Engagement Letters to Help Run Your Practice Well
The Independent Consultant
Engagement Letters to Help Run Your Practice Well
Anna Rappaport and Lauren Bloom
An important part of a successful consulting practice is having a clear understanding between the consultant and client about what is expected by both parties. Often, using an engagement letter is an excellent way to document that understanding. This article will provide some information about what might be included in an engagement letter and suggestions on how to negotiate them with your clients.
The Code of Professional Conduct (Code) sets forth requirements with regard to Actuarial Services performed by an actuary and governs the relationship between the Actuary and Principal (the client or employer). The core of a typical engagement letter is a clear definition of what it is that the actuary plans to do for the client, how the compensation will be determined and what the responsibilities of each party are. The description of the scope of the engagement is important so that both parties are clear on what they have agreed on. The Code sets forth some guidance as to how the actuary shall conduct the assignment. While the guidance in the Code need not be repeated here, the actuary should comply with the Code whenever the actuary provides professional services to a client.
Compensation and scope are usually related. Compensation may use an hourly rate, a retainer, a fixed fee for a specific project or some other basis. Where the compensation is based on a retainer basis or a fixed fee, it is normally very important to state in the letter what is included in that fixed fee, so that the client will understand exactly what the actuary will and will not do. It's also a good idea to specify any additional fees that will be associated with the engagement, for example, reimbursement of travel expenses, copying costs or the cost of outside peer review.
In addition to the type of work and additional fees involved, the actuary might wish to include items such as how many drafts of the work will be provided within the fixed fee or retainer for review and comments. Anna usually provides for one or two drafts with revisions when writing something that the client will give input to, and then makes additional drafts available for an added charge. This can be particularly important if you are working on something that may get public distribution, especially if the client tends to provide many comments. In some cases clients give multiple comments, sometimes asking first to include material and then asking later why it was there. Providing drafts with tracked, dated changes identified by their author can help manage the editing process. The actuary also may want to specify how many meetings (either in person or by conference call) are included for the fee provided, so that additional meetings beyond those anticipated when the project began would then involve an added charge.
The Nature of the Work - Actuarial or Non-Actuarial?
An assignment may or may not require the actuary to issue a formal actuarial opinion. Standards apply to actuarial opinions that do not apply to other types of advice the actuary may provide. If the actuary is writing a report or doing research for publication, the client may be providing editorial services. Anna's approach is to make clear that she expects that kind of editorial support. Lauren agrees that it's often a good idea to have editorial services available to support actuarial work, especially if it is anticipated that the work will be published. The actuary can ask the client to provide editorial support, retain an editor and pay for the editorial services or build them into the price of the engagement. Where something is going to published with the actuary's name on it, it is important for the actuary to retain final sign-off of the version to be published. Where something is published, is not an actuarial opinion and does not have her name on it, Anna provides input but the client may decide what they want to publish. Lauren would caution, however, that if the actuary is concerned about the accuracy or completeness of the client's version, the actuary may want to reserve the right to withdraw from the engagement prior to publication.
Timing and Communication
The engagement letter also usually includes a schedule for when the work is to be done. If the work requires exchange of information between the parties, the actuary may wish to specify the completion date in terms of elapsed time after the actuary gets information rather than a fixed date. It's also often a good idea to include some idea about milestones within a project plan so that both parties can see how things are going along. If a project involves asking for information or asking questions along the way, the actuary may want to provide a normal response time (one day vs. three days, etc.)
Another critical part of the scope is how the actuary and the client expect to communicate with one another. Anna recommends that if work is mostly going to be transmitted by e-mail and there will not be in-person meetings, this approach be specified up-front. It is nice to meet people face-to-face, but often they may be far away and in-person meetings can be time-consuming and expensive. Lauren thinks it is usually wise for the engagement letter to specifically describe the level of reliance on the client that the actuary expects and to require the client to identify a contact person to whom the actuary can go with questions and requests for information. It may also be advisable to state in the letter that the actuary may not be able to complete the engagement without the client's full support.
If the actuary is working cooperatively with the client and the client's attorney, or with the client and another actuary, the engagement letter usually should address the cooperative relationship and explain how the actuary expects to proceed. If the actuary expects to be able to contact the prior actuary, the engagement letter is a good place to state that expectation. It is also prudent to identify who will receive the work product on the client's behalf. If the actuary wishes to reserve the right to meet or speak with a specific individual or entity (for example, the President or Board of Governors of a client company), the engagement letter is a good place to make that desire clear.
Are You an Expert or a Vendor?
Larger organizations hire a variety of outside people, some of whom are considered experts and others who are considered vendors. They often have purchasing departments who deal with vendors and have standard contracts that apply very poorly to actuarial consultants. At times they may have provisions that you cannot or are unwilling to meet in these standard vendor contracts, including broad indemnification, requirements for large amounts and various types of insurance, etc. While the adverse consequences that are possible under these indemnification clauses are often very remote, they create risk for the actuary if he or she accepts them.
For the individual practicing on their own, these conditions may be unacceptable. It is important in such situations to be viewed as an expert, or it may be very difficult to reach an agreement.
Matching the Letter to the Assignment
It would be nice to have a standard letter that could be used regardless of the situation. However, there are very different situations including the following:
The description of work in the engagement letter usually should be tailored to the specific nature of the engagement and expected work product. Lauren observes, however, that the actuary may choose to keep the more general provisions of the actuary's engagement letters essentially identical.
Other Things to Think About
To keep life simple, it would be easy to stop with the core of the engagement letter. However there are other issues that the actuary is usually wise to consider. Some of the issues to think about are:
Management of Professional Liability
Some small actuarial firms have chosen not to buy liability insurance, often basing the decision on a perception that clients may be less likely to sue if the actuary has no insurance to offer a "deep pocket." Most consultants, however, have such insurance, although the level of coverage may or may not be sufficient to make a client whole if the actuary makes a mistake. Regardless of whether the actuary has errors and omissions insurance, there are various strategies that the actuary may wish to use to limit liability:
Each of these points will usually need to be individually negotiated with the client. Once decided, the actuary will normally wish to include these points in the engagement letter.
Intellectual Property Issues and Ownership
If the actuary is developing material for another party who is paying the actuary to develop it, normally that party will own it. However, if the actuary is using material that the actuary already has and expects to use for others as well, the actuary usually will wish to be clear that the actuary is not transferring ownership. If the actuary is giving a speech they want to post on their Web site, the actuary may wish to reserve that right in the speaking agreement.
One sensible way to address intellectual property issues is to provide that there is no transfer of the intellectual property that was owned by either party prior to undertaking the assignment.
Working for Others and/or Hiring People the Actuary Worked With
The client may not want the actuary to work for the client's competitors. For example, if the actuary is assisting a software company in the development of software for a particular function, the may wish to limit the actuary's ability to work for competing software companies. This is a part of the business deal, and the actuary will need to think through whether to agree to such a condition.
If the actuary is providing added help to a larger actuarial firm, the firm may want to limit the actuary's ability to work with the firm's clients except through them.
The client may also wish to limit the actuary's ability to hire people the actuary previously worked with. Again this is a part of the business deal to which the actuary will have to decide whether to agree. Ordinarily, if agreed to, the limitations described above would be reflected in the actuary's engagement letter.
Who Will Do the Work
If the actuary is going to do the work personally, they may wish to say that in the letter. Some engagement letters specify that the actuary will not transfer responsibility for the work to any third party. Some letters also specify that the actuary is an independent contractor, not an employee, and specifically state that the actuary is not entitled to participate in the client's employee benefit programs.
For the individual actuary and actuaries practicing in small firms, much of the work may be small assignments. Neither the actuary nor the client can usually afford to spend huge amounts of time coming to agreements about what the actuary will do, so it's usually preferable for the actuary to keep the engagement letters reasonably simple. This can be challenging. Lauren suggests that it may be beneficial to start from a "standard" engagement letter that is then adapted to the circumstances of a particular assignment. Even if a fair bit of editing is required to conform the letter to the assignment at hand, it is still usually simpler to edit an existing letter than to prepare one from scratch.
Pitfalls to be Avoided
Each actuarial assignment is different, but some pitfalls appear more frequently than others. For example:
What Others Say
Other professionals have similar issues. For example, a review of the standards for Chartered Financial Planners certification provides guidance on the standards that apply to CFPs. For the CFP professional, a written letter is required in advance of the engagement setting forth the following:
"Specific parties to the engagement, including details of any legal and agency relationships which may exist; Assurance of protection of client confidentiality; Specific personal financial planning services to be provided; Attestation that any assumptions used in the planning will be disclosed in writing; Duration of the engagement including frequency of contact, which may include subsequent reviews; The CFPs compensation arrangements with respect to this engagement; Existing conflicts of interest and agreement to disclose subsequent conflicts of interest if or when they do occur; An explanation of qualifications, licenses and experience of individuals who will work with the client; Client's responsibilities, including the full and timely disclosure of information; The CFP professional's responsibilities; and Procedures for resolution of client claims and complaints with the firm." (Source, page 31, CFP Certification Standards, 2006, Financial Standards Planning Board)
The legal profession also requires its members to use engagement letters. The required content of such letters varies from state to state, but generally includes a clear description of the services to be provided, the fees to be charged, the schedule for completion of services and disclosure of any real or apparent conflicts of interest.
Within the actuarial profession, the Code speaks to some of the issues referenced by the CFP, including conflict of interest, confidentiality, actuarial communications and disclosure of assumptions.
The engagement letter is a valuable tool, both to define the terms of an engagement and to provide a vehicle for resolving outstanding issues with the client. Consulting actuaries are wise to use them.
Lauren M. Bloom is the founder and CEO of Elegant Solutions Consulting; she is also a speaker, writer and consultant on professional ethics, governance and litigation risk management.
Anna M. Rappaport, FSA, MAAA, is the founder of Anna Rappaport Consulting. She is an internationally known expert on the aging workforce, retirement policy and strategy, and women and retirement. She is a Past-President of the Society of Actuaries and chairs the Committee on Post-Retirement Needs and Risks.