Registered Investment Advisers (RIAs) face growing exposure to negligence claims. While the law does not mandate Errors and Omissions (E&O) insurance, also known as professional liability insurance, the coverage may be important. As reported by InvestmentNews, without E&O Insurance, RIAs risk absorbing the full weight of legal fees, settlements and judgments.

Kevin Thompson, founder and CEO of 9i Capital Group, explained that E&O coverage helps protect firms when clients allege that an adviser acted outside of fiduciary obligations. "Much like any other risk, you've got to limit it as much as you can. Having extra lines of coverage in place matters," Thompson said. According to InvestmentNews, he cautioned that conflicts of interest remain one of the fastest paths to regulatory trouble, including failed audits.

The risks extend beyond compliance missteps, especially when providing advice on insurance products, as reported by InvestmentNews. Brian Francetich, director of Golsan Scruggs RIA, observed that most advisers lack deep expertise in the many branches of insurance, ranging from life and annuity products to property and casualty coverage. In his view, E&O insurance, when properly structured, plays a vital role in defending claims of unsuitable advice. But coverage is only part of the solution. "The key risk is competency and expertise of the subject," Francetich said.

Finally, Francetich warned that not all E&O policies provide equal protection. The definition of "Professional Services" or "Investment Adviser Services" can vary significantly between contracts, with potential pitfalls if an individual adviser also holds an insurance license and acts as the broker of record. Careful review of policy language is essential to ensure coverage extends to insurance-related guidance.

Financial Advisor Transitions consults advisors nationwide to explore employment transition options and to preserve and protect their practice in any transition that they make.