Box Pro Podcast Transcript
Hank Multala, President of Adviser First Partners & Chad Ramberg, President of Box Professional Insurance
Hank Multala 00:01
I'm here with Chad Ramberg. Chad, thanks for your time today and taking some time out to chat.
Chad Ramberg 00:07
Thank you, Hank, it's an honor to be here. Thank you for having me.
Hank Multala 00:11
Wow, an honor. You should have waited until the end of the podcast to bestow the compliments. So how you doing today? I'm doing great. Great. Well, I really appreciate your time today. And I'm sure listeners or anyone that this is going to be shared with will really take away some, some great knowledge and hopefully open their eyes to information that perhaps they were unaware of, or never considered. But I'm always curious how people ended up in a specific industry. For example, my undergraduate degree is in mechanical engineering. And here I am. And you have a bachelor's in science, specifically in science. So, what led you into and remain in the insurance industry?
Chad Ramberg 01:00
It's, it's a long story, see if I can make it short. the first. The first 20 years of my career, I actually spent on the claim side of insurance. I was arguing with insurance adjusters most the time to make sure they'd pay what they needed to. I switched teams at one point actually became an insurance adjuster for a short bit, too. But the businesses that I was running at the time got sold to a consolidator. And at that time, I said, you know, I need I had a financial acumen I was General Manager, controller. And I said, what can I do that I would really enjoy, and it looked like financial advisors really enjoyed their job. I did pretty decent financially. And so, I got my licensing for that became an IAR, registered rep. I learned it was much more challenging than I thought it would be to get a book of business going, but it was sure, sure, good to go through those paces. And the funny thing about that was, after a year, I had about 5 million under management. At the organization. They said, hey, you're doing great. I said, thank you, I went home, my wife said you brought 20 grand home, that's not enough to eat on. So, I said, okay, then I shifted back into more of the insurance side and serving advisors, as with their insurance, their business insurance. So that's kind of what got me into this role of helping financial advisors. And it took off it took off really well. And I think the reason was really, because having walked in the shoes of an advisor, I understood more of the daily dynamics, what it takes, and of course, having passed all the licensing, I had the knowledge of what they were doing so we can have a good conversation much quicker and more effectively.
Hank Multala 03:01
Right, you talk about you know, your wife saying, oh, you made 20 grand. I remember when I first got into business back in 91. He was a Dean Witter, prior to being acquired by Morgan Stanley. And it was a gentleman there that I became really good friends with. And so, Glenn, how does this work? It goes while you do a stock trade, you make 100 bucks, that's fantastic goes well, that's before the front takes their cut. So, you get about $40 or $35. And I said, Well, that's still my bet. He goes, Well, that's before taxes. I was like, this is going to be a long road. But
Chad Ramberg 03:31
the numbers look good and big. And they don't, when you get into it, you're like, okay, there are a lot of legitimate expenses to take care of.
Hank Multala 03:42
Well, obviously, you know, the benefits of the podcast are that, you know, it really delivers, what I enjoy is a real delivers a clearer understanding and just provides some finer details about a company that you're really not going to get from a website. Because website, you can only put so much stuff on there. So, I'm really looking forward again to sharing this message with the listeners. So, let's kind of jump right into this. Just so we're all on the same page. And and the listeners have a common reference point. Give us a brief overview of Box Professional Insurance.
Chad Ramberg 04:13
Yeah, so Box Professional is built really just for advisors. That's one thing that makes us unique at what happened. I was doing this for about five years under another insurance brokerage company, and what I found is when I was doing my daily work, I said I think we could build some really great things for the advisory industry if we focus just on advisors. And so that's why I started looking around I said OKAY, am I going to buy an insurance brokerage firm is like a build it from scratch or partner and I found this firm out of Grapevine, Texas, which is in the DFW area. 100-year-old insurance brokerage firm. They had a small RIA, I talked with them at one, you know, years ago. So, I circled back with him. And I said, hey, I'm thinking about building this for the advisory industry. And they were interested. So, we figured that everything kind of came together in a unique fashion with them both cultural fit their experience in the advisory industry, they actually reached out to me initially, because even though they had an insurance brokerage company, they're RIA, they didn't know the underwriters to connect to they were having a hard time getting what they needed. Okay, so I did an evaluation for him help make sure they had the best for their situation. So that's kind of how where Box came from it out of my experience of wanting to make sure and build it really, for the advisors. And partnering with a really old brokerage firm that that had some understanding of what it meant to be a financial advisor.
Hank Multala 05:53
Right, I know, if you go back to, you know, asking about background, you know, you know, I look at mine being well, from an education standpoint, being an engineer, and I'm very analytical and process orientated. And you've been a claims adjuster, an investment advisor, you've worked at an RIA and each experience gives one a different perspective as it relates to the work that you do. What did those experience you have? What did they teach you? And how has it been beneficial for those that you work with on liability and risk management?
Chad Ramberg 06:30
So, it's interesting, as having been an advisor, even for a short bit, I think what that gave me is remembering when I'm working with a client, when we're talking about risk and liability, it's a lot more than insurance, you know, you have all these other things, you've got to manage, you know, where's your next client coming from? How are you doing that? cash flows, how all that works together, you know, remembering the risk is just beyond is a client going to sue me? I'll get upset with me or just upset in the world in general. So that from being an advisor, I think that really helped there. Being an insurance adjuster and working on the claims side for so long. One of the big things that I learned is the way we start a claim, has potentially a massive effect on the result of resolution of that claim.
Hank Multala 07:29
No, I just lost you there for a second, that's okay.
Chad Ramberg 07:31
No, no worries. So, we got that, that knowing how we start a claim becomes really important. And so, I want to make sure when I'm working with a client, that when you get to that point, if you ever get to that point, that's when the premiums you pay really become important. So, we take a lot of effort in helping out there. But also, before that, when we're buying the policy, really dig into the analytics, because the language in the contract is going to be the roadmap for how we're treated when it comes to a claim. So, we dig in really deep with clients early on, put a lot of effort into that. And then, and then continue every year to review that. But that's really driven from my experience as an adjuster when my supervisor came in, and one time told me, he wanted me to deny a claim. And here's the contract use that language. So now I reverse engineer that when before we buy the coverage, so we make sure we're getting it right.
Hank Multala 08:33
Right. I think it's nice to you have the perspective of an advisor, especially in this industry, because you understand what they do you don't you just don't know it based on information. There's a clear understanding. I'm thinking that quite often insurance seems to be let's call it a secondary thought. As financial professionals develop and grow their practices, they just grab an insurance solution, perhaps without giving it too much thought I think I'm accurate in this assumption, correct me if I'm not, but why is this practice of let's secondary thought dangerous, to an advisor’s practice whether their sole proprietor or multi partner?
Chad Ramberg 09:20
It's helpful to kind of know what's going on behind the scenes. There's this organization out there called ISO Insurance Services Office, and what they're doing, you know, I say, a little bit of a joke, but the little bit serious, they were built so the insurance carriers could legally collude and what I mean by that is, it's actually a good thing for the insurance industry, but they put together most of the insurance contracts out there that are sold, so they write the contract, the endorsements, the exclusions, even put together a pricing list. So, then that to the insurance carriers, the insurance carriers put their name on the front page, call it a policy, sell it to you ot I. This is this is, this is how we're used to doing it. And this is why we're taught the best way to buy insurance is by this find the strongest carrier, highest limit, lowest deductible best price, make your choice and move on, absolutely true for those ISO standardized coverages. The interesting thing is the Insurance Services offices said they're not setting any standards for the financial services industry. So, some people call it the wild west of insurance. The The reason that this all comes into play for us is we see the lack of standards as being an actually a benefit, because we have a lot more levers we can push and pull. The biggest mistake, and the things that most advisory firms or individual advisors don't know, is that they'll go to a wonderful local broker really good friend of theirs or buddy that, that that's a good individual, but they don't know all the levers that they can how to match up that firm's biography with what's out there, both with the underwriters and the coverage? And how are they going to design it with when they just don't know what the options are? So, if you go most of the time, when we're going through a review with an advisory firm, and they're working with a local broker, they're either way overpaying, or they've missed some key components of coverage that they just didn't know they should have in there. And so, we're able to just dial it in not because we're, we're awesome. It's just that we focus on this every day. So, we have a great understanding of what's going on.
Hank Multala 11:52
Yeah So I was gonna ask you, you know, is it good that it's kind of the wild west, and it's not standardized, and you answered my question. So, when you say the word insurance, I know, three syllables, three syllables, but still a big word, you get an overly broad view of products and services that are available and encompasses quite a bit. What specific types of insurance do you help advisors with?
Chad Ramberg 12:16
Yeah, so we're really helping advisors with any sort of business insurance to operate that business risk they have. And you're right, insurance is huge. I get confused. A lot of times, I've had clients, you know, they have their own insurance, life health insurance brokerage firm. Right. and, and they'll say, no, we don't need any help with that. We got it covered. And I said, okay, great. What we're helping, though, with is the, the E&O the D&O the cyber, wire fraud protection, you know, if there's an ERISA bond or something like that, any business insurance risk, we, we don't get into life insurance, we don't get into, we can help with business, health insurance, and all of that, but we're not focusing most of our time there.
Hank Multala 13:04
Okay. All right. So, as I mentioned earlier, I know insurance can be a secondary thought. And that's kind of obvious with all the different types of protection available to advisors, and it gets confusing to some. So, what's mandatory requirements for insurance for advisors? And what is the most common insurance coverage that advisors need to pay attention to?
Chad Ramberg 13:30
Yeah, the good news is there's not a lot that's mandatory. There are there's a couple of states, Oregon, and Oklahoma but the real thing that most insurance brokers, or I'm sorry, most advisors need to pay attention to is their E&O or fiduciary liability insurance for clients. And the reason that's important is because one is it's the most expensive, but it's also the area where there's the most risk, So. And the reason you buy that coverage is, is most people purchase for trade error risk, but we really want to protect that potential client becoming upset and claiming any sort of fiduciary duty or breach of that. So, if you're a private fund, or you've you know, you've built an LP GP structure or mutual fund ETF or something like that, you also want to make sure and bring D&O into the mix. In addition to that, we got a lot of questions coming up around cyber. The SEC has really been putting that on the map, along with a lot of state regulators, just to make sure you have a good cyber plan doesn't necessarily mean you have to buy cyber insurance. But the good news is, is the prices have gotten way more competitive. So, we're usually want to have some sort of answer for how we're going to approach that. And right now, we're seeing a lot of wire fraud situations. It's just constant battle. Yeah, yeah, for protecting people, people doing all kinds of social engineering trying to access your client’s money.
Hank Multala 15:08
Right, right. Yeah. And I think we will continue to see that more and more. So, I know one area that everybody is familiar with is errors and emissions, or E&O insurance. And I think there's often misconceptions of E&O insurance. What does E&O do? What does it not do? And what coverage is really appropriate for, let's say, unique fiduciary risk profile of an advisor? Or for a practice?
Chad Ramberg 15:39
Well, it's a big question. The reason I say it that way is because it really depends on the advisor themselves. So, a lot of times, it's kind of a funny thing I've had people say, well, advisors are IAS are all the same things. They give financial economic advice. And they charge a fee, either hourly, or a percentage of AUM. And I said, well, I suppose it's as if you're flying in a plane, and you look down every everybody looks like ants, they all look the same. But when you when you really work closely with them, there's a lot of variances from advisor to advisor. So, when the E&O, when we're looking at that, we kind of start with two big buckets. One is the transactional type error, or what you think of as an error, or omission. And, and it's going to cover those. So, if you fat finger a trade, RMD error, anything like that, that's covered. The other one is that I mentioned the breach of fiduciary duty. Now, the good and bad of that is that breach of fiduciary duty is hard to prove. And that's a double-sided coin. So, what happens is, if you get a client that's upset, they get an attorney whispering in their ear, and they want to make your life hard or try and recover funds, even if you did nothing wrong, which most advisors have not, at least that's my experience. We need to defend and show why you met the fiduciary duty, why you did the right thing. So really, what E&O was focused on is from a client perspective, a claim coming in now, when we're working with advisors, we also want to bring some protection in from regulators. So, the SEC, or state regulators can sue you on behalf of clients, because they get concerned about something. If they're going through a regulatory investigation or an audit, and they find something they want to investigate most of the time, we want that to be able to trigger a potential claim so we can defend clients. So, it's really client focused type claims, but we want to bring in that regulatory support to
Hank Multala 18:04
So how do you determine, you know, the right coverage?
Chad Ramberg 18:09
Well, what we do is we start with a firm, firm biography. So, I've just broad view of our process is we start with a discovery call, which is 15 to 30 minutes, before that call, I jump online, I look at the ADV's publicly available information like websites and maybe LinkedIn profile items like that. And then we have a half an hour discovery call. And then what we do is we build a firm biography. So, we say these are the key components of what that firms’ services they're providing to clients, asset mix, and also client types. Those are the three key components there. And then we take, and we put together, we actually have a list of all these different insurance contracts and 50, about 52 different variations, that we see underneath that. And just to make it easier for the advisor, we're going to pull four different offers that we typically get from carriers and say, okay, one of them is what they currently have pull in three other different carriers and what they can offer. And then we're showing the advisor where those variations are, and we'll have a recommendation and say, this is what we would recommend. But the key part of this is going through that when we're doing that we call it an RIA-view kind of a goofy name RIA view, right but what the goal is when we get done is that the advisor is going to be able to say okay, now I know what I'm paying for. And I know also what the options are out there. That just like a financial planning your clients for asset management, your clients don't necessarily need to know all the reasons you made a recommendation. But it's helpful for them to understand the thought process behind it because they, you may learn something just going through that process. And that may adjust and inform that recommendation as we go. So, spending that second, it's about 45 minutes to an hour going over our findings, really, makes a better process overall for the client is what we share. They just appreciate it.
Hank Multala 20:34
Right. Well, going through the process, I think is especially important. So, looking through, industry rags and a news and you had mentioned Oklahoma and Oregon and Vermont, I believe, who have insurance requirements. And I'm positive that you heard about the news that Oklahoma, I believe it's Oklahoma's made E&O insurance a mandate. What's your thoughts on insurance mandates? Perhaps? The pros and cons of it? And do you think this is going to lead to additional mandates themselves or additional mandates by other states? What your view on that?
Chad Ramberg 21:10
Yeah, this this might sound a little bit odd, but I'm not a big fan of mandates. And the reason is, is pretty simple. But I guess maybe this is being headquartered in Texas and liking freedom and all that good stuff. But really, what it comes down to is it doesn't allow for the nuances of what may be overkill for some firms. So, for example, if you're a $25 million firm, you know, really good clean practice, maybe you don't need a million dollars in coverage. So first of all, that's kind of goofy. I like flexibility, because we want to be smart, not just throw insurance at the wall and see what sticks. And that's the thing I don't like about mandates. So right now, Oregon was the first state to require a million in coverage Oklahoma was the next one they started about in 2020, I believe is when the requirement started for Oklahoma, which is also a million in E&O coverage. And, and so that's what the requirements are. And we of course want to meet those, but we need to do it in the smartest way possible. Vermont, they require cyber insurance. So, I'm just not a huge fan, let's be smart about it, it may drive other here's my concern. The best proof it is it really helps insurance carriers, and insurance brokerages sell coverage. So, it does help me from that perspective, but it's not real healthy to buy because you're required to. Because what you're going to do most likely than not is if you go on there and Google online, you might find a really good what you think is a really good group program and not understand it's missing some key components, and it may not do what you want it to. So, you end up paying for something that's not worth what you're paying for. That I hate to see. And so, there's another con of it. So, my biggest recommendation for any advisor, if you're required to get coverage, make sure you talk with a specialist in this area, even if it's not, not us talk to somebody that does is every day.
Hank Multala 23:29
Right. Okay, so I want to change direction here a bit and look at retirement plans, specifically 401 K's and it seems recently there's been a boom, I will call of 401k lawsuits and I'm aware that JPMorgan recently did a survey and their conclusion was I think it was, you know, over 40% of company fiduciaries actually don't think they're fiduciaries. And I know ERISA defines and I'm reading this one because I'll never remember this defines a fiduciary is a person involved with a planned administration, someone with management control over investments or a person who gives investment advice regarding plan assets, So essentially, if you're responsible for some level of a 401k plan, management or oversight, you're probably a fiduciary, which simply put you have a legal obligation really to act in the best interest of the plant participants. But also, ERISA states that every plan must have at least one fiduciary which I know if it's not named, it can be the owner of the company or member of the board. How can an investment advisor you know, service help mitigate the risk to these fiduciaries, regardless of if they know or don't know their legal obligation?
Chad Ramberg 24:53
Yeah, one of one of the ways advisors can be most helpful or take on a larger legal role. For that is a 3(38) versus a 3(21). advisor. And so, it's really simple as a 338 is a higher fiduciary standard. So, the responsibility of the advisor goes up in serving the plan itself. And some advisors really, really, really can use that to dig deeper with the client and provide better service.
Hank Multala 25:28
Okay, so a 3(21), or 3(38) fiduciaries what are what are some of the considerations when, when trying to make a choice between the two and you know, if there's any words of caution or issues behind either one?
Chad Ramberg 25:43
Yeah, so most of the time advisors are 3(21), because they're not going to have discretionary authority of the assets in the plan. And what that means is, if you're going to move, let's say, from one mutual fund to another mutual fund selection within the plan, they're going to advise the client but the client, the plan, sponsor is going to sign off on the actual changing, we're going from, from this selection to that selection, as a 3(38), you're going to have discretionary, so you can, you can actually change the structure or move within an out of different with different assets in there. And so, what that means is, you have a whole set of requirements from the Department of Labor. And the biggest one is understanding what the bonding risk there is, from an insurance and risk management side, you're required to have a third party, ERISA bond. So, there's a first party ERISA bond, the plan sponsor has those are inexpensive, easy to get the third-party ERISA bonds that you're required to get only on the 3(38) plans that you advise on, we get along the 3(38) only on a 3(38). And so, what I see out there, and this isn't a huge error, but it can be an expensive one, as a lot of insurance brokers don't know, to really dig into the difference between a 3(21) and a 3(38). So, they're just going to bond all of the ERISA assets you're serving on, which is, which is potentially way more expensive than it should be. What we want to do here is make sure we're getting exactly what's needed, and really hit the nail on the head, the ERISA bonding requirement. And in part, I really see it as a little bit silly, because the way most advisors, at least if they're an RIA is set up is custodial is different than the RIA, so it'd be exceedingly difficult for, for the adviser to steal the money, which is what the bond is really protecting. But my recommendation also is if you're going to go into the ERISA space, and really focus on it being a 3(38) can be a huge value, because most advisors are going to be a 3(21). Because of the added requirements, or they just don't want the headache, you make less money as an ERISA advisor. So, I have clients that solely focus on ERISA plans, they do very well. But they're very process driven. They, they built a way to serve those clients at an extremely high level, which they still have been able to figure out a way to make it profitable. But the reason they've done that is because they that's their niche, that's what they focus on. So, if you want to get into that space, great, it can be a great niche, but you have to be ready, you're going to be paid, you know, anywhere between 15 to 40 basis points at the highest versus 1%. And so, it's you just have to build it differently.
Hank Multala 28:53
Right. Well, thanks for I know that. I appreciate your review on the 401k side and I was a little bit off on a tangent, but it was just a question I wanted to make sure I asked you. So, one thing I mentioned in the introduction was that you say the firm was built for advisors and by advisors. I know, everyone probably understands what it implies. But can you tell me what it means? From your from your viewpoint?
Chad Ramberg 29:18
Yeah, from my viewpoint is really we, we work extremely hard to serve from the perspective of our client. And I know a lot of people say that, but what it means is when we're improving our process as we go, we've built it around that mindset of a financial planner. So, our process we've even use, the discovery call, and terms that our advisors use, because we think that they should be served just as they are as fiduciaries to their clients. So, you expect, or you have to legally put your clients first You should expect that from your insurance broker. That's what we expect. That's what it means to us. So, we, you know, initially our onboarding process, we're going to spend extra time with you. But then every year, we're going to go through just like you would a financial plan with the client, you're going to at least look at it and say, are we on track? is this doing what we want it to? for insurance purposes, we might say, hey, have you grown? Do we need to think about adding limits? How are we going to, and sometimes it's a real quick at renewal, five-minute call pricings? Great, everything looks great, we're good. Sometimes it's going to take a little bit more, but we're, we want to make sure and take that time with our client to make sure we're not missing anything. Otherwise, we get to a claim situation. And if we miss something, well, that's just untenable.
Hank Multala 30:53
Right. So, I know you serve a lot of a lot of different clients and business models from SEC RIA's, a state registered RIAs, public and private funds, family offices, and other structures. So, I wanted to go through the most common and, you know, briefly review the needs and their risks. Specifically, let's look at asset managers, financial planners, fund managers, and ERISA planning. So, let's take these two at a time because I think if we tried to do all four at the time, it'd be kind of confusing. So, let's start with asset managers and financial planners. What needs and risks should these two business models be aware of?
Chad Ramberg 31:36
Yeah. So, what I want to start with is all of these business models, what they have in common is their clients, they have a fiduciary responsibility to their clients. So that's in the background. Now, the interesting thing with financial planners, I'm gonna start with them. And then we'll talk about asset managers. So, for a financial planner, and I've had a lot of financial planners say, well, what I do is so simple, and we're really dialing this in, we're not managing assets, there's extraordinarily little risk. And yes, and no, you don't have any trade air risk, though, what you do have is you have that risk of a client becomes upset, because of anything you said around that financial plan, they made a decision based off of what you recommended, they can claim fiduciary duty breach, if that did not go well for them. And so that's an overly broad, frustrating risk scenario to be in and so what we want to make sure is when we're getting coverage for financial planners, it is a lot less expensive. So that's the good news. But we still want to make sure that we get an overly broad definition of financial planners, because they are usually that CFO for that family, in a sense that if they have any financial questions, they should be bringing it to that financial planner, they're going to help guide them through that decision, we want to make sure the coverage is broad enough, we can defend them. For asset managers, in a lot of firms, they may do both financial planning and asset management. The asset managers, what really comes into play is making sure that the exclusions don't exclude assets that they're advising on. So, in other words, if they have alternative assets, and that's the that's each carrier is going to define alternative assets differently. So, we may be totally okay with a certain level of exclusion on alternative assets. But we want to really dig into that and make sure that that meets the risk of the client, or at least we know if something's going to be excluded, how much is and why it is. So, I call the Ramberg rule. Okay, just like it because it illiterates. Right, right. Sure. And it's my name, but
Hank Multala 33:57
You better copywriting it
Chad Ramberg 33:59
Yeah. Right, exactly. If I can get some traction there. But what it is, is the 95/5% rule, and that is 95% of your claims come from 5% of the assets out there. And broadly speaking, that's alternative asset classes. So, I think, you know, you got the Parrado Principle 80/20 rule, So, that' kind of the thinking behind that. Unfortunately, it's a real thing that we see in in the insurance market for advisory firms because well, in broadly speaking, what's driving claims for advisors is volatility in the market. And then on the alternative side, if there's any internal mishaps with those funds or if the client needs the funds and it's locked up or something like that, that's why we get see so many claims driven from that alternative side, which doesn't mean that If anybody's done anything wrong, in fact, like I said, they usually have it, but we still have to there's been a misunderstanding and we have to straighten it out.
Hank Multala 35:10
Right. So how about the last two? I mean, what, you know, what needs, and risk should the fund managers and those involved in an ERISA planning be aware of, I mean, outside of the 3(21)or 3(38), fiduciary information you just discussed?
Chad Ramberg 35:28
Yeah, on the private fund, if you've created, if your GP and you've created a private fund, we really need to add D&O coverage in there. So, what Directors and Officers Coverage is what D&O stands for and this is a little bit of a misnomer is if you have E&O , and you get a suit from a client, the E&O is going to cover the directors and officers for that suit from a client. So that's why most firms don't need D&O coverage because they're still covered from clients suits. Even if you're a director, officer. When you create a private fund or mutual fund, what happens is, is your client is also an owner of the fund, by definition, so they own up there. They may disagree with the decisions that the directors and officers made, and they may sue the general partner and that's why directors and officer’s coverage become important if you have a fund structure, so that's the key. A lot of a lot of insurance brokers is going to want to include D&O with across the board, we get way more nuanced it nuanced on it. But it's very clear. If you have a fund we want to consider and probably make sure want to have D&O included there. On ERISA, the one thing I did mention on the 3(38), the bond requirements that third party ERISA bond, what we dig into here is really the difference between a third party and a first party. And the first party is for example, if you're a financial advisor, you've created your own 401k fund for your employees. You're the first party in that sense. The third-party bond is when you're the advisor, the third party is that client of yours. And so, getting that bond and structuring it right is the real key. Now we're also going to, when we're looking at those we're going to look at those other coverages to cyber is one that kind of goes across the board with everyone.
Hank Multala 37:39
So, I've piled on probably a bit into my next thought. So, I'll apologize at the beginning. So, I've heard a lot about a breach of fiduciary, what does I'm sure you've been involved or assisted advisors in some of these, but what does a breach of fiduciary duty claim? What does it look like? Why is it important for advisors and I guess you probably know the process very well? But if you can probably go through the claims process a little bit with the listeners?
Chad Ramberg 38:14
Yeah. So, as we look at claims across the board, I think I mentioned that what's really driving claims in this arena, is volatility in the market. So, what will often happen is we'll get a bout of volatility I'm going to use last March as an example. So, volatility spiked, as COVID was coming in. And clients get nervous, every advisor knows this, you know, the good advisors are going to buddy up to their clients, make sure they communicate with them, even that much better. Now, if something falls through the cracks, or the client, so upset, somebody who's whispering in their ear, they may say, hey, I'm down money, because my account is smaller. And I want to try and recover those funds. And if there's any sort of minor error, however minor, they could use that as justification of saying, well, maybe the advisor didn't do the right thing by me. Maybe they didn't. They didn't put my needs first. Well, that's, that's breach of fiduciary duty. And so, then what's going to happen is, they may get hold of an attorney, or they may call you up first and say, I'm really upset. I want you to make me whole here. And as the advisor, you might say, well, this is something that's beyond our control. We didn't know it was coming, you know, and talk through that. So, let's say for example, in that situation, if they're a client of ours, right, tell us all of our clients, if anything's keeping you up at night before it's a written complaint. But if it's keeping you up at night, give me a call. Let's talk about it. Because with some of our policies, most of our policies in fact, we have what's called an investigation clause where the carrier can pay typically up to $10,000, to hire a security attorney to help resolve that situation before it turns into a claim. That's really where we like to get involved really early on. Now, the most interesting thing about that is that's pre deductible so that the clients not paying any additional money out of their pocket, but they're getting that support. And the carrier's happy to do it because they know the average claim is going to cost them between three and $600,000 to resolve. So, they can do math, they say, well, we can pay a lot of $10,000 chunks to claim save a claim here or there. And that works out good for them. Now, for the advisor. For me, I like it, because it's, you know, it's pre deductible, it doesn't cost the client anything, the advisors like it, though, because when we use it effectively, we keep their ADV clean. And of course, that's it's hard to recover from even. Yeah, we just don't want we want to keep your ADV clean. That's really what it comes down to. So those, what, then what happens is I'm helping coach the client as we go through that claims process. And I don't have any power in making those decisions. But just by knowing and understanding what's happening and helping the client understand that we can navigate that process so much more effectively, we just tend to get better results and because sometimes the way we communicate with the underwriter is gonna help get us there faster, or slower. And of course, faster usually means we can get through it quicker, let's not burden the client, on the carrier and everything else. So that's how we get to a win as best as possible. Because the claims that I see out there, it's just misunderstandings. So, we got to get everybody on the same page. Once we get there, the client may not be happy, but at least the client is going to understand that look. The advisor did give the right recommendation. And it was the best thing to do for the client at the time when that decision is made. And then we have to adjust as life goes on. If anything, 2020 taught us that.
Hank Multala 42:22
Now I'm sure you probably saw a lot in March last year, did you probably see more claims in a month, and you've seen the past two years before?
Chad Ramberg 42:33
Yeah, it was pretty wild. So, it was a little bit of a shocker in March of 2020. I had early on in the month we had 5 claims pop right up, which doesn't sound like a lot. The problem is because there are so expensive typically to resolve we wanted to get right on there and get those fixed. In contrast with that, about 18 to 24 months prior to that I maybe had three or four claims come up. So, and then there were other claims, I'm dealing with a claim right now, that really the advisor did the right thing. But what happened with all that volatility through 2020, they put some options on to make sure they could lock in their gains midway through the year. And then as we kept going through the year, the market was coming back up. And so, the advisor was having conversations with his client. And the decision was made to Hey, with the election, and we just don't know what's going to happen. It's not let's keep that protection on there. And so that was a decision made. But then when they got to the end of the year, the client said, Wait, the markets way up. Why didn't you make money?
Hank Multala 43:49
Because I don't have a crystal ball. That's why. That's one of the reasons.
Chad Ramberg 43:53
Yeah, advisors know, you know, just from that explanation of the story, they know, that's, that's, that's a frustrating situation for a client to come back and tell you that when they were with you and made the decision. specifically, to avoid that risk. Not really recognizing what it is, but we Okay, so we're gonna pay to go back explain why it was prudent, fiduciary, and appropriate at the time.
Hank Multala 44:23
Right, Yeah, I know, you know, when I was in advisor, it was quite often the rule and an understanding or maybe kind of an inside belief that when the markets did really well, the clients were happy, and they would pat themselves on the back. And when things got really screwed up or things got very volatile, they they'd obviously love to point the finger at the at the financial advisor or whoever was helping them manage their assets. So, it seems like pricing for insurance can be all over the place. What makes the market you know, the professional liability side such a crazy market as it relates to cost?
Chad Ramberg 45:06
Yeah, so it can be all over the place. And this is a frustrating thing for many clients. So, we always have to ask the question, if it's offered really low, why is that pricing low? And just make sure we understand why? Because unfortunately, what's happening is, there's some large insurance brokers out there that take advantage of the lack of understanding of what's going on in the market. In other words, what they'll do is, and I have a client, I just helped, he went from a group plan, he was paying a couple $1,000 a year in coverage. And he said, I'm getting a great deal. And I said, yes, you are. But when we looked through it, what we found was in there was an exclusion that says, if he owned anything that was the same or similar as to what the client owns in the event of a claim, they can exclude the claim, which was a little absurd, because this particular like most advisors, they eat their own cooking, they had an asset mix that was very similar, if not the same as what their clients had. So, what we ended up doing was, we needed to switch that over to another carrier that said, look, if they owned 5%, or more of the market capitalization of the stock, then that could be excluded, which was completely fine with that I haven't had an advisor own that much of a publicly traded asset yet. So, it's things like that in the pricing, where we just really want to be careful, we know what we're talking about there. The other side of that coin is I've had clients where they get a really good strong carrier. broad terms is really good, but they're still paying 30% more than they should be just because they didn't, that the broker didn't go to the right carriers or have the right conversation with the correct underwriters to really explain how that risk can be focused in more appropriately and get the pricing a lot better. What happens that here's, here's another little trick or tip of what's going on behind the scenes, most carriers grew up in that asset management world. What I mean by that is the carrier was selling E&O and D&O to advisors who are managing assets, that risk looks one way, there's a few carriers out there that grew up more in the financial planning world, that risk is a lot different. Now today, we have most firms as they grow and develop, they do both financial planning and asset management where a certain degree of either, so those carriers that understand what that means when your process starts, you may not do a full, you know, 60 page book financial plan, but when you start with that perspective of financial planning and fill the buckets with the appropriate assets, from there, you get a much cleaner risk profile. And so, we're able to get much better terms than going to one of these carriers out there that does not understand that financial planning risk perspective.
Hank Multala 48:26
Okay, I know we've discussed a lot today and you know, a lot of content so and I wanted to leave this question for you towards the end. So, what makes Box Professional Insurance so unique? And how are you serving those better than others that are in the industry presently?
Chad Ramberg 48:48
Well, one thing that makes us so unique is I have a CRD number, sounds a little silly. But what that means is you can actually look me up on IADB just like I look up my clients now you're gonna see on there that I'm no longer practicing advisor. But, what that does is that just as this kind of proofs in the pudding, I think every single insurance broker, at least if they're, if they're selling the coverage, they should have to take their 65 because then they're really they're going to be verified that they know what to fiduciary duty for an advisor means and, and so that's one key area. Now, the part that's not directly seen is internally we have a Kaizen process, it's lean process improvement. We work every day at what we're doing and saying, okay, from the client’s perspective, how can we get better at providing that value to clients and what that you won't see that on every day, clients probably won't see how that affects the service that they're getting. But over time, what we're seeing is those improvements just provide better and better value for our clients. And that's why we do that. I think, over time, what clients have told me is they like the improvements that we're making, because we're making their life easier. We're more aligned with what our clients need and want. And that's absolutely the goal.
Hank Multala 50:21
Chad Ramberg 50:22
So most even that, sorry, to interrupt, but most of your insurance, so in the market, there's only about a half a dozen, or well, there's only about a dozen or so carriers that are really good at providing this coverage. And then when you're looking nationally, at the insurance brokers who really specialize in this for RIA's, there's only maybe half a dozen or so. And then when you dig into that, there's really only a couple of insurance brokers that have a really good process of explaining the coverage. Most insurance brokers just say, hey, this is the best I could find buy it. Only a couple of us actually look under the hood with the client to make sure it's doing what we want to. And then we're the only ones that only focus on advisory firms. We don't have any distractions of manufacturing, or restaurants or anything like that. We're just focused on serving our advisors.
Hank Multala 51:22
So, I wanted to finish our discussion on what I think I asked this question from everybody on the podcasts so far. And it seems that there's been a never-ending consolidation in our industry through M&A, and RIA consolidators. I know we don't have a crystal ball, but what do you see happening in the next, say, five to 10 years? And how will it further necessitate the need for our RIAs to utilize the services that Box Professional Insurance provides?
Chad Ramberg 51:56
Yeah, crystal ball. I have crystal ball questions, I asked my clients, and if they don't, they don't love it. And I understand why but I think the opinion that my opinion here might be helpful. So, what we're seeing right now is we're seeing a lot of what's the opposite of, of consolidation? Well, what it is, is it's a lot of advisors breaking away from larger organizations either and a larger RIA or a wire house, or something like that. And, and the reasons for it are vast, but we are seeing a lot of advisors becoming independent. And that's a huge, important time for them to talk to someone like us, because we're going to help make sure and dial that in right from the beginning. And some will do it because they actually their plan is for the next five to 10 years, go independent, build their book up and make it look a certain way so that they it's their exit plan that they can sell the book beyond that. And I've been told that many times from advisors, so what I think we're gonna see is over the next five years, an increased number of breakaway firms, with those that are anywhere from 50 million to 500 million is kind of that range of size of teams that tend to break away. And then we're going to start to see consolidation after that where I think the RIA channel is getting bigger and stronger. So, we're seeing it kind of break up and then it's going to consolidate again, that's more of a natural business cycle that we're going to see. But it looks a little goofy, from the sense of how that transition is going from the broker dealer to the RIA market. Now fortunately, there's a lot of big players out there, they're trying and starting to catch on and understand how there is this natural migration to the RIA channel. And so, more and more tools are getting built to make it easier and better for the advisors when they choose to go that route.
Hank Multala 54:08
Right, I think you know, with the continued interest in a growth in the breakaway side of our business, you know, this ebb and flow a little bit. I would not imagine why anyone would try to go this alone without a true partner like your firm just to really help them steer down the most efficient path to risk and liability management. Well, Chad, I wanted to thank you again for your time today, I hope was still an honor. You know, for those of you who are interested in learning more about Box Professional Insurance, you can visit them at boxproinsurance.com you'll find an overview of the areas where they practice and how they better serve the RIA industry. We've also included a link on our Outside Resources page directly to Box Professional Insurance at adviserfirstpartners.com Please don't forget to subscribe to our podcast, A Chat with Hank on Stitcher, Google podcasts, Spotify, or wherever you may listen to your programs. Chad, thanks once again for sharing your time with us your overview your thoughts, and really your insights regarding protection and risk management.
Chad Ramberg 55:20
Thank you, Hank, so much it is really an honor and a pleasure. You know, what, what is great is and I just want to say thank you for helping get the word out there that there is an ecosystem to help support advisors as they build, develop, and grow. You know, it's, it's one of the exciting fun things that we get to do is just help serve and support that, you know, if it's their compliance team, if it's their custodial team, whoever it is, you know, we're all here to help your advisor, the folks that are probably listening to this podcast to do better and you're helping get the word out to make it stronger ecosystem. So, thank you.
Hank Multala 56:02
Oh, you're welcome. My pleasure. Take care.