RIA Mergers & Acquisitions: What’s the Risk?

By Brian Francetich (Revised February 2018)
We have indeed seen a substantial increase in merger and acquisition activity among the RIA community and hear from dozens of advisors their desire to acquire or be acquired.  So, what are the key issues to address concerning the liability around such a transaction?

In the consideration of a practice merger, acquisition, or sale – what exposures might such activities present to principals/fiduciaries? Clearly, the implications to the successor entity are different from the firm being acquired. Below are a number of questions that should be asked in each direction during the negotiation/due-diligence process:

  • According to the buy-sell agreement, who is responsible for the liability of past acts? How is indemnification of future possible events/claims managed and funded?
  • How will relationships of the acquired firm be transitioned into the acquiring firm? Have these clients been advised in writing of the merger or acquisition?
  • What professional liability coverage does each firm carry? Have provisions been made with current carriers regarding prior acts?
  • Will any firm need tail coverage? If so, what is the cost?
  • Is the withdrawal of an entity’s regulatory registration required? If so, when will this be effective?
  • How will the transaction affect the “Material Change” clause within the insurance contract? Could the transaction nullify insurance coverage? (See our “Material Change” Risk Tip for further clarification)

As an acquiring firm, the following points are critical. Most RIA professional liability insurance contracts will extend coverage to a “Predecessor in Interest”. However, in order for this to be “triggered” the “Predecessor in Interest” typically must be named on the Declarations Page or by endorsement. It is then increasingly important that we understand how the “Predecessor in Interest” conducted past business activities, and what “skeletons” may be in that closet! Would you be willing to share your limit and accept past liabilities/acts (exposure) or would you require an insurance “tail” (extension of the insured’s right to file claims) be purchased by the acquired firm? Indemnification provisions within the buy-sell agreement can address certain issues and clarify the “exposure-funding” plan going-forward.

A firm being acquired should consider the possibility of a suit being brought by clients for past activities or as a result of the M&A transaction (such events have been known to trigger claims, should third-parties determine their timeline for alleging fault is being exhausted). Where does the liability reside after the acquisition occurs? Is the acquired entity then dissolved? Were reasonable terms arranged (done at coverage inception) for the entity’s right to purchase a “tail” from the insurer?

As always, Golsan Scruggs remains available to the RIA community concerning these technical yet valid exposures.

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.

At Golsan Scruggs, we believe it is incumbent upon us to earn the right to be appointed as your insurance and risk-management agent. Our RIASURE process exists to serve that purpose.

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