3 Products RIAs Must Buy
No business wants to spend money it doesn’t have to. But without these 3 products RIAs must buy, a firm could find itself paying for risks it can’t afford.
In any shopping scenario, there are some bells and whistles that would be nice to have and other must-haves that you can’t do without. When it comes to RIA firms looking to protect themselves, there are three essential insurance products.
The next time you review your insurance coverage, it’s of top importance to ensure you include coverage for Errors & Omissions, Fidelity Bonds and Cyber Liability. Here’s why.
Are There Really Must-Buy Insurance Products for RIAs?
Most RIA firms are careful in how they spend their money. No one wants to buy things that aren’t needed. But when it comes to the kinds of outsized risks RIAs face, there are a few kinds of insurance products a responsible RIA should consider a must-buy.
The products needed are tied very closely to the three big what-if’s faced by an RIA:
- What if I make a mistake?
- What if our fund is robbed?
- What if my data is hacked?
Unfortunately, there’s no one insurance product that protects RIAs against all three of these dangers. Instead, RIAs must obtain the following specific coverages for each of these risks.
3 Products RIAs Must Buy – #1 Errors & Omissions Coverage
Errors & omissions (E&O) coverage covers the kind of mistakes that are common today. It’s the foundation for an RIA firm’s insurance protection. It has been the most commonly issued policy in the industry for years.
E&O coverage protects against claims of honest mistakes, such as trading errors, advisor-client miscommunications, product suitability complaints, failure to disclose or breach of fiduciary duty.
A mistake as simple as typing the wrong ticker symbol for a stock purchase can result in a tangible loss for the client if that stock then falls. E&O coverage can help the RIA firm cover the cost of such losses and damages.
E&O coverage is also a must-have for more complex claims of professional negligence, including those where no mistake was made. Excessive fee lawsuits alleging an advisor is working against a client’s best interest have become common. In such a case, E&O can pay an RIA’s legal fees, settlements and judgements.
However, E&O doesn’t cover everything. Normal market losses, fraud and dishonesty aren’t covered, nor are theft from plan funds or cyber hacks. For these risks, RIAs need additional protection.
3 Products RIAs Must Buy – #2 Fidelity Bonds Coverage
Fidelity bonds coverage is designed to protect RIAs from internal and external theft risks not covered by E&O. Fidelity bonds can make whole any clients who are robbed through the firm, whether the theft involves dishonest behavior by an employee or fraud by someone from outside the firm.
Increasingly, fidelity bonds coverage is needed for external threats more than internal ones. Through email, web and phone, fraudsters have successfully submitted funds transfer requests and wire change instructions to drain millions of dollars in assets from client accounts.
Compared to larger financial institutions, RIAs are often easy targets. Social engineering tactics are used to get past an RIA’s technical security. Fraudsters impersonate clients in emails, on websites and even on the phone, tricking firm employees into authorizing a distribution and wiring funds to a fraudulent account.
While better security protections can prevent some of these frauds, others may still get through. It is in these cases that fidelity bonds coverage is a must-have.
3 Products RIAs Must Buy – #3: Cyber Liability Coverage
Cyber liability coverage protects you from the threats posed by modern cybercrime. Just as no RIA could survive long in today’s world without computers, RIAs can’t do without the coverage that protects those computers and their data from thieves.
Cybercrime involves a broad spectrum of issues, not limited to the monetary theft of firm assets or client assets that may be facilitated through a computer and protected by a fidelity bonds policy. Often, hackers are also after confidential data. This data can be sold on the black market, used to facilitate other computer frauds or encrypted and held for ransom.
RIAs can face the need to replace hardware and software, pay ransoms to regain control of their computer systems, or make clients whole after a data breach that exposes their private data to hackers. Costs for IT experts, public relations and legal defense also pile up, making broad cyber liability coverage another must.
Next Insurance Steps for RIAs
While it’s true that all businesses have to contend with the risk of a mistake, theft or hack, most businesses aren’t held to the same standard of liability as RIAs and other regulated financial professionals. Under ERISA rules, liability can quickly rise into the millions or billions. Professional as well as personal assets can be put at risk.
Risk profiles are on the rise for RIA firms everywhere:
- Cookie-cutter class action lawsuits are targeting firms over perceived errors and stock market losses.
- Clients whose accounts have been drained by fraudsters are filing lawsuits against their RIAs.
- Cyber criminals are sending hundreds of millions of malware and phishing emails every day.
To protect against these risks, it’s smart to have the right Errors & Omissions, Fidelity Bonds and Cyber Liability coverages. With these must-have products, you can protect your firm against outsized risk presented by the modern world.
When it comes time to obtain coverage, Lockton Affinity Advisor offers the products and service you need to protect yourself and your firm from these and other risks. Coverage is tailored to meet the needs of RIAs and the threats you face.
Plus, fiduciary coverage is included 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 insurance from Lockton Affinity Advisor.