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Registered Investment Adviser (RIA) Errors and Omissions Insurance

Posted by RIA in a Box

May 4, 2014 4:44:00 PM

While RIA firms are not always required to secure errors and omissions insurance from a regulatory standpoint, as RIA registration and compliance consultants we strongly recommend that investment advisers secure adequate errors and omissions (E&O) insurance coverage. An 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. Here are some things to consider when shopping for an errors and omissions plan:

  1. 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.
  2. Coverage limits: It is important to note that there may be separate limits for an alleged act, all acts combined (aggregate), 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.
  3. 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.
  4. Master policies vs. Individual policies: Often, an investment advisory firm can save money on errors and omissions coverage by joining a master policy. A master policy combines multiple firms under one policy. Generally, these master policies will have a total master policy annual coverage limit. If the master policy coverage limit is reached, other pooled firms may not have access to protection. Thus, advisors should perform a high level of diligence to fully understand whether the policy is for the individual firm or part of a larger risk-sharing pool of firms.
  5. Exclusions: Unfortunately, many professional liability insurance plans have a laundry list of exclusions. Be sure to review the full list of exclusions when comparing plans to see what differences may exist. As an example, some policies may exclude coverage of derivatives transactions. If your advisory firm doesn't utilize derivatives this may be less of a concern but if your RIA firm manages a derivatives trading strategy obviously such an exclusion could expose the firm to major risk.

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This small list of considerations is by no means a complete or exhaustive list. RIA in a Box does not offer any form of errors and omissions or professional liability insurance to registered investment advisers and we strongly encourage all advisers to shop around for to find the right E&O protection. Fortunately, a number of providers have emerged over the past few years to service the investment adviser industry.

However, it should also always be noted that even the best professional liability insurance plan does not allow an investment advisory to have an inadequate compliance program. Regulatory fines and sanctions will generally not be covered by insurance programs. Thus, it's critical that the advisory firm implement the proper internal compliance policies and procedures to establish the proper culture of compliance.

 

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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