PLANADVISER - March/April 2019 - 53

Be Ready to Shop for Insurance
Asked what simple tips or advice could help retirement plan
advisers start the process of shopping for an E&O policy,
Francetich says it will sound much like the common advice
firms hear when looking to professionalize their practice.
" You need to be able to demonstrate that you have a
culture of compliance that's built around firmly established
best practices, " he says. " You need to show that you
have sound policies and procedures, and you also need to
be able to show that you are actually effectuating these
policies and procedures.
Also very important is demonstration of the scope and
scale of service. Much of the time, this is in the advisory
agreements, but it might not be very clear
or intelligible from the perspective of the
whole RIA business. You need a very clear
outline of what services you will provide
and won't provide for clients. "
For firms that have had recent claims
against their existing E&O policies, this will
make the shopping experience more challenging-particularly
if there are multiple
claims and if any are still open.
" We occasionally see situations where a
firm warns that any RIA firm that does not have proper
E&O insurance coverage is exposing itself to serious business
risk.
One of the first and most obvious areas to look at with
any potential policy will be the annual premium, RIA in a
Box writes.
" Just like other forms of insurance, higher levels of
complexity, risk and coverage limits will lead to a higher
annual premium cost, " says the guide. " In the investment
adviser industry, you'll often see higher premiums for advisory
firms that utilize alternative investments, have past
regulatory disclosure issues, or have relatively inexperienced
principals who are the new to the industry. "
client with open claims goes to shop around
and realizes the economics of a risk transfer
aren't going to make sense at this juncture, " Francetich
observes. " Usually you can find someone that will offer you
a policy, but it's a question of cost and coverage quality. "
In this sense, Francetich says the E&O insurance market
for RIAs is like the Wild West.
" Because the Insurance Services Office has not created a
standard coverage form, you'll see a huge amount of diversity
in the policies offered, " he says. " You'll see policies
issued at very high premiums that, in the fine print, carve
out some of the key coverage areas. There is a very open
ability to do this. "
It is vital for advisers to understand that there are
two sub-markets of providers. First are carriers that
are " admitted, " meaning they have to adhere to oversight
from the state insurance regulators. Then there are " nonadmitted "
insurers; this second group has essentially free
rein to write whatever they want into their policies.
" In this non-admitted space, it is truly 'buyer beware,' "
Francetich says. " You could buy a policy that excludes 90% of
what you do as a retirement plan adviser or wealth manager.
I've actually run into those types of policies before. "
Steps to Analyze E&O Policies
According to commentary from RIA in a Box, which provides
compliance solutions for investment advisers, RIA firms are
not actually always required, from a regulatory standpoint,
to secure errors and omissions insurance. But in its role as
an RIA registration and compliance solutions provider, the
firm strongly recommends that investment advisers secure
adequate E&O insurance coverage.
In an introductory guide published on its website, the
" We occasionally see situations where
a client with open claims goes
to shop around and realizes the
economics of a risk transfer aren't
going to make sense at this juncture. "
Next and just as important as considering cost is
reviewing, in very fine detail, the real coverage limits coded
into the potential contract.
" It is important to note that there may be separate limits
for an alleged act, all acts combined (aggregate), or for the
overall master policy, " the guide says. " There are a wide
range of coverage limits. The higher the coverage limit, the
greater the premium cost. "
The deductible also must be carefully considered. Just
as in health insurance or automobile insurance, this is the
amount of money the investment advisory firm will pay out
of pocket before the E&O policy kicks in. Naturally, the lower
the deductible, the greater the premium cost.
After the review, the adviser should consider the interplay
of master policies vs. individual policies, the guide says.
" Often, an investment advisory firm can save money on
errors and omissions coverage by joining a master policy, "
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