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This is the Transition To RIA Vendor Profile Series where we take a look at the solution providers powering the RIA model. On this episode:
Vendor name:
Windermere Insurance
Vendor category:
Errors & Omissions (E&O)
Episode host:
Brad Wales
Episode guest:
Scott Shannon
Vendor contact info:
Full Transcript:
Brad Wales – Hi, I’m Brad Wales with Transition To RIA, and this is the Transition To RIA Vendor Profile Series where we take a look at the solution providers powering the RIA model. On today’s episode, we’re answering the question “What is Windermere Insurance?” To help us with that is Scott Shannon from Windermere. Scott, thanks for coming on.
Scott Shannon – Hi Brad, thanks for having me.
Brad – I’ve known Scott for several years, so I look forward to this episode. We’ve done, and we’ll put it in the show notes, an episode with Scott on my Q&A series. So Scott, thanks for coming back and helping out with this series as well. Let’s jump right in and could you give us the proverbial 30-second elevator pitch of “What is Windermere?”.
Scott – Yes, certainly. Thank you, Brad. Windermere Insurance is a full-service insurance brokerage located in Charlotte, North Carolina. We have capabilities in commercial insurance, high net worth personal lines insurance, as well as benefits and the team that I manage that is specialized in RIAs.
We’ve been doing this for over 10 years now, just trying to help RIAs on their insurance side, breakaway RIAs especially, but also existing RIAs. I think it’s a specialized business and the RIA needs are specialized so we’ve been focused there for a number of years and have had good success.
Brad – Windermere comes up in conversations I’m having with advisors, I’m talking about their need for E&O insurance, right? Errors and omissions insurance, and that’s what we did our other episode on. And so often they’ll say, oh, you need E&O, you need an E&O provider, and certainly that’s a big part of what you provide.
Maybe you could clarify it too, as E&O doesn’t do it justice, because I know there’s cyber and other types of insurance that folks that are moving into this space should consider. Could you give us a kind of a quick list of what those are that are typical in your conversations.
Scott – Yes, certainly. E&O is kind of the anchor coverage especially now that pretty much all the custodians require E&O insurance. So that’s kind of the anchor coverage for somebody looking to break away and set up. Cyber is another one that I’d say 90 plus percent of our clients would carry. That coverage is not required by anybody, but if you click on a bad link or bad attachment and bad guys get in, it can help cover all those costs associated with that. So that’s a really key coverage.
Those two are the primary ones, but also as a new business, you might need commercial general liability insurance like slip and fall. If you have an office space and your landlord requires the slip and fall as part of your lease, that’s a typical coverage.
Then depending on the state and how many people you have on your team, you might need workers comp. That’s at the state level and there are different kinds of criteria for that but that’s one that you may have to have simply by state requirements. And that’s kind of the four key coverages for a breakaway situation.
But there are other coverages as well depending on the size of the firm and the risk tolerance that include directors and officers coverage, employment practices liability. You may need an ERISA bond if you’re 401k or profit sharing and kind of an ERISA business where you have discretion. ERISA has a bonding requirement so that may be a requirement that you have to go forward with. In other words a fidelity bond.
This is interesting because this is like if you got tricked into sending money to the wrong place, it’s sometimes called social engineering, fraudulent instruction, things of that nature. The custodians require that typically, but the E&O carriers only provide a small amount, typically up to $250,000.
So if you wanted to have more than that, and we definitely have clients that want more than that, they actually kind of view that as their biggest risk, you can get a separate dedicated policy called a fidelity bond that can help you with those risks as well. So that’s probably the broad list of coverages that an RIA might consider.
Brad – And I think the key, which Scott pointed out there, is you’re kind of baseline. For those that are not aware, Scott briefly alluded to it, most major custodians nowadays, and this is only new in the last couple years, do have minimum coverage levels amounts. I think it’s primarily E&O and cyber that have minimum coverage level amounts.
And so one, Scott can help you know based on whatever your chosen custodian is, here’s the minimum they will require. But just because that’s the minimum they require doesn’t necessarily mean it’s sufficient for your profile or your risk profile.
I know, and Scott shared it with me multiple times over the years, that what he can help with is to help you look at the size of your practice and the profile and just understand what’s typical with other practices out there. So Scott, I know you help with that quite a bit as well. I don’t know if there’s anything you want to just add to that as far as just because you met the minimum doesn’t mean you might not want to consider some other options.
Scott – Yeah, I think that’s a good point. We do include some benchmarking in our materials that has a range of coverages that we’ve observed. We don’t think there’s a right or wrong answer to how much coverage, other than you’ve got to be at the minimums that the custodians now require.
But outside of that, we really do see a broad range. People that have had history with the claims in the past see the value of the coverage more and might tend to buy more coverage. It’s really a trade off between budget and how well you want to sleep at night.
But we see a really broad range. We saw multi-billion dollar firms that did not carry until they were required to by one of the custodians three or four years ago. And we have firms that are a couple hundred million dollars and might carry two or three million. So it really runs a very, very broad range.
But we’ve got some kind of benchmarking that can get that. We get asked that question a lot. “How much should we carry?” And there’s not a scientific way, but we have some benchmarking typically against AUM and concentrations and some other criteria that at least is somewhat of a starting point that can help you size up versus what your peers may be doing.
Brad – Yeah, I think that’s very helpful for advisors and teams to have something to sort of benchmark against. You’ve kind of answered this in a way, but I’ll throw it out there again, are there any specific things you want to add about how you compare to other providers out in this space?
There’s kind of two buckets I’d put in that I come across. I talk to advisors and teams that sometimes say, “I already know an insurance person.” or “I’ve got a local insurance person.” and that might be for property casualty or that sort of thing. So I often say, well, that’s great. They might be wonderful at that, but do they have the expertise for what the regulators or custodians or whatnot might expect, let alone benchmark against?
And so one, I assume you’ll agree with that statement that you’re better off having that expertise, but then there are other providers out there that are industry specific as well. So any additional thoughts of how Windermere is different from some of these other options out there?
Scott – Yes, that’s a good question. I think that the main point that we would make is that being specialized is critically important because the RIA business is very different than a restaurant, of course, or even other financial services businesses. Having somebody that kind of lives and breathes that all day, every day really matters.
We’re not the only ones that are out there doing it and the other people do a good job as well. I think everybody that’s specialized in it can talk your language, especially if you’re in a kind of breakaway situation and you’ve got a long, long list of things that you need to do.
Insurance is not at the top of the list. It’s important. It’s on the list, but it’s something that can be done quickly and efficiently if you’re dealing with somebody that does this all day, every day. Everybody that knows somebody in the insurance business, be it a brother-in-law, a neighbor, whatever it is, who is more likely do property insurance, restaurants or real estate developments or whatnot. They’re probably not doing this in cyber for RIAs.
Yes, we have lots of questions where we might do the cyber, the professional kind of coverages, whereas the more standardized coverages can be done by the local person. It’s good to have that relationship and they might be a client, might be a friend or somebody. That’s fine, but I can’t tell you how many times we have reviewed policies that have been put in place by non-specialized brokers and they’re missing trade error coverage. I’ve seen this on multi-billion dollar RIAs.
You’d be surprised that it is worthy of specialization and it does matter and it can ultimately determine if claims are covered or not. So I think the main thing is just being specialized in the space. We think we do a good job and we think we’re very high-service oriented. But again there are other people out there that do this.
The main point we make is with us, you’ll deal with somebody that does this all day, every day. It’ll make your life a whole lot easier, especially at a time when you have a lot of demands going on as you’re juggling a whole lot of things as Brad well knows and can help you with. It’s setting up that business and this should be a quick and efficient and easy part of it and I think that’s because you’re talking to somebody that does this all day, every day.
Brad – I’d like to point out that having missing coverages works 100% fine, no problem, right up until it doesn’t, right? So you might luck out. You might go your whole career and never have that trade error or the cyber issue, and you save some money, whether you knew it or not, because you didn’t know you even had the missed coverage.
Some people will luck out and it would never be an issue, but the whole point of insurance is to protect yourself so if it does become an issue, the time to find out you’re missing coverage is not after the event has happened. Obviously, it’s too late at that point.
So I think a very important part of this is where you can add value. But you can’t necessarily help everyone, right? And I don’t know how you define the minimum client size or whatnot or what the right profile is. Where does a team or advisor need to be, and how do you measure that? Is that based on revenue, based on assets, or whatnot that it’s going to be a good possible fit with Windermere?
Scott – Usually, we’re dealing with clients that are typically SEC registered. Our clients range from around the size of 100 million to multi-billion, 10, 15 billion or so. But the breakaways by definition, we don’t really typically see them less than 100 million. And you can probably answer that by the efficiencies or the size that you need to get to where a breakaway really makes sense.
AUM is kind of how we typically measure it. The revenue, probably less so. The underwriting that the carriers do starts with AUM and that’s probably the most important, but as long as you have enough size where they need the cyber and especially in a breakaway context. We love working on those because we love the fact that somebody’s taking the risk to leave the mothership and set up the new business. We’re always happy to work on any of those types of situations.
Brad – And with those variables, some go into the price you alluded to. At a high level, if you could just help folks understand, if they come to you and you’re pricing this out, you don’t get to just pick whatever price you want, you go into the underlying insurance carriers and whatnot. What are the main variables that go into that? So obviously, AUM is one, but what else do people expect to drive the price that ultimately you might be able to help them with?
Scott -Yes, the primary under rating criteria is AUM, then it would be percent of alternatives in the portfolio because some carriers don’t want to have any alternatives, some are filing up to 20%. That’s a big one. A clean regulatory record is important. So are the U4s clean or at least clean recently, say, the last five years.
We have lots of introductory calls with people that are thinking about breaking away; we can do that very early in the process and we’ll just have a couple of quick conversations. Those are really the three to four questions that I will ask. If you’re clean on all those, then there could be something else in the application that might impact premiums or terms otherwise, but those are the three big ones. If you get through those, then as long as there’s nothing else that’s unusual or unexpected.
These applications have become much more streamlined over the years, which is great. The ones we’re using now are basically a page and a half. And even with the breakaways where you don’t yet have a full-on ADV with history, which is what existing RIAs have benefit of, the carriers are scraping information off the ADVs, can get that publicly and therefore the applications can be a lot more streamlined.
You don’t quite have that with a breakaway, but even still the applications are much more streamlined now. So you really want to get to know what’s the AUM, what’s the investment strategy.
What’s the performance can be another question and are you clean on a regulatory side? Are you doing services like bill pay, tax prep, trustee? Some RIAs do that on a limited basis and most carriers are okay with that as long as it’s disclosed and contemplated up front and that’s in the application as well. Those are really the primary variables.
If you’re doing a whole bunch of alternatives, that doesn’t mean you can’t get coverage. You just have a smaller universe of carriers that might be willing to do that and they probably would charge a little bit more because historically there have been more claims with alternative assets then there have been with just straight ETF, index funds, things of that nature.
So we try to flush those things out on the first conversation in a breakaway context. We may not even get an application at that point, but we’re asking those questions and then helping somebody understand the timing, the process, what the cost might be. Then we’ll get the application done closer to the actual break date. But those are kind of the primary variables.
Brad – With respect to breakaways, most of my audience are not already an RIA. They’re looking to transition into the model. So obviously you can help those folks through the education and consider all the options like we talked about.
But for folks that already have an RIA that might be watching this, that are using that local person or are using a solution provider that for whatever the reasons is no longer a good fit for them and they want to perhaps come and use Windermere instead, how does that work?
Is that where you try to line up when does their existing policy reach its expiration so you peg it right to that date going forward or what? What can you do for existing RIAs that already have something but it’s possibly not as good, or they just prefer to work with someone like you that may have more knowledge? What does that look like?
Scott – Yes, certainly we very much do those types of situations. And those are ones actually that we will try to go out and find. You go to the SEC database, they’ve got all the clients there, the RIAs that are there, so we can do some pre-screening that way. So we’re very interested in that business as well as the breakaway business.
Typically if we have a conversation with somebody who’s either found us or we found them, then we usually look at the policy. That’s the starting point, and we don’t charge anything to do that. We’ll look at it.
A lot of times we get the calls right ahead of the renewal, 30 or 60 days out, because they’re thinking about it at that point in time. But if we happen to have one that’s six months away, we’ll still say, hey, let us look at the policy. We’ll give you some feedback.
It’s typically like most policies you look at and say, well, there’s definitely some things that could be improved upon, some structural things, some cost things. But I think you’re fine. There’s nothing earth shattering. Let’s circle back up a couple of months before the renewal, unless they’re really unhappy with their broker and they just want to make a change. We can do that at any point in time as well. But typically, it’s review it.
Sometimes you might see a real big problem like that situation I alluded to earlier where we’ve seen missing trade error coverage. You’ve got to fix that immediately even if you renewed your policy two or three months ago. But a lot of it really is just trying to read the full policy.
We’re familiar with every single policy that’s out there. Again, we’re a broker. We represent all the carriers. We’re not affiliated with anyone. We just work with all of them and try to find the best fit for the client.
So we know the policy forms, but we also know to look in these policies for endorsements that really do matter and you have to look through all that. So we’ll go through and do a robust analysis on the coverage, come back, give them the feedback. This is either there is a real problematic need to fix now, or we’ll do it when you are closer to renewal and then we’ll go out and do a broader marketing, talk to other carriers, and try to just really close any major gaps that might exist.
Talking to somebody who’s not working with an experienced broker in this space, then the policy might not have been marketed very much or it might’ve been something that’s been on the shelf for a long time. And this market does change in terms of cost, in terms of terms that the carriers are willing to offer. So sometimes you’ll find that it’s been the same carrier for 10 years and it hadn’t been marketed and it’s kind of expensive and they’re missing this coverage, they’re missing that coverage.
That may just be because the broker just really isn’t as knowledgeable or isn’t as focused on it as somebody that otherwise is in this space would do. We don’t see nearly as many problems with policies that are written if the broker is somebody that’s got experience in this space.
Brad – And I think where we’re gonna see that is when we open the industry news and there’s just announcement after announcement of alternative investments, they’re going to be put into this user model or this firm has signed a deal with this firm to distribute the alts and so forth. And I think we’re going to see more and more of that. I’m not here to judge whether that’s a good thing or not, but I think we’re gonna see more and more of it.
And back to your original point that if you’ve had an existing policy that’s just been sitting on the shelf for 10 years and you’re maybe blindly renewing it but your practice has evolved, maybe you weren’t using alts back then but you are now, you want to make sure you’re still covered based on the profile of your practice sufficiently.
Scott – So in the market right now there’s actually a lot of capacity out there. The pricing is pretty good. The terms are getting better. It kind of goes in cycles. A lot of people assume that this insurance is going to have gone up in price lately because their homeowner insurance, the auto insurance, or the commercial property insurance has gone up.
But this market is in really good shape. And so if you have it sitting on the shelf for a while, not only are you probably not getting the benefit of them adding crypto coverage now when they wouldn’t have before, for example, you might also be leaving money on the table because it’s likely your premium has gone down. If you haven’t marketed in four or five years, it’s very possible, depending on what else has happened with your business, if it’s grown a lot, then that’s going to probably increase costs up to a point.
It’s not only a cost issue, but it’s also, very much to your point, a structural issue and you want to get the benefit of what’s going on in the market, especially now. The market’s not always as good as it has been the last couple of years.
If you have a whole lot of claims like you did after the financial crisis then things tighten down; it just kind of goes in cycles. But now is a really good time. One of our big messages to existing RIAs is if it’s been on the shelf for a while now it’s a great time to take a look at it because you probably can save some money and you probably can get better terms as well.
Brad – And that just comes back to that industry-specific expertise to know that this is the trend you’re seeing out there because this is what you focus on. So I think that just further reverberates that message for sure. Back to the breakaway folks, for someone that because they’re talking to me or they’re talking to a custodian and understands, okay, I need E&O and again there’s more to it than just E&O, but we’ll use that phrase.
If perhaps they are watching this video and they say “I’d like to talk to Scott.” and they reach out, what does that first conversation look like? Again, if this is probably early, I am working through the steps to start my own RIA. I understand I need and should want E&O. Hey Scott, how’s this process play out? What does that first call typically look like?
Scott – That first call typically, but not always as typically, I’d say is anywhere from 90 to 120 days before a break. It can be 180 days or so. And of course it can be a lot closer. But most of them, we typically say, let’s start our process no sooner than 60 days out because the carriers don’t really focus on something that’s farther away than that. They only hold quotes for 30 days. We can get the applications done and just put them on the shelf and not do anything about it.
We really kind of say let’s get started 60 days or so out knowing we have a lot of cushion because our process takes about a week truly to get quotes, to compare them, to analyze them, to put them in our format and have the conversation.
So it’s not a lengthy process but we say let’s start at 60 days because we know that the breakaway folks have a ton of other things that they’re doing so sometimes they want to get it out of the way early, other times it goes down to the wire.
But the first conversation is usually far enough in advance that it’s not, I need an application filled out tomorrow so we can go get quotes. It’s like ask those three or four questions, tell me about your business, the things we talked about earlier, and then that’s helpful. Then we’ll say, okay, well, based on that and your AUM, the cost will probably be roughly, for your budgeting purposes, let’s use this for cost, because if you wanted $1 million in coverage, it might cost this amount. If you want $2 million, it’ll cost 60% more than that.
And we tell them about our process, ask those questions, tell them when we’ll send the applications back. They might have some familiarity with insurance, or they might have none at all. And so it’s a little bit of just educating them on the process, the timing, the logistics. Do I have to pay before we put this in place or do I get payment options or how does that all work?
So it’s typically just more an educational conversation if it’s outside that 60-day period. If it’s inside of that, then we can go ahead and get the application going. It’s all in a portal. It’s all electronic. It’s very streamlined. It’s very easy.
It’s just kind of explaining to them that again insurance is not the most important thing by far on their list but it’s on the list, they’ve got to do it, so it’s just trying to explain to them what the process is, what the timing is, what the considerations are, and just kind of get the ball rolling.
Brad – And so you can’t put a pen to paper weeks in advance, let alone maybe too much or you’re really getting into the weeds. But is it fair to say if, and this is typical and I’m sure you’ve dealt with this, I help some advisors and teams that literally it’s a multi-year exploration process, transition process, that sort of thing. And that’s fine. And often early on because they’ve never paid for E&O directly – now they’re paying for it, right? It’s just baked into their payout perhaps indirectly.
And so they’re trying to build, start this kind of discovery process like a P&L that’s…“Hey, if I were to pivot, what’s this all gonna cost me?” And related coverage is just one piece of the pie.
So if someone wants to talk to you a year in advance, I assume you’re able to at least give some general feedback albeit you got a Caveat that you can’t predict the future of what things would be like a year from now. Is it fair to assume you can at least give some general guidance, give a general range of where some of these numbers might land based on today’s situation?
Scott – Yes, absolutely.
If we get some of those high-level questions answered that we talked about earlier in terms of any regulatory dings or alternatives or whatnot, and most people kind of fall in that category pretty easily, then we can, to your point about how markets could change a year from now or something like that, the real benefit of that early conversation is really to help them with the budget. If it came from a custodian or you or whoever it comes from that has an idea of what it is, you’re probably helping them with their budget or whatnot.
We can kind of sharpen that pencil a little bit. Even without an application, we can just kind of talk about what we think it’s going to be, the different coverages, and that’s mostly what they’re interested in. Okay, what’s the number? And some will ask about, tell me a scenario that you know would cover this, tell me your most recent claim situation. We kind of walk through that so it can be a little bit more tangible, but a lot of it really just is, what’s it going to cost? How long does it take to do the application? When do I need to do it?
So yes, if they’re a year out or they’re 90 days out or anywhere in between, we can have that conversation. And then we follow up in our CRM, we will hit them back at a certain time. So we’ll come back to you to confirm timing, talk about cost again, if anything has changed, or if we’re still kind of in that same ballpark.
But I think that’s the value. Some candidly have seen our earlier videos. Some go, “I saw you and Brad talking and you said 60 days.” and so I didn’t hear on 30 days out. We actually had one of those, like a week or two ago. And so that’s really easy. We got the application done that day and we got it out to carriers; we’ll get quotes in a couple days. So it really could run any kind of range.
I think that the real value is to do it early so they’ve got some comfort from this as it’s something that’s on their checklist, they gotta get it done. They’ve made a connection with somebody that’s given them some confirmation of what costs are, what timing is, and then get onto their next item and then circle back around to us shortly before they’re getting ready to break and we’ll just get it knocked out.
Brad – That’s kind of one of the reasons I wanted to make this new series. It is a little bit of an icebreaker. So I’m glad to hear you say you’ve had folks that have already seen our prior episode on the Q&A series and then by the time they’re talking to you, this is not a brand-new thing. They know what you look like, sound like, your style.
So I hope people find value in this series for those reasons as well. So that dovetails into my final question, for folks that would like to go beyond just watching this and actually talk to Scott and have this conversation, what’s the best way to get a hold of you and Windermere?
Scott – Give me a call, an email. We’ve got the website, all the contact information is on the website. So just reach out and we’re very responsive. If somebody’s reaching out and checking in, we love those kind of situations. So just get in touch with us and we’ll have a conversation early in the process, answer questions more in the educational context. So we’d be happy to have that dialogue as early as possible in the process.
Brad – I’ll make sure the website and contact info is in the show notes. For those following along, you’ll be able to click on that. And as you can tell, Scott’s a great educational resource. I think he’s very open to start early. Having that long educational talk, this is not just, hey, let me sell you something. This is a journey. And at the end of the day, it’s something that you’re gonna need anyways. And so Scott, I’ve always appreciated your consultative approach on that front.
I appreciate you coming on to help us out here and dig more into Windermere Insurance.
Scott – Well, thank you, Brad. I’ve always enjoyed our conversation. If we can help in any way, shape, or form, certainly reach out to us.
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