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Tom Henell  Tom Henell, NAPLIA COO / Partner

Exposure to Accountants and Investment Advisors

For accounting and financial professionals, high profile clients are generally an attractive market segment, but they also potentially cause higher exposures. Insurance underwriters can be cautious when they detect these scenarios, and as a result, these exposures can impact your professional liability / errors and omissions insurance. If you have high profile clients, we recommend taking proactive risk management measures, and identifying these measures to your insurance carrier up front to mitigate underwriting concerns.

Why are high profile clients a risk?

The simple fact is that high profile clients have higher exposure, potentially making them more frequent targets of lawsuits. In addition, certain characteristics are consistent among these clients with which you should be familiar.

Individuals who rely on public careers to make a living tend to have a finite number of years of high earning potential. Typically, these careers can start -- and end -- rapidly with little to no warning. The nature of such can make it difficult for an individual to transition into the necessary financial lifestyle.

High profile / high wealth individuals typically have a multitude of individuals who manage their personal and professional affairs. This includes everything from contract negotiation, legal issues, bookkeeping, cash flow management, investing, bill paying, account reconciliation and more. Many times these responsibilities overlap. The personal access and distribution of responsibilities creates the potential for embezzlement -- unfortunately a common occurrence in these scenarios.

Often we see that the professional (accountant, investment advisor) is drawn into suits alleging the professional's failure to identify the exposure and take steps to stop the embezzlement. Even though the professional was not involved in the misappropriation of funds, he/she become a target for recovery.

These issues are compounded when the professional has limited, or no, direct communication with the client. High profile clients tend to have layers of individuals insulating them from daily business involvement. Investment or accounting professionals usually finds themselves dealing with a business manager rather than having a direct relationship with the client. This makes it difficult to have a true understanding of risk tolerance, asset allocation, and financial objectives.

Risk management steps

High profile individuals can be good clients for accounting and investment professionals. However, we recommend that you understand the inherent exposure, take the following risk management steps, and pro-actively identify these processes to your insurance carrier.

Utilize a comprehensive engagement letter.

A good engagement letter specifically identifies the services you provide, as well as those services which you do not provide. This actually creates an opportunity for you to not only mitigate your exposure, but to market additional services you may provide to a client.

Deal directly with the client.

Develop a direct relationship with the client and not with an intermediary to protect the clarity of your communication and recommendations. This will also protect you from a scenario where individuals in-between you and the client commit a violation or embezzlement.

Document all conversations and agreements in writing.

Create a paper trail which will serve as an essential element in your defense should an issue arise.

Do not take any limited power of attorney to disburse funds.

In addition, if you are responsible for bill payments, ensure that the funds are deposited into a separate account which is zeroed out monthly and that you do not have access to master accounts.

Do not receive statements for any account which you are not contractually responsible for managing.

 Observe if client appears to be living outside their financial objectives.

This may be difficult, however, recognizing red flags is important and understanding when to terminate a relationship.

Report any financial discrepancies directly to the client.

Again, communication should be direct with the client and not via an intermediary. Any discrepancy in reconciliation or unusual withdrawals or transfers should be identified.

Conclusion

Given the unique nature of high profile / high wealth clients, accounting and financial professionals must be aware of potential exposures. Understanding these exposures and risk management measures will allow you to make an adequate assessment of your potential vulnerabilities. Any client who is not willing to abide by your risk management standards should not be retained.