If you own and operate an RIA, buying insurance is probably at the very end of a long to-do list. You know you need it – but you may figure that one policy is indistinguishable from the next. After all, that’s how it is for most personal insurance.
But buying errors & omissions (E&O) insurance isn’t like purchasing home or auto insurance. There is no standard contract, and every policy differs in terms of coverage. Make an oversight, such as failing to include cost of corrections or specific investment vehicle exclusions, and it could cost you – big time.
Over the past few years, the share of advisors maintaining specialty insurance has steadily increased as large custodial platforms such as Fidelity, Schwab and Pershing implemented specific insurance requirements for RIAs on their platforms.
In a 2021 benchmarking study of its RIAs, Fidelity found that 97% had purchased E&O insurance, with a median amount of coverage of $2 million. However, not all policies are created equal, so advisors should understand the nuts and bolts of a potential policy before signing on the dotted line.
Whether you’re a breakaway advisor beginning to set up your own business or have been running a longtime RIA, now is a good time to thoroughly examine your existing plan and consider investing in a more comprehensive policy. Here are three essential considerations for RIA owners who are in the market for E&O insurance.
Work with a specialist. When you break a leg, you don’t visit an internist. You make an appointment with an orthopedist. So why would you see an insurance generalist for something as specific as E&O? Seek out a specialist who focuses on your industry and can help you navigate the many options. You should also have a prospective broker do a thorough analysis of your existing policy if you have one so that you can identify any holes.
Look at the fine print. Many E&O policies aren’t worth the paper they’re written on. For example, we’ve seen an insurance carrier exclude coverage if the RIA or Investment Advisory Representative (IAR) owns stock in a company they’ve also invested in on behalf of their clients. Unfortunately, E&O is the Wild West of insurance, and RIA owners should carefully examine all provisions to ensure they aren’t paying for a worthless policy.
Consider other options. In addition to E&O, advisors should consider investing in several other types of policies – directors and officers liability (D&O), crime/fidelity, cyber and employment practices liability (EPLI).
D&O policies protect a company’s directors or officers from personal losses if they are sued by an organization’s employees, customers or vendors. Crime/fidelity bonds cover wire fraud and employee theft issues. Cyber insures for data breach and ransomware/extortion events. EPLI covers companies against lawsuits related to harassment, discrimination and wrongful termination – and is a good investment once an RIA grows to 10 or more employees.
Though many advisors shop around for the cheapest plan, thinking they’ll never have to use their policy, it’s a good idea to remember that insurance claims go up when the stock market goes down. With many financial experts predicting a bumpy start to the new year, ask yourself: Is now the time to take on additional risk?
There is little point in owning an insurance policy full of loopholes and exclusions. The good news is that you won’t have to break the bank to invest in a comprehensive insurance policy. A knowledgeable RIA underwriter can drive down pricing by providing the most complete and actionable information.
Brian Francetich is Director and Managing Underwriter for Golsan Scruggs, a corporate insurance and risk management firm.