Read The Transcript Below:

Steven (00:51):

Hello everyone and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals edition. I’m your host, Steven Jarvis, CPA, and joining me today is a very special guest who’s going to help us understand some of the potential liabilities and legal ramifications of being involved in your client’s taxes. Now, before we set the stage a little bit more for the where this conversation’s going to go, Cameron Norris from Golsan Scruggs is my guest. So Cameron, welcome to the show. Tell us a little bit about yourself.

Cameron (01:22):

Steven, thanks for having me on. As you said, my name is Cameron and I work at a firm called Golsan Scruggs. I hope some of you have potentially heard of us, but we ultimately are a boutique insurance brokerage firm that really focuses in working with financial institutions, primarily investment advisors, private funds, and some CPAs around the country. I’ve been doing this for 10 years myself and just hoping to share some industry insights and ultimately provide a bunch of good education.

Steven (01:51):

 Well, and Cameron, you and I got introduced because I know advisors who have worked directly with Golsan Scruggs and had great things to say about that experience, so you came highly recommended. But we also want to have this conversation because a lot of questions come up from financial advisors about the distinction between tax advice versus tax planning and am I getting into realms that I don’t want to be in from a liability standpoint and before anyone turns off the episode saying I don’t do any tax advice and this is irrelevant, that’s actually part of what we want to talk about is more of a broad conversation about things like e&o coverage for advisors and what you could be potentially liable for. And then the conversation that comes with that, which is why you’re here, Cameron, is what are you potentially covered by your insurance or how do you know what you’re covered for? And then Cameron, you’ve been gracious enough to come prepared with some examples of claims you’ve actually seen get paid out so that we can talk about this from a reality standpoint and not just the theory soapbox. So that’ll sound like fun conversation to you?

Cameron (02:51):

Yeah, it totally does. And as I joke with everyone, it seems like claims examples are always the most interesting. Advisors usually aren’t posting them on their LinkedIn pages, so I’m not going to use anyone’s names, but I think it’s good things just to know about and ultimately this, whether you do tax planning or just are a financial professional, some of the topics that we’re bringing up are really applicable to all industries or all financial service related industries and just knowing some of the dirty secrets around how these policies work or maybe don’t work at the end of the day.

Steven (03:24):

So Cameron, let’s get into it. Why don’t you set the stage for us, talk a little bit more high level about how advisors should be thinking about insurance coverage in this area in general.

Cameron (03:32):

Yeah, so I think the main coverage that we are going to talk about today is your e&o insurance, and I’ll use the term e&o and professional liability interchangeably. But ultimately at its basis it is your exposure giving advice to clients and that ultimately at the end of the day, the carriers within their coverage forms are crafting what we would call the definition of your covered professional services. If you’re an attorney, it could be attorney’s e&o. For the purposes of this conversation, we’re going to focus on investment managers, your liability being a judiciary, but then also some of the things that I think clients are requiring almost in today’s day and age, which isn’t just purely buying and selling securities. They want financial planning advice, estate advice, the tax advice and how that is ultimately incorporated into a proper insurance program or hopefully should be.

Steven (04:28):

I think a really important thing to highlight here, and we’re going to reinforce this a few times, but again, whether you’re proactively giving tax advice, tax planning recommendations, or you’re telling yourself that you are not doing any of those things, this is a really critical conversation. Cameron’s going to share examples of where this can come up even if you think you’re not giving tax recommendations because at the end of the day, and I talk about this on the podcast all the time, every money movement has a potential tax implication. And so you could be even more liable potentially by not proactively addressing taxes if you’re inadvertently creating tax liabilities or having tax impacts on your client’s life that you’re not trying to proactively address.

Cameron (05:10):

And Steven, you are jumping a little bit ahead here and taking some of my thunder, but a good handful of the claims examples are purely, I’ll call them transactional issues, that advisors caused a tax event for their client that was unforeseen, that then brought liability onto themselves. I don’t want to say that I’m an expert in every area, but one could argue that if the advisors knew about certain specific situations ahead of time, it would’ve prevented these claims from occurring at the end of the day. Yeah, I mean, Steven, is it good for me to just set the stage here and one of the important things that I think kind of just helps flavor this entire conversation?

Steven (05:46):

Yeah. Please go through it Cameron. I am always eager to jump ahead to the tax things, but yes, give us the full picture here because just like tax planning in general in a client’s life, this is just one piece of the puzzle.

Cameron (05:56):

Yeah, exactly. So if you take nothing like this conversation, this is the most important thing to understand about insurance professional liability for investment advisors or tax planners. And it is really that none of the carriers have their own standard coverage forms and conditions. So most insurance that you buy, whether that be general liability, auto insurance, homeowners insurance, there is actually a quasi-governmental agency. It’s called the insurance services office, but it oversees much of the property casualty marketplace, which is what I am licensed to sell. That being said, the insurance services office, we call it iso, they have decided to stay completely outside of the investment advisor and tax planner e&o world. So as a result, it is much less commoditized and the individual insurance carriers have the ability to craft their own terms and conditions, which can be both good or potentially both deficient in specific areas of your business.

Steven (07:06):

Cameron, I’ll just interject real quick there because just in the last week leading up to this podcast, I had two different advisors tell me that in their most recent e&o renewal that they, for whatever reason this time, they decided to take a little bit deeper dive and were surprised by some of the things they saw in their policy because to your point about it not being standardized, it’s not templated. You’ve actually got to take the time to understand what is and is not covered because this can have real implications if you’re ever in one of these situations where you need to call on your insurance provider and get a claim covered,

Cameron (07:40):

I would agree and I would get off my soapbox and hopefully you have a broker who’s educating you on these things. It’s probably the main thing that I spend my time doing with clients and our team here, but it’s definitely an area where the devil’s in the details for a quick highlight. The most common claim that we see for e&o for advisors is trade errors. There’s a good number of carriers that they will limit your trade error coverage. They will not cover discretionary trade errors, only non-discretionary trade errors. So there’s lots of gotchas that people need to be aware of as you read through this and even just comparing policies. So I’ll get off my soapbox, find a broker that knows what they’re doing because you also may not know what is standard terms of conditions or these are adverse compared to other carrier options that could exist now.

Steven (08:28):

So Cameron, what you’re saying is that all these advisors who say, ah, you just need some kind of passive portfolio with a handful of ETFs and you’re fine, it looks the same no matter what custodian you’re at. You’re saying that doesn’t work with e e&o coverage. I can’t. I have an e&o policy, I’m fine.

Cameron (08:41):

Exactly. My joke is like, this is kind of a joke. I say people buy umbrella insurance. Well, an umbrella policy doesn’t cover an umbrella. An e&o policy doesn’t just cover every errand omission you may have to have, it may be if it’s set up correctly, but it can have a lot of holes at the end of the day. So one thing that I think is important to help kind of dig into some of the weeds, but not to bore everybody here, but the basis of what a investment advisor’s e&o policy is built off of is really their liability as a fiduciary to clients. It’s built off of the 1940 act and the personal and professional exposure that brings on to registered investment advisors. From there, the subject of tax planning and tax advice, it has become an area where there definitely are good handful of carriers that will extend affirmative coverage to that service.

(09:37):

And largely Steven, it’s built off of what I mentioned earlier in that today’s day and age an advisor is a wealth manager. They’re not just oftentimes purely just setting up a portfolio and never talking to people. They’re doing financial planning, estate advice, tax advice, they may be doing help do tax preparation or filing. There’s a variety of different services that you can do. And as a result, the insurance marketplace is fairly robust. Insurances, though people may not like it, it is a fairly efficient industry in general. So as a result, good carriers, they have crafted either endorsements or in their base forms, they will expand out the services not purely just to cover buying and selling securities. And I read through prepping for this conversation, probably a good eight to 10 of our key carrier forms and that’s some carriers that I don’t like and there’s some that give affirmative coverage for tax advice, tax planning. There’s other ones that it’s not covered there or maybe it’s vague at the end of the day, whether you can make an argument of if it’s there or not.

Steven (10:44):

And being the newbie to this conversation, when you talk about it having affirmative coverage, I’m assuming that distinction means that it’s specifically spelled out that yes, we will cover these types of claims under tax e&o that might occur, whereas the contrast would be to that would be that it’s either specifically excluded or that it’s somewhere vague in the middle and now we’re paying attorneys on top of paying our insurance premiums to sort out whether a claim’s going to go through.

Cameron (11:08):

So in general, these forms, the carriers write broad definitions of what’s covered and then they exclude specific things from there. Usually tax advice falls under the definition of financial planning. It falls into that category of the underwriter’s policy forms. And so long as they don’t exclude tax advice somewhere, if they say, as your covered professional service, you can give a state advice, tax advice, you can provide tax planning services, then you can feel confident, you should be able to feel confident that coverage is likely to be there in the event that a client comes back and complaints about something that you’re doing or it blows up on you and you have to file a claim and use your insurance.

Steven (11:50):

So Cameron, let’s get into some of those specific, it’s one thing for me to talk on a podcast about what I think might come up, but that’s why I love having people come on who can say, Nope, here are the actual types of claims we see. So you reviewed claims coming into this conversation. What are some of the things you’re seeing out there?

Cameron (12:06):

So I would say that as I looked across all of our claims, we’ve recently put together a claims library, which is very helpful as I went through this situation. And these are all claims from the last, I think about three years or so. So we could go back even further, but I would boil down the claims. They fall into two different categories and I would say the first is pour it vice and the second is what I would call a transactional issue where you caused an unforeseen tax event for your client and then they are upset whether that was just not understanding the tax code in certain specific situations or a be fat, thumbing and error and not being able to unwind it.

Steven (12:51):

So I’m sure these aren’t the technical terms for it, but so those buckets basically boiled down to I had it wrong and I gave my client bad advice and they followed that advice and it had a poor outcome, or I just didn’t have an intentional or proactive or systematized approach and my actions inadvertently cause tax things that I just never even took the time to consider.

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Cameron (14:28):

Yes, and clients get upset when they get a tax bill that they didn’t know about. Yeah, they do. So I think we’ll start with the largest claim that I could pull from just my recent memory and I’ll try to oversimplify these issues, but this advisor, they were putting together what’s called a premium finance life insurance program. And as a part of that situation, you have to post collateral to help get a loan from the bank to finance the premium. Typically it’s for an indexed universal life policy. That’s my understanding. Well, this advisor and client have posted an existing annuity as the collateral. That advisor did not realize that when you posted annuity as collateral, it immediately increases the tax basis to its current value. And this was, I don’t remember how old the annuity was at the end of the day, the client had a $485,000 tax bill that they were not expecting as a part of this transaction. As a quick side note, if you ever read through an insurance policy, you will see a lot of tax related exclusions. Like insurance companies aren’t there to pay advisors taxes. Taxes are supposed to be kind of a tax taxes are taxes. So at the end of the day though, if you partner with a good insurance company, they realize that if you cause a big large tax event for your client, whether or not they would’ve paid it this year or in the future, it’s better to avoid litigation and try to find a remedy to make that call. The carrier that was with this client, the insured paid a $10,000 deductible and the carrier wrote a $485,000 check to that client so they could fund their tax bill, which is kind of funny, Steven, when you think about it, client made out..

Steven (16:15):

Oh yeah, it’s the lottery for the client. Yeah..

Cameron (16:18):

I know. So client didn’t have to litigate, saves everyone headache of that, but client’s renewal rates went up a little bit unfortunately as a result, but they were able to not have to fund that ultimately themselves.

Steven (16:30):

And Cameron, I’ve definitely come across other instances talking to different attorneys and advisors who have been in these situations where, because that situation, even your open simplification might to some advisors say, oh, okay, well they got into this complicated premium financing situation. Of course they created a mess. But we see these kinds of things even with rollovers getting done incorrectly at times when a check inadvertently goes to a client and the client cashes the check and then still tries to put it back into a qualified account, there are things that can go on even if we’re not dealing with the most complicated arrangements here that we’ve got to be really aware of first, hopefully upfront, it’s what are we doing to make sure these things don’t happen? I can’t imagine your carriers are out there saying, sure, advisor, do whatever you want. Well, we’ve got you covered. It’s let’s try to prevent these things from ever happening. But insurance is there in just in case

Cameron (17:20):

You know the tax world much better than myself. I don’t do my own taxes. I hire a tax professional. One of the other claims that I have on my list here, kind of a fact, thumb mistake, the advisor, they wanted to do a 10% Roth conversion on a $500,000 account. Maybe I’m oversimplifying this whole thing, but bear with me. Instead of 10%, they hit a hundred percent and the entire account got moved over to a Roth and at the end of the day there was $167,000 tax bill that was associated with that and the custodian, they weren’t able to unwind it to go back to pre-state. That’s another issue of a transactional claim. And carrier also paid out probably about 150,000 at the end of the day. And as I look across it, Steven, a lot of these ones are, I don’t even want to call them from transactional, but it is almost similar to a trade error in a much different lens in that we make an oops mistake. And with taxes you can always unwind it with a trade error. You can your custodian money in the trade error log with taxes, it’s a little harder. And then you just owe the IRS. If you’re with a good carrier that has good, I would say trade error coverage almost then if you have good tax planning language and a carrier that pays trade errors, well then these transactional issues should be handled fairly well within your insurance contract. Don’t go out there advisors and do things willy nilly because your insurance rates are going to go up, but you can construct these things to work well. And that’s actually a good handful. We had a good, I looked at the data. We had seven or eight Roth conversion type claims. They range from the low end one was like 20,000 and the highest one was the one that I just brought up that was 167,000 at that realm.

Steven (19:12):

So Cameron, that might start speaking to one of the questions I had for you. So you said there were seven or eight Roth conversion related ones. Were those all these transaction type errors that you’re talking about where the wrong amount was converted?

Cameron (19:22):

Yes, that is essentially correct. I think there was one in which the Roth conversion that they did, did not end up ending in the results that the client was happy with. That was a much smaller claim. The client was, I think they felt like their tax benefits that they thought they were going to receive weren’t as big as they would anticipate at the end of the day that one won. We’re still working on the data, so it wasn’t my client. There was less information on it, but there definitely is still the poor advice type ones that are unhappy.

Steven (19:57):

So that’s what I might have to follow up with you on when you get the rest of the data. Where I hear some of the hesitation from advisors when they think about getting into tax planning is what if I give what I think is good advice and when we’re planning for the future, there is always guessing involved. If we grossly oversimplify choosing Roth, at the end of the day, we’re expecting that at some time in the future, tax rates are going to go up. And so again, if we grossly oversimplify this, I meet advisors who are concerned that, hey, if I weighed into this tax planning realm and I give clients advice based on this expectation that tax rates may go up, what if they don’t ever go up? And so I was curious to ask you if you see claims that are related to long-term different outcomes than a client had hoped for?

Cameron (20:42):

Yes, we do. And I think the reality of it is in our data that would come up in more of a breach of fiduciary duty type suit because what the client at the end of the day in my experience is they’re going to claim over a period of time they’re going to say, Hey, Mr. Advisor, Mrs. Advisor, you gave this recommendation and in 2014, and here we are in 2024 and I’m not happy with how this whole situation played out. Usually they’re going to be throwing the litany of claims at you, a breach of fiduciary duty, unsuitable tax advice or whatever the attorney is going to try to attach themselves to. But that falls again, kind of into that financial planning realm, the state advice, the tax advice. I think it’s also really important that advisors, if you’re not educated on taxes, then you shouldn’t be giving tax advice. But I do think that clients expect you to be educated on it if you’re not, I guess don’t talk about things you’re not educated on first of all. But then two, I think it’s an important part of clients and it’s good to get education at the end of the day so that or partner with a good tax resource that can educate you so that you hopefully give quality advice. Sectored client expectations. You can’t predict the future and this is completely unrelated to this situation, but client selection and communication are the two best things that you can do to avoid any types of claims. That’s great advice. If your client came to you and you know that they were upset with their old advisor, they didn’t eat the S&P 500 and the person’s an attorney and sued somebody else, I would probably be a little hesitant about bringing them on board. Everyone wants new clients, we all want to grow, but I have a good handful of clients that would say post claim, I kind of knew this person was a little bit litigious. They’d sued their other advisor, this was not worth the headache. I think one of the ones that I do want to talk about, Steven is a poor advice one if you don’t mind me. Yeah, please. And this, it’s convenient timing that happened. Client contacted me maybe a week ago, so I will preface it that they are also a CPA, so they do have a more formal tax arrangement with some of their clients. They’re an RIA and a CPA. They had a client, wasn’t even a tax client, a tax engagement client. He said, Hey, I want to sell my house, my condo in Florida. Do you think that I’m going to have to pay capital gains on this transaction? They sent a very quick email that said, Hey, high level, we don’t think so, but what we should get engaged further on this subject. At the end of the day, client goes away, a month later, comes back and said, you know what, based on you telling me I didn’t think that we were going to have to pay taxes on this capital gains, I bought a new condo and I’m renting the old one out. They dig in further and say, you know what? The advice that we gave was probably incorrect. You will owe some capital gains at the sale of this. To which he turned around and said, Hey, I would’ve never bought this new condo if you didn’t tell me that my old condo wouldn’t have capital gains. My client’s a little frustrated in saying, well, we did tell you that it wasn’t, we need to dig in further. It’s also unique in the fact that the client doesn’t have any damages yet. He hasn’t sold his condo. There’s no tax bill. It’s, it’s a great hypothetical situation. Hypothetically, if he sells it for this much, he may owe these taxes.

Steven (24:08):

Well, Cameron, I think that really illustrates the point you were just making about client selection and communication being your best protection because, and let’s assume that there were no red flags in this becoming a client, but just going back to the communication piece, and this something I work with my team on all the time, is you’ve got to think about the communication as the person receiving it. Because when that CPA sent that message, they probably thought it was crystal clear in their minds they’re thinking, Hey, we’re not really sure. Don’t do anything yet. We’ve got to dig into this. But what the client heard is, oh, well, don’t there be any capital gains? So especially if we’re talking about bigger transactions or more impactful things or just understanding client relationships, maybe that needs to have been a phone call. Maybe that shouldn’t have been a client at any point. But yeah, I think that definitely really reinforces the point that you were making on this.

Cameron (24:53):

Yes, and the other thing too, it also reinforces the point that it’s a very easy for clients or retroactively to be upset about something. It’s easy to look back and say, oh, well we’re in the future now. If you would’ve said something different in past state, then I would’ve been better off. I wish I would’ve put all my money in Nvidia probably whatever a year ago or something like that. But unfortunately I didn’t. But my wife probably been like, what are you doing as well? So…

Steven (25:18):

Cameron, I want to back up just a second before we move to action items, because I think I heard you as we talking about those claims on Roth conversions that it sounds like those claims tend to be part of bigger claims where it’s a disgruntled client basically getting somewhere into relationship where they say, you know what, Cameron, our relationship hasn’t turned out the way I wanted it to. So here’s this list of things I’m unhappy about. Here you go. And maybe I’m just hearing that the way I want to. To me that doesn’t sound like the Roth conversion was isolated. There’s one piece tax piece of it that was isolated. The client is otherwise happy, but this one thing went wrong. At the end of the day, this is why we have insurance, right? At the end of the day, there is a risk to being in business. There’s a risk to giving future looking advice, there’s a risk to planning, there’s a risk to having clients. All these things we want to do as much as we can upfront to mitigate that risk. I would much rather not have to figure out how my e&o coverage works. I’ve filed claims on all sorts of other types of insurance. I haven’t yet had to file an e&o claim and I’d be just fine never going through that. But I’m still going to have the coverage even though I’m mitigating as much as I can upfront.

Cameron (26:27):

Yes, and I would say unless it’s a trade error or a transactional issue, usually clients are upset around the whole situation. You gave me that financial planning advice or beneficiaries, right? That’s one that people don’t talk about enough. Oh, someone inherits a portfolio. I thought mom had $2 million, she has 1 million. Why did you have her in bonds for the last whatever, 10 years when she was 94? If you would’ve put her in the S&P 500, we’d have a $2 million portfolio, me and my brother. So there’s certain things that you can and can’t control. I think what you can’t control is making sure that you’re communicate clear with clients, try to give good sound advice. I think it’s important to be educated with your professional service and then also partner with other professionals, right? Like estate attorneys, you may be able to give high level estate advice. Hey, you don’t have a trust Mr. Or Mrs. Client, you should get that in place. But then you have to work with an attorney that you think is qualified to actually execute that at a high level. I think that, as I’ve mentioned a couple times, people are expecting more and more out of their financial advisors bluntly. I think people have to justify their fees in a certain respect sometimes. And what comes with that is talking about taxes, insurance, wills, trust to estate. So I think people are going to have, you’re going to have to become kind of a financial quarterback in certain respects. So make sure that you try to give sound advice, good client selection, but then also you can either transfer the risk or you can take the risk if you want to transfer it to a third party like an insurance company, make sure that you have the right policies, right policies, terms and conditions. But then also a broker that can probably speak to carriers. Claim experience. There’s definitely some gray area when these things come up. And a broker’s experience in knowing if carriers are going to pay claims or if they’re going to be very difficult to work with is something that I think is often overlooked. And it takes a broker that’s been through claims to know that, but there’s friendly carriers and there’s unfriendly carriers. So you want to ideally match up good coverage terms and conditions with a friendly insurance carrier. If you’re a good risk, you should be able to get all those things in a budgetable sense.

Steven (28:44):

Well, yeah, I certainly appreciate you coming on and sharing your experience and expertise or sharing that perspective here. We always like to wrap up with action items and the way you were talking about that reminds me of our most frequent action item on this podcast is getting every tax return every year for every client because you’ve got to see the actual documents and the same thing carries over to your e&o coverage to your insurance policies. You can’t just take for granted that because you paid the premium and signed the policy that you’re covered on everything. If you haven’t looked at the actual document recently, you either need to have read it and understood it yourself, or you need to have read it and understood it and worked with the broker who can help you answer the questions that you weren’t sure of yourself. It makes me think of the saying pictures or didn’t happen to get the policy or didn’t happen, right? You don’t want to be learning how your policy works when you go to make a claim.

Cameron (29:32):

No. And I will say, I’m not going to use names. I don’t want to get in trouble. There are insurance companies, I was looking through some of the, that have a lot of volume in the space that I’m sure people that are listening to this have that do not have affirmative coverage for tax plan. Those may be same carriers that don’t even give you trade error coverage as well. So the devil’s in the details and I think as far as action items, make sure you’re educated, set client expectations, and then partner with good resources.

Steven (30:01):

On the topic of good resources. Cameron, if people want to reach out and get connected with you and learn about the resources you offer, what’s the best way to do that?

Cameron (30:07):

Yeah, so best way is probably, you can find me on LinkedIn, name is Cameron Norris, kind of like Chuck Norris, but with a Cameron in front of it. Can also go to our firm’s website, GS RIA, like Golsan Scruggs, RIA. I also have an email address C Norris like Chuck Norris at Golsan Scruggs. I’m not sure Steven, if you put any of this stuff into the podcast notes or whatnot, but hopefully you’ve heard of us. I have a LinkedIn, I have a social media presence. Well not really just LinkedIn, but get ahold of me or anyone on our team. Everyone’s a good resource when it comes to this subject.

Steven (30:40):

Perfect. Thanks for sharing Cameron. And for people listening, if you’re looking for a resource, check Cameron out. I got introduced to him by advisors who’ve worked with Golsan Scruggs and had great experiences. So once again, Cameron, thanks so much for being here, for everyone listening. Until next time, good luck out there. And remember to tip your server, not the IRS.