CAPE TOWN – Every investor should be concerned about making sure that their money is safe. That is why it is important to only invest in regulated products, and to use financial advisers with the proper licenses and qualifications.

However most investors are unaware that there is another layer to securing their capital. That is that every financial adviser in South Africa must carry professional indemnity cover and where they deal with client funds they must own fidelity insurance cover as well.

Effectively these are insurance policies that provide some level of guaranteed protection of their clients’ money. Professional indemnity insurance covers them if they are found liable for losing client money through professional negligence or omissions. Fidelity cover insures them if money that they manage is stolen due to fraud.

Anybody who makes use of a financial adviser should make sure that their adviser does in fact have the appropriate risk policies in place, and how much they are covered for. However it is not actually the responsibility of the client to request this information. The Code of Conduct for Authorised Financial Services Providers and Representatives brought into effect by the Financial Advisory and Intermediary Services (FAIS) Act, requires that advisers provide it to every client upfront.

Unfortunately though, this rarely happens. A number of financial advisers contacted by Moneyweb admitted that they had never been asked for this information and had never provided it.

Some of them also admitted to being unsure about how much cover is appropriate for their business. Although there are minimums provided by the Financial Services Board (FSB), there are no fixed guidelines on how advisers should calculate the cover they need, as the considerations are so different from one to another.

There is also uncertainty amongst advisers about what personal indemnity cover is intended to protect them against. In other words, what would constitute a valid claim.

So how do you know whether your adviser has enough insurance?

“There is no specific answer to that question because each risk is different,” says Caroline da Silva, deputy executive officer at the FSB. “We set the minimums, but we also say that financial advisers have to carry adequate cover.”

What counts as ‘adequate’, however, really depends on the kinds of clients and products that they are dealing with.

“The average advisor faces a definite conundrum here as there does not seem to be a definite formula,” says Billy Seyffert, chief operating officer at Moonstone Compliance. “Even the suppliers of the insurance themselves are loathe to give advice on the amount.”

In most cases it is left to the financial adviser to determine for themselves, but they have complicated choices to make.

“Let’s use an example of a short term insurance broker who deals with lower end clients where the biggest risk would extend to the value of structural insurance on their homes,” Seyffert says. “Let’s say that the broker’s clients, on average, own houses of up to R1.5 million, but he has one wealthy client that owns a house of R10 million. To be fully covered he would require insurance for at least the full R10 million, but that might not be affordable and it would be over-insuring for most of his book.”

Every financial adviser faces this sort of conundrum in one form or another. They therefore have to balance the cover they require with what is affordable and the chance of a claim being made.

“We understand that you cannot insure for every eventuality, but advisers must apply their minds to what is an appropriate transfer of risk,” Da Silva says. “They have to weigh up how much they can afford against how much risk there is of something going wrong.”

For a client, however, there is comfort in at least knowing that the insurance covers the full extent of the capital you have invested or your insurance liability. To know whether that is the case however, it’s important to ask.

“Hopefully the client will ask the question and the more informed the client is, the more detailed the question will be,” Da Silva says. “Clients need to be comfortable that the insurance covers what they have invested if they get the wrong advice or if their assets are stolen.”

However, even if your financial adviser doesn’t hold cover to the full amount of your liability, it is important to remember that just because your financial adviser is only insured to a certain amount, that doesn’t mean that they can’t be held liable for more.

“An adviser’s level of cover doesn’t limit their liability,” Da Silva says. “Their liability could extend to all that has been lost or what they are criminally or civilly liable for. Clients don’t have to limit their claim to the amount of cover that is held.”

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