Securing Errors and Omissions (E&O) insurance for a registered investment advisory (RIA) practice involves many factors to ensure you get the right policy for your client. In general, E&O insurance covers an RIA for a wrongful act, error, omission or breach of fiduciary duty in rendering professional services to a customer or client. Common E&O exposures for RIAs include:
- Trade Execution/Error
- Regulatory Compliance/Audit
- Conflicts of Interest
- Adherence to “Best Execution” (Trading)
- Suitability of Investments
- Employee Dishonesty/Fidelity
- Relationships to Third-Party Professionals
- Breach of Contract
- Cyber/Privacy Data Breach
- Investment Research/Due Diligence
Example of claims include everything from recommending what turns out to be an unsuitable investment; to innocently misrepresenting the features or impact of an investment strategy or transaction, which results in losses for the client; to incorrectly executing a trade or falling for an Internet fraudster who wants a client’s money wired to him; and getting sued because a client is angry the stock market dipped, reducing her portfolio’s value.
How much coverage the RIA should purchase depends in part on the assets under its management. The RIA also has to consider how much it can absorb from a loss perspective, its historical lawsuit experience and the industry-wide regulatory climate. Market conditions also will come into play because, in a downturn, the insured should anticipate more claims. Another thing to look at is peer benchmark data to ensure the RIA is in line with companies of similar size.
It’s important, of course, to consider the insured’s risk profile—what could go wrong with respect to each product and service the RIA offers to make sure the insurance coverage is aligned with the services provided. Also, make sure the policy’s definition of “insured” properly reflects how the organization is structured, and that the definition of a “claim” suits the client’s needs. Review a carrier’s exclusions and any gaps, and where additional enhancements can be added to further tailor a policy for the insured.
RPS provides RIA firms throughout the U.S. with E&O insurance, and can assist you in customizing a policy that works for your insureds. Contact our professional staff for more information about our E&O solutions.