out about you and your business and recommend a policy that meets your needs exactly. Policies vary, so be sure to check all the details before you sign on the dotted line. Then you can relax and focus on making your business a success.
Sadly - none of us have "crystal balls".
The British public and business leaders regularly seek advice from financial experts. Asually the help they receive is reliable and translates into profitable returns. However, when it all goes wrong the results can be devastating, leaving bewildered investors significantly out of pocket. Here are some surprising examples of bad luck, questionable advice and downright over-confidence from trusted finance professionals.
Controlling the monarchy’s purse strings
As money worries go, the monarchy are unlikely to ever feel the pinch, but even so, the Royal Household’s top financial advisor has recently been scrutinised by a government body. With a personal fortune of over £330 million, the Queen is comfortably off, but she relies on Sir Alan Reid, her treasurer, to oversee her public funds and private finances.
Royal advisor told to budget effectively
According to the Daily Telegraph It was the royal family’s excessive spending habits that were brought into focus by a House of Commons paper, drafted by the public accounts committee in October 2013. The Queen’s financial advisor himself, Alan Reid, was thoroughly chastised by the committee after they’d discussed his methods of financial management. Having exceeded the Sovereign Grant of £31 million in the year 2011-12, the Royal Household then went on to give its senior members generous pay rises in the year 2012-13, whilst freezing the earnings of staff on under £21,000 per annum.
The palace must divert copious funds to restoration projects!
With tension running high, the Palace was forced to issue a statement explaining that huge amounts are spent on conservation of various historical properties. It was also mentioned that work was being done to generate more independent income. Mr Reid remains in his job.
Economics expert becomes celebrity pundit
Ben Stein is a celebrity finance expert, who has moved between writing, politics and the media for most of his career. This included a notable role in the classic 1980's film Ferris Bueller’s Day Off, where he adlibbed an economics lecture. In 2004 he released a book entitled "How to Ruin Your Financial Life", a sarcastic look at the type of lazy and misinformed advice which can be given to investors.
Stein denies any impending storm, as the credit crunch begins to take hold worldwide
Ironically, Stein then went on to cast doubt on the idea of a financial crash, declaring that stocks were ‘a great place to be’, even as late as 2007. In August of the same year he appeared on US television denying that the credit crunch would ever become a reality and telling the audience this period presented a great ‘buying opportunity’. However, just over a year later, in August 2008, the global implosion of stocks and shares began, with numerous bankruptcies, bail outs and government takeovers being implemented in order to avert a total fiscal meltdown.
Did Stein fail to appreciate the extent of the debt being amassed?
According to Business Insider his commentary at the time led to him being called an ‘idiot’ by commentator Henry Blodget. Blodget criticised Stein’s attitude to the market collapse, going as far as to suggest Stein was either delusional or attempting to drum up a controversy to drive web traffic. Stein himself has acknowledged his wrong judgement during that period, claiming that he ‘missed the boat’ somewhat. However, his career has not suffered as a result and he continues to report on politics and economics through his column in Newsmax magazine.
Former England international stung by questionable financial advice
With average weekly salaries of around £3500, Premiership footballers were considered to be some of the best paid residents of the UK in the 1990s. However, even this elite group of athletes are not immune to bad financial advice. Chris Sutton is a former England international footballer who began his career playing for Norwich City in 1991. After a successful run with the club, he moved to Blackburn Rovers, becoming the first player to be transferred for a £5 million fee.
Foreign currency investment cost Sutton dear
Despite a career spanning over ten years, he was forced to file for bankruptcy in 2013, blaming what he called ‘bad financial advice’. In fact, he and his wife were piling money into a spread betting scheme that operated using foreign currency. It was designed by their accountant, Simon Grinter.
Lack of experience led footballer to trust in his adviser
Grinter was able to convince Sutton, and other players, that their sizable investments were providing a valuable return, when, in fact, the opposite was true. Sutton admitted he knew very little about what his financial advisor was doing, but he was aware that he had never seen a profit on his investment. With little knowledge of his own finances, Sutton was left extremely vulnerable.
Grinter took risks with client's millions
In all, 70 people who participated in Grinter’s enterprise claimed to have lost money as a result. Grinter was eventually charged with fraud. He maintained at trial that his plan could have turned a profit given time, but the judge condemned this attitude as ‘breathtaking arrogance". Grinter eventually received a jail sentence of six years; he had taken around £7.9 million in all and went on to lose £3.3 million.
Not-so-clever accounting at Lehman Brothers
From a peak revenue of $59 billion in 2007, to a bankruptcy declaration in 2008, the catastrophic fall of Lehman Brothers is one of the most startling incidents in financial history. The financial services firm was just one of many institutions which were reliant on each other for their funding rather than their depositors. They lent massive amounts to people with little or no chance of repaying their debts and when the bubble burst, events quickly spiralled out of control.
Damage limitation came too late for some
The heads of many British banks and their advisors met with the government in late 2008 to discuss the terms of a tax payer funded bailout, and many were saved. However, a last minute lifeline from Barclays boss Bob Diamond was blocked by then Chancellor Alistair Darling, and collapse became inevitable for Lehman Brothers.
Did Accountants hide the true extent of Lehman Brothers debt?
The company had worked in partnership with their financial advisors, accountants Ernst and Young. In the aftermath, this firm was partially blamed for the collapse as they had allegedly helped to conceal the true extent of Lehman Brothers overleveraging. In 2007 the official figures showed a leverage value of £31 to £1, meaning that for every £1 it owned, the company was borrowing £31. A government report later found that creative accounting techniques had concealed the true figure; it was in fact closer to 44-1. It is still being debated whether of not any blame can be attached to Ernst and Young and this could be the case for a long time to come.
Did Jim Cramer provide bad investment advice?
With his own series on US channel CNBC, Mad Money, it would be fair to assume that financial guru Jim Cramer has a reasonably deep understanding of the industry. Nevertheless, accoring to theHuffington Post stories about his lack of insight and the downright unreliability of his predictions have been circulating for years. Primarily, observers were shocked at Cramer’s insistence that his viewers should invest their money in companies which were clearly failing in late 2007, most notably Bear Stearns and AIG.
Bailouts that came too late
Whilst AIG recovered from the 2007 - 2008 crisis with the help of a massive government bailout, the same was not true of Bear Stearns. Their reliance on subprime mortgages in the preceding years meant the company suffered massive losses, and despite being given help from the Federal Reserve, they eventually collapsed.
Inaccurate predictions can hurt investors
Most recently Cramer has come under the spotlight for his market predictions relating to Hewlett Packard, Best Buy and Netflix. In late 2012 he advised his audience to exit Hewlett Packard and Best Buy stocks as soon as they could. However, just over six months later the two companies had seen the value of their stock rise over 110%.
Soaring share prices for Netflix
At the same time, Cramer claimed that Netflix shares were on a downward spiral and should therefore be sold. Somewhat startlingly Netflix went on to become the number one performing company on NASDAQ, climbing to 174.49% by the following May.
He may well of course be proved to be correct eventually - who knows.
Cramer remains a respected voice in the financial world
Jim Cramer continues to make trading recommendations on his TV show which are respected by many of his viewers and the media alike.
Financial advice is all about transparency and trust
Good financial advice from a qualified and trustworthy professional can help individuals and organisations make the right decisions at the right time. With experience, an economics expert can skilfully guide a client through the maze of financial products available, improving people’s lives or boosting the turnover of a company significantly. However, when an advisor takes risks with their client’s money, withholds information, or chooses to gamble on a hunch, things can go quickly and dramatically wrong.