How Lockton Affinity Advisor Meets Schwab Insurance Benchmarks
Your financial services firm faces special risk when operating your business. In the registered investment advisor (RIA) industry, that risk is climbing. Recently, Charles Schwab Co., Inc., one of the largest financial services custodians in the world, sent a memo to their RIAs communicating new requirements for RIA insurance protection.
The Schwab memo emphasizes the importance of adequate insurance for protecting your business and personal assets and providing the coverage and resources necessary to weather the unexpected. Since 2006, claims and lawsuits targeting RIAs have proliferated, reaching their highest level ever in 2020. As an industry leader in RIA insurance protection, Lockton Affinity Advisor agrees that adequate insurance to address this heightened risk is a must.
Here’s a look at how new insurance requirement benchmarks set by Schwab and other industry leaders may impact insurance for RIAs and how insurance from Lockton Affinity Advisor can meet your firm’s needs.
How New Schwab Insurance Benchmarks Will Impact RIAs
As one of the world’s largest custodians, Schwab helps set the benchmark on what is required of RIAs for doing business. A recent memo from the company demonstrates this point, outlining new insurance requirements for affiliated RIAs:
- Under a new policy, Schwab requires specific insurance coverage for firms seeking to join or remain on its Advisor Services Custody platform.
- Insurance requirements apply to registered investment advisors, non-registered investment advisors, turnkey asset management providers and banks and trusts.
- Firms must obtain and maintain insurance coverage for the performance of their professional services for their investors and clients.
- Coverages required include Errors & Omissions coverage (E&O), as well as coverage for social engineering, theft by hacker incidents, and theft by employee (if applicable).
- Required minimum coverage of at least a $1,000,000 aggregate minimum limit was set by Schwab for all of its advisors under the new policy, with some facing higher limits.
- Schwab requires firms to be able to provide proof of insurance upon request and to notify the custodian if coverage is cancelled or ceases to be in effect.
- Requirements stipulate a 90-day period for current and future RIAs joining the Advisor Services Custody platform to come into compliance with the new rule.
Why New RIA Insurance Requirements Are Necessary
New requirements to obtain third-party insurance represent an added cost for RIAs to do business. These increased costs may be viewed negatively by some, but the added expense pales in comparison to the threat of typical RIA lawsuits.
Proper insurance coverage has never been more important for RIAs:
- Before 2006, large class-action lawsuits were rare and targeted at big firms with billions of assets under management.
- Claims against investment losses have been increasing since 2008, with many smaller firms now being targeted.
- Most recently, claims and lawsuits alleging fraud or excessive fees doubled between 2019 and 2020.
Claims and lawsuits against RIAs pose a significant threat:
- Costs to defend against even a baseless claim can be extraordinary, especially if a lawsuit proceeds to the discovery phase.
- Fiduciary obligations and liability for losses are often shared between several parties, meaning you will often need to defend yourself if any of the involved parties is sued.
- Additionally, under ERISA Section 409, your personal assets may also be placed at risk in a claim.
How Lockton Affinity Advisor Meets RIA Insurance Needs
Schwab insurance benchmarks help drive home the importance of RIAs having proper insurance coverage. However, RIAs are largely on their own when it comes to shopping for and obtaining the necessary coverage. Schwab’s memo cautions that its new requirements may not necessarily be enough coverage for every business to protect its assets, employees and clients, so it’s important to find coverage tailored to your own needs.
At Lockton Affinity Advisor, we provide products and services that meet the needs of RIAs, including the new benchmarks required of Schwab Advisor Services RIAs. Your choice of insurance is key, so it’s important to ask the right questions. To help you assess your insurance needs, here are some key questions to ask when shopping for coverage, along with our answers.
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What types of insurance policies/coverages do you provide?
Lockton Affinity Advisor offers specialized coverages for RIAs including but not limited to E&O Insurance, Cyber Liability Insurance, Financial Institution Fidelity/Crime Bond, and General Liability designed for RIAs.
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Do you specialize in any particular type of insurance?
Yes, we specialize in commercial insurance solutions for RIAs and broker dealers.
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What differentiates your company from other insurance providers?
Our entire team is trained and specializes within the RIA industry. Unlike others, we offer exclusive E&O and Cyber Liability solutions that can only be purchased from us. Lockton Affinity also has the advantage of being an independent firm and representing all the other typical carriers that our competitors may offer.
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Do you currently provide policies to independent RIAs?
Yes, we insure over 1,600 RIAs across the country.
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What other types of financial services companies and industries do you serve?
In addition to RIAs, our firm also works with broker dealers, life agents and IMOs, and investment fund providers.
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What are the main types of insurance claims you have seen come from the RIA industry?
Common E&O claims include breach of fiduciary duty, trade/execution errors, suitability claims and contract disputes. Common cyber liability claims include fraudulent instruction claims, phishing and social engineering and ransomware claims. Common fidelity claims include fraudulent instructions and false pretense claims.
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Based on what you know about our firm, what insurance policies would you recommend?
Recommendations should always be tailored to suit your particular needs. However, to be adequately protected today, most RIAs will needs three commercial insurance policies: E&O, Cyber Liability, and Fidelity Bond (including coverage for false pretense and fraudulent instructions).
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What types of events would the coverage you are recommending cover?
E&O coverage is triggered if a client is damaged or alleges they are damaged as a result of a delivered professional service that your firm provided or failed to provide. Additional policies are available to protect against a broad array of common risks, including claims for social engineering, theft by hacker incidents, and theft by employee.
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What are the main factors that you evaluate when determining policy costs for your customers?
The cost of insurance for your firm will vary based on the size of your firm, the limits you choose, and the insurance provider you select. Lockton Affinity Advisor follows industry standard practices for underwriting, considering typical factors such as a business’s revenue, assets under management, number of employees, services provided and other factors.
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What would you approximate as the cost for a firm of our size based on your recommendation?
Each Lockton Affinity Advisor customer receives a personalized price indication tailored to your unique insurance needs. Feel free to contact us to learn more about what insurance would look like for your firm.
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How do your rates compare with those of other insurance providers?
At Lockton Affinity Advisor, we take the time to truly understand our client’s specific practice, and highlight the positive risk management details beyond what a standard application will uncover. Because we specialize within the RIA industry, we know what is important to the carrier’s underwriter and make sure we highlight those details. We also offer exclusive programs.
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Describe your billing process and terms?
We require a just signature to bind coverage. We then invoice our client and offer flexible financing options if desired.
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If a claim is made and a resolution is determined, typically how long does it take for payment to be made?
To minimize the cost and stress of a claim, we assign a claims liaison to all clients that have a claim. Your claims liaison will assist you along the entire claim process, including making sure damages are paid in a timely manner.
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Is reputational damage covered in any policy you would recommend for our firm?
Yes, reputational coverage is included in both our E&O and Cyber Liability solutions.
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If a cybersecurity breach occurs, does your company provide services to research the cause and recommend steps to help remediate the problem?
Absolutely. Every cyber carrier that we represent offers robust post-breach services including but not limited to client notification services and specialized forensics.
Coverage from Lockton Affinity Advisor meets the new requirements set by Schwab for RIAs and offers high levels of protection for all its RIA and broker dealer clients. With the increasing risk posed to RIAs like you, it’s important to make sure you have adequate insurance coverage whether you are an RIA with Schwab or with any other firm.
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