Kevlar for Clients

Kelly MacDonald, senior vice president and team leader at Aon Risk Solutions, wants to make sure her clients don’t just get the most comprehensive and tailored coverage, but that they understand how to best identify, mitigate and manage their risks.

“I want them to bulletproof their practices,” says MacDonald.

But it sounds a lot like MacDonald is teaching her investment professional clients how to make their own Kevlar. The bulk of her time is spent consulting clients on risk management, including understanding the precise nature of their business and educating them on the changing risk environment, based on her extensive knowledge of claims and regulatory changes.

And with rising complaints against financial advisors and dealers, her focus on risk mitigation is something that’s become increasingly necessary. In 2013, the Ombudsman for Banking Services and Investments (OBSI) investigated 434 complaints made by clients against their financial advisors or dealers. Though lower than the 599 complaints OBSI received in 2009, the number of complaints is still far higher than those received pre-market meltdown.

“By far and away the largest issue we see in investment complaints is investment suitability,” says Tyler Fleming, director of stakeholder relations and communications at OBSI. “Certainly, when we conduct an investigation, we look at how well the client understood the risks, how well things were explained and how well things were documented.”

The rise in complaints against advisors is just one of the exposures that has made errors and omissions (E&O) coverage for investment professionals more complex in recent years. Another is data security. Nothing better illustrates the nature of this risk than the data breach by the investment industry’s own regulator. A year ago, the Investment Industry Regulatory Organization of Canada (IIROC) announced it had lost a laptop containing sensitive information on more than 50,000 Canadian brokerage clients in Montreal. A subsequent inquiry into the breach found the regulator had broken its own rules around managing sensitive data: the information on the laptop wasn’t encrypted.

These two issues, however, play perfectly into MacDonald’s wheelhouse. “What Kelly brings that’s very unique is that she’s taken client relations to the next step,” says Hano Pak, chief agent for Starr Insurance. “Instead of just offering insurance, she’s offering additional services, such as helping with compliance, helping her clients understand what compliance procedures look like, and helping to build those compliance measures into their day-to-day business. By providing that, she makes the risk environment better not just for her clients, but for the underwriters as well.”

MacDonald started her career as a broker 17 years ago. In 1997, MacDonald had just finished university and was weighing her options: a master’s in business administration or law school. Then her mother asked if she wanted to get her broker’s license and come work for her.

“I really had my heart set on doing something else,” says MacDonald. “I’m quite independent. I wanted to do things my own way. I didn’t just want to follow in my mother’s footsteps.”

But, needing someway to bide her time before graduate school, MacDonald agreed to the job offer at Baird MacGregor and, within months, she was hooked.

She started working in personal lines, then worked up to small-to mid-sized commercial and, simultaneously, doing “every course she could get her hands on.” MacDonald was itching to do something more. At 27 years old, she had her first ever job interview with HKMB and was hired as an account executive in their leasing and car dealers department.

“It was a nice change for me at the time,” she recalls. “It was a bigger book of business, larger accounts, more autonomy, all my own clients and I was responsible for a larger budget.”

It was there she figured out what she liked and didn’t, preferring sales and client facing work. A few years later, however, she was inadvertently headhunted by Aon while volunteering at a university career fair for the Insurance Institute of Canada. MacDonald joined Aon’s professional services group as an account executive in 2004, her first real foray into an E&O specialty.

“Within a year and a half I was promoted, took over the department, and was responsible for 10 to 12 people,” says MacDonald, who notes management was a new step for her. “I have a very strong personality, so I can be a bit polarizing, but I try to attract individuals to the department [who can] work under my management style, with similar motivations so I can help people reach their business goals.”

MacDonald was promoted to manager of the group in 2006 and then to vice president in 2008. A year later, she took some time to start a family, returned to Baird MacGregor for a few years, and ultimately came back to Aon in 2012 to run the public institutions and programs department. MacDonald, overseeing 15 account managers, really sank her teeth into pro liability, E&O for financial investment professionals, as well as for general P&C clients.

A New Landscape

MacDonald’s return to Aon coincided with a number of external influences affecting E&O coverage for her clients in the financial services sector. For one, the industry was still adapting to a tide of regulatory changes in the wake of the 2008 financial crisis.

“The regulatory environment is constantly changing,” says Rick Williams, president of World Financial Group & Transamerica Securities. “It’s important for our partners to know what’s going on and be in tune with changes to national regulations, provincial regulations and, in our case, SROs [self-regulatory organizations] as well. The knowledge level to navigate what’s going on is critical.”

MacDonald has developed an extensive education program for her clients, involving regular consultations, three to four annual web presentations on relevant topics regarding claims, the publication of white papers on key risk-management subjects, and hands-on risk-management training sessions.

“Kelly’s taken the initiative to educate our field force, our agents, through seminars,” says Williams. “She is positioned to say, ‘This is what we’re seeing in terms of claims, this is what you need to do to run your business and protect yourself.’”

One of the key areas of training is around documentation, says MacDonald, who believes that while the majority of financial advisors are giving their clients good advice, “they’re often keeping terrible files.”

“Your transactional file is your best tool of defence if there’s an allegation against you,” says MacDonald. “You can show that you have a file, that it aligned with the client’s knowledge and risk tolerance, and where something was complex, you used a disclosure form. That’s a very powerful defence when a client says, ‘You didn’t tell me or I didn’t understand, I’ve lost all this money, I’m not a savvy investor.’ An advisor that goes before a judge or into arbitration with a transactional file that’s empty has nothing.”

This has become crucial with the rise in complaints against financial advisors since 2008. With the public becoming savvier, P&C brokers are, increasingly, finding themselves on the defence against E&O claims.

“I say this to all financial advisors, and it applies to brokers too,” says MacDonald. “The world is changing and how they’re doing business is changing. You’re in the car, on the bluetooth, having a meeting with one of your clients, in someone’s home, in someone’s office. You’re not having client interactions in the same way you used to, but you have to figure out a way to get a record of those conversations into the file.”

For financial advisors, OBSI has become more significant in its impact on E&O insurance claims because it can offer dispute resolution options at no expense to consumers who file complaints. This has led to clients favoring use of the ombudsman over litigation, and a spike in claims. OBSI’s recommendations are non-binding, but the acceptance rate of implementing recommendations is high.

“We’ve been discussing with regulators and industry associations the need for firms to review their E&O policies to ensure they cover voluntary settlements as defined under our process,” says Fleming. “We find the nature of E&O insurance often drives the behaviour of firms in settling. If they have coverage, they are more likely to settle.”

Of the 472 investment-related complaints investigations concluded in 2013, 37% ended in monetary compensation, totaling $4.6 million. The average payout was $27,000, but the largest single compensation was $275,000. The year before, 42% of investment complaints to OBSI ended in compensation, with an average payout of $23,000.

MacDonald spends a lot of time walking clients through what non-binding arbitration looks like and how it works, and offers examples of cases that have been investigated by OBSI.

“It’s important for them to know how often OBSI finds in favor of a firm versus how often they find in favour of a client,” says MacDonald.

It’s for this reason that MacDonald has a reputation as one of the E&O industry’s foremost risk experts, particularly for niche clients in the financial services industry.

“She sees what’s happening in the global industry based on complaints and claims being made,” says David Chapman, president of FundEX, Canada’s largest flat-fee mutual fund dealer. FundEX oversees 600 advisors across Canada. “She goes out to our advisors and says, ‘These are the steps you need to protect your practice,’ and outlines everything they need to do.”

Chapman says there are a lot of things that his advisors take for granted until they hear MacDonald’s presentation. “It’s not until a claim comes through that people really understand the potential impact on their businesses and their lives. Some of these advisors, their mouths just drop when they hear Kelly speak and they’d almost go back into their shell and be afraid to do business if it wasn’t for the expertise she offers to help them protect themselves.”

MacDonald has also worked to develop innovative insurance packages that encompass the potential costs of arbitration and subsequent payouts.

“Since 2008, the propensity for clients to complain is directly related to the circumstances, the downturn at that time,” says Chapman. “Kelly has put into place an errors and omissions program for our advisors, a group plan, so if there are any complaints that come in from clients that could trigger payment, we have comprehensive protection in place.”

Internet Innovation

For several years, MacDonald has also included cyber riders in most E&O policies. “One of my first experiences with Kelly was putting together a cyber program for a professional association and its members,” says Jeanette Lawrence, formerly of AIG and now vice-president of E&O for Berkley Canada.

That was seven years ago, notes Lawrence, who says cyber crime wasn’t yet on the radar for most financial professionals at the time.

“She put together something really interesting and talked to the association and its members about the coverage to get them to the point where they understood it enough to buy it,” says Lawrence. “Adding cutting-edge coverage at a time when other brokers weren’t necessarily having those discussions with their clients was key, because the coverage has evolved a lot since then and so has her knowledge.”

More recently, MacDonald has worked with insurance partners to develop add-ons to typical E&O coverage, including a social media rider and proprietary cyber privacy coverage—always incorporating an educational element for her clients.

“We talk to them not just about password protection but about using appropriate encryption software, limiting access to information, locking file cabinets and destroying documents they no longer need,” explains MacDonald. “We’re also explaining that using social media is fine, but you have to understand that if others are publishing on your site, you become a publisher and you have to be mindful of what that means.”

Gunning for Growth

Besides her risk management expertise and education offerings, MacDonald has positioned herself as a strategic partner for her insurance partners, finding ways to help them expand and grow—and not just in relation to their insurance needs.

“When we look at launching a new product or a new initiative, we go to Kelly to quarterback these things,” says Williams at WFG & Transamerica Securities.

Eight months ago, MacDonald launched a joint initiative with Williams to develop a referral program to help clients of WFG & Transamerica Securities access Aon’s P&C brokers. “We needed to put all the infrastructure in place to support that initiative,” says Williams. “There are legal components, aspects of operations, aspects of Aon working with their partners to find effective modelling, education of the field force and the promotion of the program.

“Aon is a very broad organization with a lot of tools in their tool box,” says Williams. “Beyond quoting basic coverages for E&O and others, Kelly recognizes the opportunities to leverage the resources within her own organization to partner with our organization to grow, create revenue and serve a broader market.”

Williams says E&O for financial advisors remains a soft market. Any broker who wants to remain competitive in this space needs to be doing more than just offering transactional service.

“Anybody can broker, go and get quotes for you,” says Williams. “If someone really understands your business and the opportunities around your business, that’s the differentiator. Kelly is more like a partner than a broker.”

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Copyright 2014 Rogers Publishing Ltd. This article first appeared in the May 2014 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.