Excessive fees, trade errors, cyber hacks, discrimination claims — RIAs face a long list of risk scenarios. Here are 9 common RIA claim examples detailing what could happen and how it could cost you without the right insurance.
Fiduciary Duty
A retired couple hires you to manage their investments. In initial discussions, the couple asked you to pursue an aggressive strategy, hoping to build on the wealth they had already accumulated. At first, you recommend against this, given the ages and life stages of these clients. However, you are persuaded to honor their wishes and invest their funds as requested.
Later, some of the investments decline, with the couple’s managed assets falling by nearly $400,000 below the initial investment. Despite their previous instructions, the couple brings a lawsuit, claiming that placing their funds in such aggressive investments was not suitable for their ages and financial goals in retirement.
You remember warning against this verbally for this very reason. However, when you review your notes, you discover you neglected to document that professional advice in your records. After the lawsuit is served, you file a claim with your insurance and settle the matter out of court. It’s still a hefty sum, with the insurance claim totaling $250,000, including your pre-trial defense costs.
Cost of Corrections
Computers are tricky. Your firm just set up a new system able to automatically trade funds based on triggering events. You decide to use this feature to automate the new investment of funds as clients make deposits into their accounts, with deposits being the triggering event that causes the system to trade the funds.
Everything looks like the automation is properly set up and ready to go, but it isn’t. Instead, clients continue to submit deposits, but the funds are not invested. The money just sits in the client accounts. Worse still, it isn’t just one client who is affected — it is 50 of them. The problem goes undetected for over six months, all while the market is having a good run.
Eventually, someone notices the error and the firm begins assessing the damage. It is estimated the clients have collectively lost nearly $130,000 during a particularly good uptick in what would have been their investments. You file a claim with your insurance and are able to be reimbursed for $120,000 of the loss to make the clients whole, after a deductible.
Trade Errors
You’re one of a number of RIAs that’s been having technical issues connecting to a custodian’s system on and off for months. This means that both planned and ad-hoc trade requests have to be executed manually whenever the system goes down. You have good protections in place for such situations, with a limited number of four designated individuals with manual trading authority who will also reconcile trades at the end of the day.
However, the technical issues persist and eventually the system goes down at a bad time. One trader is out on maternity leave, one is at a conference and another falls ill. This leaves only one inexperienced individual with trading authority to handle all the manual trades for several days.
It’s the perfect storm for the all-too-common trade error and few different ones happen at once. Several trades are executed incorrectly, buying the wrong security and selling the wrong amount of another in “fat-finger” trades. One client is mistakenly sold out of a legacy stock position and another has their change request overlooked. There are even a few duplicate trades due to the trader failing to reconcile some trades before the automated system comes back online.
When the errors are caught after the senior traders return, losses for clients amount to $40,000. Your firm opted for a $5,000 deductible on your E&O policy and are able to receive $35,000 from your insurance provider to help make the clients whole.
Excessive Fees
As a plan advisor, you’ve heard a number of horror stories about excessive fee lawsuits. Worried about a claim, you take great care to select appropriate investments for plan participants in all investment categories. You perform all appropriate due diligence, observe all industry benchmarks and carefully monitor fees and investment returns.
However, you still find yourself caught up in one of the hundreds of excessive fee suits that have been proliferating over the last few years. A few different complaints are alleged in the $2 million lawsuit. An aggressive law firm known for such suits claims you failed to conduct a public RFP bidding process on a frequent enough basis, that lower cost investments existed that were not offered, and that you failed to choose an appropriate investment option for capital preservation.
While you had diligently monitored recordkeeper fees and stayed with one who offered very low fees, already offered cost-friendly investments with fees that were low by industry standards, and avoiding other capital preservation options you’d seen result in claims, it doesn’t matter. You file a claim with your insurance, and the matter is settled out of court for $500,000, minus your $10,000 deductible.
Fidelity Bonds
As an employee benefits plan RIA, you have a very thorough vetting system for new fiduciary hires. Besides industry education and experience, professional recommendations, background and credit checks, a careful screening for company fit is also performed. Your system has worked well for years, and the firm is proud of a stellar record of stewarding participant assets under management without issue.
Your firm also has a vetting system for new third-party vendors and contractors. However, your system isn’t foolproof. One day, a seasoned contractor serving in a fiduciary capacity decides to outsource certain tasks it performs for your firm and some irregularities begin to occur. With most plan participants not checking their balances regularly, the problem goes undetected for several months.
After several participants reach out with questions about missing funds, you conduct a review of recent account actions. It’s determined that a rogue contractor employee used the contractor’s system access to skim a total of $100,000 out of several different participant accounts before quitting and disappearing. A contractor theft is covered under the firm’s Fidelity Bond insurance, so the participants are able to be made whole when you file a claim with your insurer.
Cyber Liability
As an RIA that keeps up with the news, you know that the FI industry continues to be one of the main targets of cyber criminals. That’s due not only to the sensitive data on clients, but the large sums of money that pass through their accounts. Even so, you’re shocked when a cyber attack targets your firm.
It starts out like any typical workday. You arrive in the morning with a busy day planned. Emails, a couple meetings later and planned time set aside for other work on the computer. But as you’re logging onto your work terminal, the machine goes blank. A strange message appears on the screen demanding a $100,000 bitcoin payment to finish logging into your computer. The same message warns your files may be deleted and client financial details published on the internet if you don’t comply.
It’s a classic ransomware scam. Somehow, whether through a rogue email attachment, website visit or some brute force attack by a persistent hacker, your computer system has been compromised — along with very sensitive client and financial information. You contact your IT provider and your insurer. Later, you also have to hire a slew of experts, from legal counsel to PR specialists and computer forensics experts to get your system back under control and protect your clients and their information. Your Cyber coverage pays for nearly all of the damages and losses sustained, but it’s an eye-watering claim of almost $1.2 million before it’s all over.
Crime
Like many, your firm handles most of its day-to-day operations online. You have the ability to write a paper check if needed, but you rarely do. Everything is done digitally. However, it turns out that you never really know who’s on the other side of an email message.
These last few months have had you starting to think the firm expenses are getting out of hand. There’s been a recurring $7,000 invoice that seemed steep. You paid it, but as you start to track down what it’s for and who at the firm authorized it, you find out it’s actually an email scam.
It looked so legitimate, too. The email comes from an address that is almost exactly the same as the business services vendor that’s so popular with companies that it’s a household name. Everything is spelled correctly and uses proper grammar. Even the logo and formatting are the same as what the real vendor uses. The PDF invoice attached to the email passed all your malware and virus checks, and, since it was sent specifically to the correct accounting team email at your firm, your spam filter didn’t catch it, either.
At this point, your firm has paid out $28,000 in fraudulent invoices. You get your IT provider to secure your systems and file a report with your bank and law enforcement authorities. You submit an insurance claim under the Crime coverage your policy provides and receive a payout that covers most of your firm’s loss, minus a deductible of $5,000.
Employment Practices Liability
Your mid-sized RIA firm hires a junior business development associate to assist with a new growth strategy. The firm is excited about the new hire. The employee’s background as a successful college athlete with a positive attitude makes him a great fit for the outgoing, cross-functional role.
While the office has always been professional toward clients, it does have a more “work hard, play hard” culture internally. Within a few months, several women who work at the firm begin to make inappropriate comments about the new hire’s athletic physique, some remarks are even said directly to the employee. The new hire reports the behavior to his manager, saying that, while he at first brushed off the comments, the senior employees he needs to interact with to carry out his job tasks are continuing to make comments that are impacting his work.
The employee’s manager notes at the time that, while he investigated the complaint, he took no action because the situation does not resemble the typical complaints depicted in harassment training materials. Several months later, your firm determines it wants to take its growth strategy in a new direction and lays off several team members, including the junior associate. A discrimination claim is filed citing a hostile work environment and employment retaliation. The firm is forced to file an insurance claim, which settles out of court for $40,000, after a $10,000 deductible.
Workers’ Compensation
Your RIA firm has been a fixture in the region for decades. There’s a lot that’s good about that, but a few things that aren’t. On the positive side, your receptionist has been with you from the beginning. She’s nearing retirement age, but you wouldn’t know it — the rest of the office can hardly keep up as she bounces from the front desk to the back office for daily tasks.
However, your building is definitely showing more of its age. It hasn’t been updated since you moved in and it seems like there’s a problem everywhere you look — a wall cracked here, the carpet bunching up there. One day, the aging building gets the better of your energetic receptionist and there’s a workplace injury. She trips over a spot on the floor that’s missing a floor tile and falls.
Everyone knows healthcare costs are up, but you don’t realize by how much until something happens. It was just a simple wrist fracture and some bumps and bruises, but the hospital ran a whole battery of tests because of your employee’s age. The bill came back at $20,000. Luckily, your firm has Workers’ Compensation coverage that takes care of your receptionist’s medical expenses and lost wages, while protecting your business from a costly lawsuit with your favorite employee.
Conclusion
The good news for RIAs? All of these common claim example scenarios can be covered by your insurance. It’s just a matter of making sure your firm has the right coverages in place. However, that alone can take some skill — because lacking the right policy, coverage limit or endorsement could mean you lack the necessary coverage to protect against the risk.
Luckily, Lockton Affinity Advisor can do the hard work for you. Our experienced team understands the ins and outs of risk within the FI industry. We work with you directly to ensure you have the coverages you need to protect against your unique risks, meet custodian requirements and protect the future of your business.
Curious what coverage will look like for you? Get started with a quick quote or give us a call at (844) 406-5958 to discuss your firm’s needs with one of our RIA insurance experts.
