For registered investment advisers, a lot can go wrong, including bad trading on behalf of the client, accidentally sending money to a bad actor instead of a client, or hacking computer systems. Then good insurance can provide important protection.
With the rise of social engineering attacks, such as compromising business email, trustees are beginning to struggle. Last year, e.g.
began requiring all RIA companies that work with it to carry a total insurance of at least $ 1 million. This includes covering liability for errors and omissions to help protect the company against claims involving business errors. Schwab also requires coverage for social engineering, theft by hackers and theft by employees, as the case may be.
Another major trustee, Fidelity Institutional, recently announced a minimum insurance requirement of $ 1 million, with its own specifications and time frame for admission.
But even if your trustee doesn’t have strict insurance requirements, it may make good business sense to have adequate coverage. Here are five tips to help you determine what types of coatings may be appropriate for your practice.
Find out the business case. Companies need to go through an in-depth analysis of whether insurance is needed and, if so, what, according to Brian Hamburger, founder and managing member of Hamburger Law Firm, which focuses on the space for investment advice. Your coverage levels also need to be reviewed when policies appear for renewal to make sure nothing has changed.
Your insurance needs will be dictated by factors such as your business mix, what professional services you provide, how you provide them and what requirements, if any, your trustee imposes. Keep in mind that even if the security guard requires a certain minimum, this level of protection may not be enough for the needs of your business.
While Hamburger usually recommends the RIA to have some kind of liability insurance, there is no one-size-fits-all answer. A fee-only practice that charges a relatively modest fee based on AUM, uses major investments, and has rigorous investment processes is likely to have much less exposure than a company that engages in riskier business practices. A particularly low-risk company may even choose to self-insure by allocating resources to deal with one or two lawsuits a year, Hamburger said.
“Insurance is a tool and a very effective tool, but there are all kinds of insurance products,” he said. “There’s insurance that, frankly, isn’t worth the paper it’s printed on, and there’s insurance that does a great job of limiting the company’s exposure.”
Seek a specialist. Because this is such a nuanced area, it is advisable to choose an insurance broker who specializes in RIA coverage, says Richard Chen, a New York-based attorney who advises investment professionals on regulatory and compliance issues. Also, be sure to compare multiple policy options.
One place to start is with your trustee. Both Schwab and Fidelity have lists of possible insurance brokers to call, and although you don’t have to use any of these lists, they can be good starting points.
Specialists can help you determine what your needs may be based on the specifics of your business. The reason why the specialist is so important is that RIA insurance is complex and the details in the policies make all the difference, Chen said. “Insurance brokers know all the nuances and specifics that make these policies more or less valuable,” he said.
Find out your policy options. Every policy is different in terms of what it covers and what it doesn’t, says Brian Frantic, director of the RIA team at Golsan Scruggs in Lake Oswego, Ore., Which helps the RIA find appropriate insurance.
“This is the Wild West of insurance,” he said. “Every insurance company will do it in its own way.”
You may be able to combine the different policies you may need, which may include E&O, a financial institution’s bond policy, and some form of cyber insurance coverage. You may also be able to purchase a basic E&O policy and add approvals to include coverage such as employee theft, social engineering, and hacker theft. Cyber insurance is also a growing area, but not all policies are packaged in the same way. Some RIAs buy cyber insurance, thinking they will be protected from any attacks, but some policies may not meet the trustee’s requirements or offer the best level of protection, Frantic said.
Bottom line. The price can vary considerably. Some companies could pay thousands of dollars, while others might expect to pay tens of thousands, depending on factors such as the company’s assets under management, its asset mix, business style, previous claim history and type of coverage desired. Don’t try to save in an attempt to save a few dollars; it can cost you many times more if you do not have the right levels of protection.
“You can always find something cheaper, but at some level you get what you pay for, and the details matter,” says Frantic.
The devil is in the details. Although there are many policies and carriers that offer RIAs insurance, understanding the different limitations of a policy can help you distinguish between a policy that provides good coverage for your company and one that does not. Some policies, for example, do not cover cases involving private placements or hedge funds, while others will not cover discretionary investment activities. There may also be restrictions on when coverage begins and what types of events are covered.
Whatever policy you look at, it’s important to read the language carefully, says Michael Cermak, vice president of Chicago-based insurance broker Thompson Flanagan. Remember to understand the specifics of the way the policy is triggered, what restrictions exist and what is needed to pay off the policy.
Hamburger also recommends that councilors understand the level of control they maintain under the policy. Some policies restrict the rights of councilors to defend a claim against its resolution. Other policies may limit the ability of counselors to choose their own legal counsel.
“Unless the counselor receives high-quality insurance that has the provisions they need to maintain control, the counselor remains in a vulnerable situation where the counselor believes the coverage they paid for is not nearly as much as they thought,” he said. Hamburger.
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