Why buy Investment Advisor E&O? We’ve never been sued.

By Kenneth Golsan
This month’s RIA Risk Tip addresses another common question our office receives from the RIA community:  “Why should we purchase Investment Advisor E&O? –For we have yet to experience a lawsuit and/or a claim in all our history.”

Great question and asked with rhetorical color – completely understandable.  Is that not the case with the majority of advisors? – Most have never experienced such an onslaught.

It is an understandable question because the facts are not readily available.  There is very little publicly obtainable information to assist in one’s exposure analysis; to fulfill one’s motive to purchase Fiduciary/Professional Liability (E&O) insurance as a strategy to defend and transfer an “obvious” severe exposure.

Here are some of the reasons why this common question is presented:

  1. Data is neither Collected nor Compiled. There is no industry “body” (governmental agency, industry association or otherwise) that collects, compiles and publishes complaint and/or dispute data for the RIA industry.  While the registered representative industry has FINRA which acts as such for its purposes, no such body exists for the RIA community.  Therefore, we have no data at our fingertips to help us understand the exposure (personal or otherwise) of acting as an RIA.
  2. Disputes are private. Complaints are brought by private parties, held confidential, and are arbitrated and settled privately.  Again, like (1) above, another potential area of helpful information squashed.
  3. Advisors protect their reputation. How would the broadcasting of a complaint, dispute, claim, lawsuit and/or settlement affect one’s practice?  Who wants to find out?!  Therefore, such dreadful experiences are not something one wishes to share with one’s industry colleagues!
  4. Fiduciary claims are “Severe” (not “Frequent”) in nature. Lower activity produces lower dissemination of facts.  As the western regional “referred” insurance brokerage for one of the largest RIA programs in the U.S. – while we may have a basket-full of potential events and a dozen or so (likely small as well) disputes or complaints, we will normally carry only a small handful of open claims and/or lawsuits at any point in time.  Again, low frequency.  Yet – high severity – the average claim, currently, is within the $200,000-$260,000 range in “settlement” with “defense costs” typically parallel (an additional $200,000-260,000) for a TOTAL claim figure in the $400,000 to $600,000 range (defense + settlement).
  5. How long have you been an RIA?  How successful is your firm? When we hear the second part of the common question – “We’ve never been sued… In the history of our RIA firm, we have yet to experience such.” –The best answer is to consider the two aforementioned questions.   If you have operated your firm for less than 10 years, we would state that such time is insufficient for a fair and wise analysis.  How many market crashes do we experience in each 10-year period?   “Stick around…” the veteran advisor will counsel “… You’ll get your turn yet!”  Secondly, how successful is your practice?  How many clients do you have?  Unfortunately, if you’re successful enough, you will no doubt someday be the “proud” participant of such an event. It is good to remember a couple of key issues.  Pursuant to our Annual RIA Risk Survey declaring that the various types of claims are brought based both on “actual” or “alleged”:  (1) claims, sadly, have to be defended whether they are true (actual) or false (alleged); and (2) only a very small fraction find themselves “umpired” in court.  Essentially, all are simply settled which removes the determination, many times, of any judicious confirmation of fiduciary breach.  Frustrating, but that is our system.

Imagine driving your car without ever seeing another automobile on the streets, without being an eyewitness to a vehicular collision, hearing of such events, or the presence of such actuarial data.  Would not such an atmosphere cause one to question the necessity of carrying automobile liability insurance?

As a father of three young boys, I tell them to “Stop, Look and Listen”.  Golsan Scruggs incorporates a RIA bio and practice risk-analysis process we call ia360 for each and every client.  This process helps us understand your practice, present common and pertinent claim potentials, and analyze coverage issues so that a proper solution is structured.  Per other RIA Risk Tips, there is no standard insurance contract.  Each underwriter attempts to incorporate its own unique terms, language, definitions, exclusions, etc.  So, buyer beware!

E&O and/or Fiduciary Liability insurance can be confusing and seemingly expensive.  Whether us or an alternative insurance representative, it is good to “Stop, Look and Listen”.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors.. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.