2 Agency valuations: Because an agency's trust position affects its value, correctly analyzing and addressing the trust ratio is critical to proper agency valuations. The lack of such analysis could totally disqualify the appraiser if his or her appraisal is contested in court. It is that important. 3 Agency cluster agreements: Trust money is frequently left out because many attorneys do not understand that trust money is a joint and several liability. The carrier could care less which cluster member is not paying its premiums. From the carrier's point of view, the contract is with the cluster and it want its money. A well-written cluster agreement addresses the importance of all members staying in trust because an out-of-trust cluster member could damage the entire cluster. 4 Financial reviews: Several firms offer financial benchmarking data to CPAs for industries including independent agencies. Some CPAs use this data as a "value-added" service to clients. But many of these services do not include the trust ratio as financial benchmark. Profitability and productivity are meaningless if the agency achieves its numbers by spending money that belongs to others. Bernie Madoff was a rich man because he spent money that did not belong to him. Other CPAs conduct standard financial reviews without relying on such benchmarks. Unfortunately, accounting standards do not specifically require a balance sheet test if a firm is spending money it should be holding in trust for others, so most CPAs do not test the trust ratio. If your agency's trust ratio is not part of your CPA's analysis, then you may have to provide him or her with information on this important ratio. If your CPA is unwilling to listen, then it's time find a different CPA. Along these lines, I believe an accounting standard that requires a balance sheet for testing if all firms are correctly holding enough money in their fiduciary accounts would be a remarkable improvement for our economy. 5 Shareholder distributions: If your accountant advises the shareholders to "clean out" the cash at year-end without regard for the trust ratio, your accountant does not have a clue about proper insurance agency financial management. The reality is this: It is illegal to make distributions if the result is the agency's trust ratio decreases below 1.0. If the trust ratio dips below this minimum, it means the accountant has effectively advised the shareholders to take money that does not belong to them. This issues also applies to the shareholder agreement because it should address whether or not distributions can be made (hopefully not) if the agency is out of trust.

Special Reports /

Trust is important in more ways than one

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