Errors And Omissions Insurance For Registered Investment Advisors

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Who Needs Errors And Omissions Insurance

How Do I Obtain Errors & Omissions Insurance (E& O) As An RIA?

Professionals working in financial industries such as insurance, investments, real estate, and accounting will benefit from E& O insurance to cover them in the event of a mistake or omission made on behalf of a client, which can be costly. Many regulatory bodies mandate employees in these professions to obtain E& O coverage through their employer or independently.

Investment Advisors Guide To Errors & Omissions Insurance

  • 1. INVESTMENT ADVISOR SERIESThe Investment Advisors Guide toErrors & Omissions InsuranceByGary Sutherland, CIC, MLIS and Paul Smith, AIFPresented byNorth American Professional Liability Insurance Agency, LLC WWW.NAPLIA.COM161 Worcester Road, Suite 504, Framingham, MA 01701 Tel 866.262.7542 Fax 508.656.1399
  • 5. P a g e | 4Copyright 2013 by North American Professional Liability Insurance Agency, LLC. All rights reserved.Chapter of ContentsChapter Page1.) Alternative Investments 52.) Regulatory and SEC Audits 93.) Claims, Fines and Sanctions 114.) Discretionary Versus Non-discretionary Investing 145.) Fee Versus Commission Income 186.) AUM Assets Under Management 217.) Conflicts of Interest 248.) Custodian of Assets and Lost Accounts 269.) Areas of Practice Coverage 2910.) Contact / Resources 32
  • 21. P a g e | 20Copyright 2013 by North American Professional Liability Insurance Agency, LLC. All rights reserved.ConclusionIt is important to understand that many underwriters are predisposed to think that fee-basedadvisors are a safer risk. Your agent will need to share additional details on your firmscommission sales to secure the lowest possible premium.Our suggestions:1. Accurately classify your revenue between fee-based and commission sales.2. Proactively explain any discrepancies in revenue to AUM, especially if revenue issignificantly higher or lower than 1% of AUM.
  • S To Analyze E& o Policies

    According to commentary from RIA in a Box, which provides compliance solutions for investment advisers, RIA firms are not actually always required to secure errors and omissions insurance from a regulatory standpoint. But in its role as an RIA registration and compliance solutions provider, the firm strongly recommends that investment advisers secure adequate E& O insurance coverage.

    In an introductory guide published on its website, the firm warns that any RIA firm that does not have proper E& O insurance coverage is exposing itself to serious business risk.

    Unfortunately, just like many forms of insurance, the devil is often in the details when it comes to RIA E& O plans, the firm warns.

    One of the first and most obvious areas to look at with any potential policy is going to be the annual premium, according to RIA in a Box.

    Just like other forms of insurance, higher levels of complexity, risk, and coverage limits will lead to a higher annual premium cost, the firm says. In the investment adviser industry, youll often see higher premiums for advisory firms that utilize alternative investments, have past regulatory disclosure issues, or have relatively inexperienced principals who are the new to the industry.

    Next and just as important as considering cost is reviewing, in very fine detail, the real coverage limits coded into the potential contract.

    Next to review will be the interplay of master policies versus individual policies, the guide says.

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    General Liability Insurance Costs For Rias And Financial Planners

    RIAs and financial planners pay a median premium of $35 per month, or $420 per year, for general liability insurance. This policy protects against third-party injuries, third-party property damage, and advertising injuries.

    Insureon’s licensed agents recommend purchasing a business owners policy for more complete coverage. A BOP combines general liability insurance with property insurance for a discount.

    Median cost per year: $420Policy limit: $1 million per occurrencePolicy deductible: $500

    Learn how to save money on your policy, which coverage limits to choose, and more on Insureon’s general liability insurance cost analysis page.

    Get Free Quotes And Buy Online With Insureon

    E& O Coverage For Insurance Agents / Title Agents Errors ...

    Insureon’s licensed agents work with leading U.S. providers to source coverage that fits your financial advice and planning business. Compare quotes today with one free online application. If you decide to purchase a policy, youll work with an account manager who specializes in business risks for RIAs and financial planners.

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    The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker – dealer, state – or SEC – registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

    We take protecting your data and privacy very seriously. As of January 1, 2020 the California Consumer Privacy Act suggests the following link as an extra measure to safeguard your data: Do not sell my personal information.

    Copyright 2022 FMG Suite.

    *Securities, insurance, and advisory services offered through SagePoint Financial Inc ., member FINRA/SIPC. Additional insurance services offered through Asset & Investment Advisors, who is not affiliated with SPF. Neither SPF, nor its representatives, provides tax or legal advice.

    IMPORTANT CONSUMER INFORMATION

    What Is Professional Liability Insurance

    This specialized insurance protects financial advisors against negligence and other claims alleged by their clients. Also known as errors and omissions insurance, this insurance might cover negligence, malpractice or misrepresentation claims. In most cases, financial planners arent required to have a professional liability insurance policy, but when youre practicing with the public, its important to be prepared for the unexpected claim which may cause you and your firm potential financial hardship.

    So, lets assume youve decided this is an important coverage to obtain heres what you need to know about professional liability insurance:

    • Purpose of the coverage
    • What is excluded from coverage
    • How to practice in accord with the professional liability policy

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    Three Types Of Insurance Every Firm Should Consider

    Google blocks hundreds of millions of malware and phishing emails every day.1 Other email providers report similarly staggering numbers. Yet, many attacks still get through. Online theft costs individuals and businesses trillions of dollars each year.2

    Cybercrime is more organized and more effective than ever. And everyone is a target. Hackers don’t only go after big paydays. They also look for easy pickingsschool districts, small businesses, and average people. Advisors are especially attractive to hackers because RIA firms often manage hundreds of millions of dollars, but don’t have the same level of security as other financial institutions.

    Today, insurance that protects your RIA firm and your clients’ assets from devastating losses is essential. There are three different types of insurance that RIA firms ought to consider: errors & omissions, fidelity bonds, and cyber insurance.

    At a recent Schwab Advisor Services webinar, Greg Severinghaus of Markel Insurance, Jessica Thayer of Starkweather and Shepley Insurance, and Scott Shannon at the Windermere Insurance Group discussed the options available to advisors and what to consider.

    Operating Your Investment Advisory Firm Without E& o Coverage Things To Consider When Self Insuring

    Definition of Employer’s Liability Insurance : Financial Advice & Insurance
    • The average cost of defending a matter in litigation is $31,500
    • The threat of litigation can never be completely eliminated, only mitigated.
    • 3,714 cases were filed with FINRA in 2013 and 3,538 cases were filed through November of 2014.
    • The largest volume of allegations seen in FINRA disputes are Breach of Fiduciary Duty and Negligence, which are common for Investment Advisory Firms.

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    Understanding Errors And Omissions Insurance

    Errors and omissions insurance is a form of liability insurance. It protects companies against the full costs of a claim made by a client against a professional who provides advice or a service such as a consultant, financial advisor, insurance agent, or lawyer.

    Errors and omissions insurance often covers both court costs and any settlements up to the amount specified by the insurance contract. This kind of liability insurance is generally required for professional advice-giving or service-providing businesses. Without E& O insurance, a company can be held liable for up to millions in damages plus the fees associated with a legal team. E& O insurance helps mitigate or eliminate these potential liabilities.

    For example, a client may sue an advisor or broker after an investment goes sour, even if the risks were well-known and within the guidelines established by the client. Even if a court or arbitration panel decides in favor of a broker or investment advisor, the legal fees can be very high, which is why E& O insurance is important.

    The benefits E& O insurance gives companies or individuals vary greatly depending on the policy and issuing insurance company. E& O insurance may or may not cover temporary employees, claims stemming from work done before the policy was in force, or claims in various jurisdictions. These policies do not cover criminal prosecution and certain liabilities that may arise in civil court not listed in the policy.

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    The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker – dealer, state – or SEC – registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

    We take protecting your data and privacy very seriously. As of January 1, 2020 the California Consumer Privacy Act suggests the following link as an extra measure to safeguard your data: Do not sell my personal information.

    Copyright 2022 FMG Suite.

    Securities and advisory services offered through Registered Representatives of Cetera Advisors LLC , member FINRA/SIPC, a broker/dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.

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    Workers Compensation Insurance Costs For Rias And Financial Planners

    The median cost of workers compensation insurance for investment advisors and financial planners is less than $40 per month, or $450 annually. Required in almost every state for businesses with employees, this policy can help cover medical fees and lost wages for work-related illnesses and injuries.

    Learn how workers’ comp premiums are calculated and more on Insureon’s workers’ compensation insurance cost analysis page.

    Will Your Errors And Omissions Insurance Policy Keep You Dry

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    Brian Francetich, director of GSRIA and managing underwriter at Golsan Scruggs, has worked for more than a decade as a matchmaker between registered investment advisers and errors and omissions insurance carriers.

    Francetichs firm works with nearly 1,000 RIA clients, as well as a small number of broker/dealers and fund companies. He emphasizes that Golsan Scruggs is not an insurance carrier, but rather an independent brokerage agent placing business with skilled carriers in this space.

    In a phrase, Francetich says RIAs understanding of the nuances of E& O policies is lacking. Likewise, he says, generalist risk experts at the major insurance companies do not necessarily know a whole lot about advisory firms or the sale of securities. As one would expect, this can cause confusion and the occasional point of friction in the E& O policy shopping process.

    The typical contract may be 60 pages or more of granular detail, so its always going to be challenging to shop for E& O policies, even for people with a lot of experience, he says. E& O is hard for RIAs to really comprehend. Even if you have read the whole contract, there is so much in there. Its going to be hard for anyone to understand everything thats contained or implicated in the document.

    Francetich says this is like trying to use a hammer when a screwdriver is the right tool.

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    Be Ready To Shop For Insurance

    In terms of pieces of advice or simple tips to give to advisers to start the process of shopping for an E& O policy, Francetich says these are going to sound a lot like the common pieces of advice that advisory firms hear when they are looking to professionalize their practice.

    You need to be able to demonstrate that you have a culture of compliance that is built around firmly established best practices, he says. You need to show that you have the policies and procedures, and you also need to be able to show that you are actually effectuating these policies and procedures. Also very important is demonstration of the scope and scale of service. A lot of time this is in the advisory agreements, but it might not be very clear or intelligible from the perspective of the whole RIA business. You need a very clear outline of what services you will provide and wont provide for clients.

    For firms that have had recent claims against their existing E& O policies, this will make the shopping experience a lot more challengingparticularly if there are multiple claims and if any of the claims are still open.

    In this sense, Francetich says the E& O insurance market for RIAs is like the Wild West.

    In this non-admitted space it is truly buyer beware, Francetich warns. You could buy a policy that excludes 90% of what you do as an RIA. Ive actually run into those types of policies before.

    Example Of Errors And Omissions Insurance

    Let’s say a company that hosts servers used by third parties for data purposes is breached by hackers who gain access to proprietary information and client data. The companies affected by the hack then sue the server-hosting company for damages for inadequate security. The server-hosting company has an E& O insurance policy and reviews it to see what the policy does and does not cover. To the company’s benefit, its errors and omissions policy is robust and covers such situations. The insurance company pays for the legal expenses involved in the court case against multiple companies. It also pays for any monetary damages rendered by the courts or settled in arbitration.

    Having errors and omissions coverage helps the company avoid a substantial financial hitâeven bankruptcyâdepending on the company’s finances. If you or your employees are in the business of providing professional advice or other professional services, E& O insurance could be worth your consideration.

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    Registered Investment Adviser Errors And Omissions Insurance

    • Annual premium: This is the annual cost of the coverage to the RIA firm. Just like other forms of insurance, higher levels of complexity, risk, and coverage limits will lead to a higher annual premium cost. In the investment adviser industry, you’ll often see premiums for advisory firms who utilize alternative investments, have past regulatory disclosure issues, or have relatively inexperienced principals who are the new to the industry. For new advisors starting an RIA firm, premiums will begin at around a minimum of $1,200-1,500 per year.
    • Coverage limits: It is important to note that there may be separate limits for an alleged act, all acts combined , or for the overall master policy. There are a wide range of coverage limits but many per firm annual limits seem to range from $1 million to $3 million. The higher the coverage limit the greater the premium cost.
    • Deductible: This is the amount of money the investment advisory firm will be out of pocket before the E& O policy kicks in. RIA E& O policy deductibles often range from $5,000 to $10,000. The lower the deductible the greater the premium cost.
    • What’s Excluded From Coverage

      E& O insurance

      Understand your policy. Is discretionary advice excluded? This is surprise exclusion for many insurance brokers as it is specific to the financial advisory business.

      Another potential exclusion may come up if your company is paying bills on behalf of the client. A client asked her advisor to handle bills to the nursing home for her husbands care. Several years later, she discovers that your company significantly overpaid the nursing home, and shes not able to recoup the overpayment. Your liability policy may not cover those bill paying services because they fell under the exclusion for discretionary advice.

      Review all of the aspects of the professional liability insurance policy with the insurance broker and know what is and isnt covered. A consent to settle is another clause that the advisor needs to understand. That way the planner avoids surprises when you are compelled to settle a claim instead of fighting it. Make sure the company policies are aligned with the insurance coverage.

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      Do Rias Need Liability Insurance

      This article is part 1 of 2 in an Insurance for Advisors series. Learn about bonding considerations for RIAs in PART 2: BONDING CONSIDERATIONS FOR ADVISORS.

      Registered investment advisors often ask if they are required to maintain any professional liability insurance, a so-called Errors & Omissions or E& O policy. The short answer? No, its not required. Nonetheless, most registered advisors do maintain some sort of liability insurance. This is not only a best practice but also may be required by institutional product vendors and others with whom advisors do business.

      Protection under E& O insurance

      E& O insurance is intended to protect an investment advisory firm and its officers, directors and employees from claims arising from the investment advisory services the firm offers. This includes the following:

      • Claims by clients for investment losses and other damages resulting from claims like negligence
      • Breach of fiduciary duty in providing professional services
      • Errors & omissions
      • Breaches of the advisory agreement
      • Failure to supervise brokers

      For example, a client may allege that an advisor made a trade unsuitable toward their investment goals. E& O insurance may protect an RIA against this type of claim.

      What E& O insurance covers

      What E& O insurance does not cover

      These policies typically do not cover fines, penalties, and punitive damages.

      Other insurance options

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