Trade Errors and Their Risks

A primary duty of advisors is the faithful execution of trade orders on behalf of clients. If an advisor makes a mistake executing a trade order, a client can suffer a significant loss and an advisor can face legal and regulatory penalties. Unfortunately, industry data shows that trade errors are increasing.

Around the country, insurers observed a large spike of trade error claims in 2020. Among a group of nearly 3,000 advisory firms surveyed, trade error claims increased five times from March through May of 2020, compared to the same period a year before.

There is always a possibility of making a costly professional mistake, such as a trading error, as an advisor. But by following the proper risk management strategies, you can lower your risk. Here’s what to know about trade errors, strategies to reduce your risk and how to make sure your protected in the case of a claim.

What Is a Trade Error?

Trade orders involve the transfer, purchase or sale of securities by a registered investment advisor. When it comes to trade errors, there are two varieties — an erroneous execution of an unintended trade and the failure to execute a valid trade order. Both may result in a loss for the client.

Examples of trade errors found in claims have included:

  • Failure to implement a change in allocation discussed with a client.
  • Allocation of client cash funds into the market intended for later asset purchase.
  • Unintentional sale out of a legacy stock position.
  • Purchase of more shares of an investment vehicle than intended.
  • Purchase of the wrong investment vehicle due to an incorrect ticker symbol.

How to Minimize Risk of Trade Errors?

While it may not be feasible to prevent all mistakes, it’s possible to greatly reduce the risk and frequency of trade errors with the proper precautions.

Here are four procedures shown to help:

  • Limit the number of individuals with trading authority.
  • Reconcile trades at the end of the day to ensure trades were executed as intended.
  • Have a designated individual responsible for reconciling trades at the end of the day.
  • Notify software and platform custodians of issues promptly to minimize manually executed trades.

Firms that implement these procedures will reduce the likelihood of a trade error occurring and

identify errors that do happen more quickly.

How to Ensure You’re Protected From Trade Errors?

While some advisors may go their whole career without a trade error claim, others won’t be so lucky. In the event of a claim, your finances and reputation could take a considerable hit.

Errors and Omissions Liability Insurance (E&O Insurance) can help shield you from legal fees, judgements and settlements resulting from a trade error claim. But it is important to do your homework to make sure you have the coverage you need.

Many E&O Insurance providers have the capability to provide coverage for trade error claims. However, it’s important to speak to your insurance representative to make sure you’re covered. Not all insurance carriers treat trade errors the same. Some require specific endorsements while others exclude coverage in all cases.

To ensure your coverage will respond in the event of a trade error claim, make sure to consult with your insurer. Check that you have coverage for a claim, amend your policy to include necessary coverage, or consider an alternative form of protection.

What Is the Lockton Affinity Difference?

With E&O Liability Insurance from Lockton Affinity Advisor, you can help protect yourself and your career from trade error claims. E&O coverage from Lockton Affinity Advisor protects against risks associated with a broad range of professional services.

Plus, it includes fiduciary coverage automatically. This coverage meets ERISA standards, including services as an ERISA 3(21) and 3(38) advisor, ensuring any fiduciary duties you perform are covered.

Help protect yourself and your career today with an Errors and Omissions Liability policy from Lockton Affinity Advisor.