Advisers could be at risk of having claims denied by their professional indemnity (PI) insurer if they are using managed discretionary accounts (MDAs), warns one specialist insurance firm.
Oscar Martinis, senior partner at McDougall Kelly & Martinis, said IFAs that are appointed as investment managers of MDAs or of their own managed investment schemes (MISs) may be in breach of their agreements if they hold a standard financial planner PI policy.
“IFAs appointed as investment managers should either have their existing financial planner PI policy extended to include their activities as investment managers or purchase an investment manager’s PI insurance policy,” Mr Martinis said.
“Many IFAs may be unwittingly in beach of their MDA or MIS agreements as their existing financial planner PI policy would be inadequate to cover their wholesale investment management activities.”
Those who do not address this “PI gap” risk having their claims denied by their PI insurer, he said.
Some of the risks that might not be covered include investigations by regulators with regard to investment management activities; misrepresentation made in the offer documents or other communication; failure to perform adequate due diligence in evaluation potential investments; and failure to provide adequate disclosure of the investment risk involved.
“Financial planning PI policies are only designed to cover financial planning professional indemnity exposures. There are few insurers who can provide both the financial planning and investment management PI cover in one policy,” Mr Martinis said.
“It is therefore crucial that IFAs who have entered into investment management agreements and do not have a standalone investment manager PI policy review their existing cover and seek written confirmation from their PI insurer that they are covering both exposures.”
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