Professional Liability (E&O) Insurance for Independent RIAs
A memo to the independently owned RIAs:
Hello all! This is my first post on wealthmanagement.com, and after following this site for several years I hope it comes as a very timely message.
Through my years of working with RIAs of all shapes and sizes, I continue to see one constant: The confusion around adequate professional liability (E&O) insurance coverage continues to grow, and at no fault of the advisors seeking to safeguard their firm's assets.
The bottom line is, the insurance world is full of "professionals" who vastly misunderstand the unique exposures that each independent RIA faces. On top of that, the heavily regulated industry becomes even further complicated as advisors continue to try to differentiate themselves and specialize in different areas of practice such as: ERISA focused advisors (both 3(38) and 3(21) advisors); Alternative Investments (i.e. Funds not traded on a public exchange, not valued daily, not liquid, etc.); Family Office services; etc.
Having attended industry seminars consistently over the past five years, I have met a lot of influencers in the industry and learned a lot! Time and time again I found myself being asked by these respective experts in their field, "Am I covered properly through my current E&O Insurance?" The more the question came up the more I realized that their current insurance brokers were not doing a good enough job of explaining the coverage specifics to their clients! That would be like selling an investment to a client and not going over their risk tolerance, stock volatility, etc. I do not know about you, but if a client is going to place their trust in me and use me for my services, I am going to make sure they are educated on what it is they are paying for.
This leads me to my next point: There are too many different "programs" and "experts" out there, so how do you choose the best one?
1. Stay away from any "GROUP" policies with shared coverage limits. There are many what I like to call "cut-rate" group programs out there, and sometimes they can be hard to spot.
· Are these the cheapest options? YES (but WHY?)
Group programs offer very bare bones coverage to the insured professional. They claim to have a ton of "bells & whistles" but in reality the policy restricts the coverage to even smaller sub-limits of coverage with higher deductibles. On top of that there is a shared coverage limit amongst an unknown number of insureds; sometimes upwards of 5-10 thousand different advisors can be insured on the same policy! This leaves anyone participating in the program in a very bad spot if come claim time the shared limit of $10M has been exhausted by the other insureds on the policy.
As a business owner that has worked his/her tail off getting to where they are today, do NOT settle for anything but the best. In the long run, the few extra bucks you saved to be able to say you carry E&O Insurance will not be worth it, I can guarantee that.
2. Think Individual Policies!
· You own an independent RIA doing independent services. Find a carrier that offers independent coverage in the following capacity:
· The firm is the "Named Insured" on the policy and coverage is extended to the firm and any professional who renders services on behalf of the "Named Insured" (this can include independent contractors too!)
· The carrier offers the "right & duty to defend" language within their core policy. (A carrier who truly wants to partner with your firm will reserve this right. This means they will stand by your side through any allegation (frivolous or not) and help you defend the claim. A lot of group policies do not have this and in fact, most group programs are worded so that you need to defend the claim yourself and the carrier will later reimburse you, assuming the claim was covered on the policy.
3. Only work with brokers who maintain their independence from the carrier (i.e. Independent Agency).
· I may be a bit biased here when it comes to this one, but having worked with both independent and non-independent agencies, I can confidently say that the clients best interests are always better off with the independent agency. The reason for this is because non-independent agencies have contracts in place with the carriers that restrict them from truly offering you the best option. In most cases, they are legally bound to only present that one carrier. How can your broker know that one option is the best if they have not approached other viable carriers to check their rates/coverage?
· An experienced independent broker will leverage his relationships at the underwriting level to get his client the best possible coverage at the most affordable rate.
In summary, E&O insurance (and really all professional/management liability insurance for RIAs) needs to be handled by a seasoned professional who can help you navigate the ever changing marketplace. I hope you find this information helpful! If you have any further questions please give me a call or shoot me an email. 267-880-6520 / [email protected]
I leave you with this saying that my mentor has instilled in me from day one, "Pick your broker, NOT your carrier."
Till Next Time,
Nicholas J. Weiner
First Professional Brokerage Services, Inc.
About the author
As Vice President of Sales, with First Professional Brokerage, Nick focuses his time ensuring that his clients receive the market's best products at the utmost competitive rates. His specialty is in professional/management liability insurance for investment advisors, broker/dealers and accountants.
Nick adamantly believes every professional organization deserves the expert skills of a specialist who can design, administer and implement a custom insurance solution. Operating as an independent insurance brokerage gives him and his team the opportunity to use their experience, knowledge and understanding of the marketplace to assist their clients in establishing a new program or revitalizing an old one.
First Professional Brokerage can be your business partner and trusted advisor, administering your insurance program with an unmatched level of service.