ERRORS & OMISSIONS

Manage Your Risks

Errors happen! Whether it is an honest mistake of the advisor, an error originating through the custodial Broker/Dealer or Fund Company, or even as a result of action from the client… an advisor cannot prevent a lawsuit from being filed.

The cost to defend oneself even successfully can be an expensive undertaking. Yet some advisors choose to go naked on errors and omissions (“E&O”) insurance. While not a regulatory requirement, Investment Advisors and Broker/Dealers concerned about risk management should consider obtaining E&O insurance.

Sometimes we don’t practice what we preach. As financial advisors, we tell our clients to use risk management tools to minimize exposure to risk. These tools include:

  • Risk avoidance (get out of the business)
  • Risk reduction (have good policies & procedures; train staff; and utilize compliance experts)
  • Retention of risk (go naked; hope not to get sued; but pay out of pocket if do)
  • Transfer of risk (purchase insurance from a reputable company)

Business Protection Tips to Help You Avoid Claims

Document, Document, Document!

  • Take notes from meetings or phone conversations with your clients and date the notes.
  • Send a follow up e-mail or letter recapping conversations with clients.

Listen and be Responsive to the Client

  • Determine the client’s financial situation, investment objectives, and reasonable restrictions.
  • Deliver what you promise.
  • Promptly and professionally handle errors or complaints.

Market Your Services Appropriately

  • Avoid unsubstantiated “puffery” such as, “We are the largest firm in the state.”
  • Avoid guarantees – even implied guarantees such as, “You will meet your retirement goals.”

Stay in your Area of Expertise

  • Know your investment vehicles and sponsor companies thoroughly.
  • Have proper licenses and practice only in those areas.
  • Consult with experts on law, accounting, insurance, real estate, etc. for client needs.
  • Consult with attorney or compliance consultant for your regulatory responsibilities.

Do Your Due Diligence

  • Investigate the financial standing of any investment (stocks/funds/TPAMs) you are recommending.
  • Be diligent in the selection of third party service providers (insurance carrier/IT/legal/compliance expert).

Create Written Policies & Procedures

  • Prepare written Policies & Procedures, including each employee’s scope of authority.
  • Distribute to all associated persons (reps and employees) electronically and/or hard copy.
  • Develop Compliance Calendar other internal forms; create library ofclient lettersclient forms.

Train your Staff

  • Create a training program for new employees and refresher courses for existing employees.
  • Hold frequent staff meetings with written agenda, prepare minutes, and record attendees’ names.
  • Periodically review sections of the Policies & Procedures during staff meetings.
  • Train on loss prevention – cybersecurity, identity theft, business continuity, errors & omissions.

Stay Current

  • Hire a Chief Compliance Officer that is knowledgeable on the laws with authority to implement policies.
  • Subscribe to industry news regarding investments and compliance. (See CompliancE-News.)
  • Attend professional meetings and conferences.

Policy Features to Consider When Doing Your Due Diligence on an E&O Carrier

Limits

Does your policy share limits with other RIA’s? Some programs may have separate RIA’s sharing a single limit of liability.

Retention – Defense Costs

What is your retention? Retentions usually include defense costs. Is yours an amount you are willing and able to pay even when defending a baseless lawsuit or arbitration?

Definition of Insured

Does it include the entire firm and all IA Reps? Some programs may insure only the RIA legal entity, requiring each IARep to purchase separate coverage.

Professional Services

Does the policy cover all of the activities that you are engaged in? Coverage for activity as a life and health agent or prior activities as a Registered Representative may not be automatically included.

Policy Terms & Conditions

Review the policy in its entirety. Does it have coverage for activities prior to the inception of the policy? What are your duties in the event of a claim?

Carrier

Is the carrier providing coverage financially sound, with experience in this line, and a good claim paying reputation?

Prepared by The Consortium® ( and CalSurance® (

This article has been provided for informational purposes only and is not intended and should not be construed as legal advice.

CalSurance Associates, A division of Brown & Brown Program Insurance Services, Inc., Domiciled in California, CA License #0B02587