As a registered investment advisor, having proper insurance coverage is crucial to protect your business and clients. The key insurance solutions that registered investment advisors need include errors and omissions insurance, fidelity bonds, cyber liability insurance, and umbrella insurance. Getting adequate coverage demonstrates professionalism and protects against potential lawsuits and compliance issues. This article will examine the critical insurance solutions that every registered investment advisor needs and provide guidance on getting proper coverage.
Errors and omissions insurance is essential to cover liability risks
Errors and omissions (E&O) insurance, also called professional liability insurance, is the most important policy for registered investment advisors to have. It protects against claims of professional negligence, unintended breaches of duty, and failure to deliver services. Lawsuits from clients are common in the financial services industry, so having E&O insurance is critical. The policy covers legal defense costs and damages awarded in a lawsuit. Be sure to get a claims-made policy, which covers claims made during the policy period regardless of when the alleged error occurred. Also get adequate coverage limits, as high net worth clients may sue for large sums. Discuss your business activities with your insurance broker to ensure you get tailored E&O coverage.
Fidelity bonds guard against employee dishonesty and fraud
Registered investment advisors who have custody of client assets or authorization over client accounts are required by regulators to carry fidelity bonds. These bonds protect against losses from criminal acts by advisory firm employees, such as embezzlement, forgery, and theft. The SEC requires minimum fidelity bond coverage of $10,000 for advisors with discretionary authority but no custody. Advisors with custody must have coverage for at least 5% of client assets under management. Review bond terms to ensure adequate protection for your firm and clients. Also consider increasing limits above required minimums for greater protection.
Cyber liability coverage is vital in today’s digital age
With hackers targeting the financial sector, cyber liability insurance is a must-have. It covers costs associated with a data breach, such as forensic investigation, notification and credit monitoring expenses, negotiating ransoms, public relations fees, and legal defense. Make sure the policy covers both first and third party losses. Cyber liability insurance also covers website media liability, network security liability, and funds transfer fraud. As more client data is stored digitally, cyber threats are growing exponentially. Proper insurance can prevent a breach from destroying your business.
Umbrella insurance provides an extra layer of protection
Umbrella insurance provides additional liability coverage above and beyond other policies like E&O and general liability insurance. It kicks in when claims exceed the limits of underlying policies. Often lawsuits allege multiple charges, so umbrella coverage offers critical extra protection. It also covers some exposures not included in other policies. Umbrella insurance is fairly inexpensive for the substantial extra coverage it provides. Most advisors recommend $1 million to $5 million in umbrellas coverage. For larger firms, limits above $5 million may be prudent.
Having adequate insurance is a key part of risk management for registered investment advisors. E&O, fidelity bonds, cyber liability, and umbrella insurance provide critical protection for advisors’ businesses and clients. Work with an insurance broker to review needs and get proper tailored coverage.