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I Just Became a Registered Investment Advisor? Do I Really Need E&O?

Are you a new registered investment advisor (RIA)? Then you know the process of setting up an investment-advisory firm is no simple matter. Whether you’re licensed with the Securities and Exchange Commission (SEC) or with a state securities administrator, establishing a firm that complies with federal or state regulations can be a daunting challenge. Then there are the tasks of deciding on the legal entity of your firm as well as designing its operational procedures.  And let’s not forget the crucial chore of purchasing investment-planning software, along with other financial applications, and the hardware necessary to run all these tools.

Given all this, it’s understandable that some new RIAs put E&O insurance at the bottom of their task list . . . or maybe even decide not to buy it.

As a new RIA, you might rightly assume your assets under management (AUM) will be limited for the first few years as your client list grows, creating only nominal E&O exposures. You might also be doing business with friends, relatives, and other people who you believe would be unlikely to sue you (at least, in theory). And you might take comfort from the fact that your regulatory agency does not require you to buy E&O insurance. How crucial can it be if it’s not required? Finally, you might decide that the cost/benefit ratio of buying E&O insurance is skewed too far toward the cost side of the equation.

Reasonable points, all. But we’d encourage you to consider these counter-points:

  • First, purchasers of financial- and investment-planning services today are not the same as those who purchased these services 15 or 20 years ago. They are much more knowledgeable about financial matters. They expect their advisors to know what they’re talking about and are much less forgiving when their advisors make mistakes.
  • Second, depending on your target market, you may quickly find yourself bringing on clients with seven-figure investment portfolios. They’ve been working for decades and now as baby-boomers are looking to move into retirement. Consequently, they can be sitting on substantial investment portfolios. Make a mistake in how you manage their hard-earned money or forget to do something important, and you will likely face an unhappy, litigious client.
  • Third, as baby-boomer portfolios have increased over the decades, a cottage industry of lawyers and law firms has formed to seek out financial-advisor clients who believe they’ve been wronged. In fact, a common marketing strategy of such firms is to get the names of advisors that FINRA or  the SEC have sanctioned and then blast them all over the Internet to recruit potential plaintiffs. Bottom line: the RIA marketplace has become much more legally treacherous over the last decade.
  • Fourth, RIAs often assume lawsuits will never happen to them because they’ve never been sued before. This is a cognitive bias called “the gambler’s fallacy.” Here, RIAs falsely believe the odds that something happened (or didn’t happen) in the past will determine the odds of it happening (or not happening) in the future. So if they never got sued, they never will. Clearly, this is a serious cognitive error that can have devastating financial consequences for a new RIA.
  • Fifth, as a new registered investment advisor, you may not be fully aware of the many ways an RIA can make mistakes, harming a client who then brings suit. You might breach your fiduciary duty, which is among the most frequent causes of RIA lawsuits, or recommend what turns out to be an unsuitable investment. Or you might innocently misrepresent the features or impact of an investment strategy or transaction, creating losses for your client. Then there are a host of negligence-related errors that can harm your new RIA firm. They might range from incorrectly executing a trade or falling for an Internet fraudster who wants you to wire your client’s money to him (who’s operating unbeknownst to you from an office in Nigeria). Then, as often happens, you might get sued just because a client is angry the stock market tanked, reducing her portfolio’s value.

Finally, depending on the nature of an RIA’s business, it’s not unlikely for clients to file six- and even seven-figure lawsuits against them. Being on the receiving end of a large legal action will quickly transform an RIA’s views on the costs vs. benefits of having errors-and-omissions insurance.

In short, even though you may be new to the RIA business, you’ll want to mitigate the financial risks of becoming embroiled in a client dispute. By putting a financial backstop in place before you get sued, you’ll be able to focus on working with your insurer-provided attorney and claims adjuster to mount a defense and hopefully achieve a positive outcome as quickly as possible. With your legal dispute behind you, you can then turn your attention to adding new clients and serving your existing ones, secure in the knowledge that if a problem arises with one of them in the future, your E&O insurance will be there for you.

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What Start-Up Businesses Need to Know about E&O Insurance

Many Americans dream of being in business for themselves. In financial services, tens of thousands of life insurance agents, financial advisors and planners, and securities brokers decide to hang their shingles each year. They’re all in search of autonomy, financial growth, and the satisfaction of doing good work for their clients.

If this applies to you, you probably remember how exciting it was when you pulled the trigger and launched your business . . . getting new stationery and cards, equipping your new office, going out on your first sales meeting, and closing your first sale. The best part? Getting your first commission check!

However, with all that excitement, you may not have considered some of the downsides of launching your new venture—the expenses required to set up your firm, the long hours needed to find prospects and close sales, the intense study required to master your product line, the effort to comply with state and federal rules and regulations.

One of the biggest downsides of all: the unique E&O risks that start-up businesses face. Which makes it crucial that financial advisors learn about—and buy—errors and omissions insurance.

Three Major E&O Start-Up Risks

So what risks are we talking about? There are three major ones.

First, new financial professionals typically enter the business with a knowledge deficit. If they’re coming from a totally unrelated field such as teaching or from a corporate job, they’re starting from ground zero in terms of knowledge. They don’t know how to initially approach clients. They lack knowledge about how to best assess financial needs. They’re still in the process of learning about the technical workings of life insurance, annuities, and investment products. Most importantly, they’re not fully aware of how state and federal regulations constrain their actions—and what the costs are for violating those rules.

If the person starting out has some related financial experience—say, as an accountant or as a customer-service person in a life insurance company—the learning curve might not be as steep as if they were totally green. But the point remains that the amount of knowledge needed to break into and then ultimately succeed as a financial sales professional is immense. Which means any lack of knowledge increases the odds of making a mistake . . . and getting sued. Errors and omissions insurance is an essential backstop for start-up professionals who have good intentions, but may lack the knowledge and experience to avoid costly mistakes.

Second, start-up agents and advisors typically start out with a low base income. They need to close a lot of cases, fast, in order to generate an income they can live on. Plus, since they’re typically early in their careers and may have young families, their cash needs might be quite high, but their net worth low. With the average cost of a life insurance-related errors and omissions claim being roughly $40,000, according to a major errors and omissions underwriter, the financial impact of losing a client lawsuit can be devastating. It’s the kind of blow a start-up professional might never recover from and for which the only remedy is bankruptcy. Here again, having a high-quality errors and omissions policy in force can spell the difference between weathering a business storm and getting swept away by it.

Third, new financial advisors typically have, well, a new client base. That means their customers won’t know them very well and may not have lived through the market ups and downs with them. This means advisors may not yet have established a reservoir of client trust and good will. If they make a mistake that harms their clients financially, their customers may not be willing to give them the benefit of the doubt. Their first impulse might be to sue the person rather than work things out. In this case, being insured with errors and omissions insurance is yet another financial safety net for a start-up professional.

In short, launching a new business can be difficult and risky enough without also being unprotected against client lawsuits. Most new agents will never have a problem client and will never get sued. But a small minority will, and the results can be incapacitating from a financial point of view. Are you willing to “bet the ranch” that your new business will never face such a client? If not, now is the time to consider buying high-quality, affordable errors and omissions insurance, designed especially for your business, from the pioneer in online E&O, EOforLess.

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E&O Insurance Builds Trust through Ethical Practices

There is a trust deficit in financial services these days. All the major opinion surveys find that consumers are lacking in trust when it comes to financial institutions and financial advisors. And while statistically, trust increases when they’re asked about their advisor, the industry as a whole must enhance its trustworthiness with the buying public.

How can financial advisors achieve this goal? By committing themselves to being a true professional, especially regarding ethics, compliance, and personal responsibility. Let’s explain each of these items in further detail.

Ethics: This involves always having your heart in the right place. Being ethical means you conduct yourself based on exemplary values such as client loyalty, fair dealing, openness, and quality. It means doing what’s right even when no one is watching. Here are some of the things ethical advisors do:

  • Protect and promote their clients’ best interests, even if it doesn’t serve their own financial interests.
  • Being transparent about their background, professional training, and business practices.
  • Engaging in fact-based selling based on skillful matching of client needs with available solutions.
  • Always being realistic about the possible results of buying a financial product and the potential risks.
  • Safeguarding client confidentiality even when third parties might press for information access.
  • Avoiding deceptive advertising practices that confuse prospects or create fear or doubt.
  • Not selling outside their expertise area just to make more money.
  • Committing themselves to the latest business practices and investment/insurance strategies in order to avoid unforced errors.

Compliance: Obviously, we could add many other items to the ethics list. But the point is this: Being ethical comes from the inside, from the heart. It is values driven, not law-driven.

It also represents a value-add to compliance, which is largely rules-based. So what compliance principles should advisors follow in order to accelerate trust building with consumers? Following are some of the major ones:

  • Follow the product training, carrier appointment, and continuing-education requirements in their state.
  • Adhere to NAIC and FINRA advertising standards, based on their license type.
  • Avoid certain “hot-button” words in sales interviews such as “account” and “deposits” when discussing life insurance and/or annuities.
  • Don’t call prospects who are on the national Do Not Call Registry or relevant state registry.
  • Only buy leads from direct-marketing companies who follow all applicable laws and regulations.
  • Get approvals from their compliance departments before using homegrown solicitation materials.
  • Avoid pursuing professional designations that lack legitimate educational content.
  • Only recommend products that comply with relevant suitability requirements, especially when dealing with senior clients.
  • Complete all required forms when replacing an existing life insurance policy or annuity.
  • Hold themselves out only as insurance sales professionals unless they have the appropriate education and/or license to support claims they are securities representatives or investment advisors.
  • Follow all rules regarding the use of life insurance illustrations.
  • Never give a prospect anything of financial value in return for a commitment to do business.

Personal responsibility: Financial advisors who behave ethically and who comply with the law not only have a leg up competing with other advisors, they also are better able to prevent mistakes that lead to costly, potentially career-ending, E&O insurance disputes. So if you take away nothing else from this article, let it be this: Doing business with your heart (ethics) and your head (compliance) will keep you safe in today’s litigious business. But even the most ethical and compliant advisors can make mistakes—and get hit with nasty legal judgments when they lose in court. This is where personal responsibility comes in.

Financial advisors should accept that one day they, too, might get sued. And that the ethical response to such an event is to protect their practices —their livelihoods—against legal claims, while also making clients whole when their error or omission financially harms a client. In both cases, buying E&O insurance is a necessary solution.

At the end of the day, protecting your business AND owning your mistakes are two sides of the same coin. E&O insurance can help you achieve both if you buy it before you need it. And one last thing. Being fully insured, not just with E&O insurance, but also with other forms of business insurance, is a great way to communicate to prospects and clients that you’re a professional. It shows that you are dedicated to being in business for the long haul and that you have owned up to your responsibilities.

So don’t hesitate to tell your prospects  you are fully insured in the event something goes wrong. There’s no need to get into the details of your E&O insurance because you don’t want to plant ideas. But do explain that you practice what you preach by purchasing insurance  that assures you will be able to serve your clients for years to come.

In summary, don’t let the industry’s anemic trust numbers get you down. Instead, focus on what you alone control . . . your own ethics, compliance, and personal responsibility. If you strive to excel in all three areas, you WILL build trust quickly. You can trust us on that!

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How to Shop for E&O for Insurance Agents Online

Quality of E&O Insurance Is Key

Buying E&O for insurance agents online has become common of late. But just because it’s possible doesn’t mean you’re assured of getting quality protection. You still need to do your homework. This involves understanding your needs and checking out potential providers before making a decision.

We can’t stress enough the importance of evaluating your needs before purchasing E&O for insurance agents. This involves asking some tough questions about your customer base:

  • Do they accept your recommendations or frequently second-guess you?
  • Do they cut you slack in the rare event you make a mistake or hold grudges?
  • Have they been litigious in the past?
  • Do a substantial number have cognitive impairments due to illness or age?
  • Have they been clients just briefly or for a long time?
  • How affluent are they? Would losing a lawsuit involving your largest client account wipe you out financially?

Considering these questions will help you select adequate coverage limits in order to shield your assets from legal attacks. And if you’re not sure about the right amount, always err on the high side. That’s because the added cost of purchasing more insurance will pale compared to losing a big hunk of your assets due to an adverse court judgment.

Once you know how much insurance you need, turn your attention to selecting an E&O insurer that will serve you capably. To this end, consider:

  • the firm’s track record in the E&O insurance market,
  • its reputation on the street, and
  • its financial solvency grades from the major rating agencies.

No Deductible E&O Insurance Is Essential

Once you know how much E&O insurance you need and from whom you’d like to purchase it, request a specimen policy. Read this document as if your financial future depends on it. Pay special attention to the insuring clause and exclusion list to make sure the protection will be there when you need it most.

No deductible E&O insurance is important, as well. As with many other forms of insurance, E&O policies typically require insureds to absorb a certain level of financial loss before their coverage kicks in. In other words, if they get sued, they will pay a portion of their legal fees until they satisfy their deductible. However, at EOforLess, life and health insurance agents benefit from our no-deductible feature. Because our strategy of doing business only with low-risk financial advisors has produced a customer pool with favorable claims experience, our insurer can eliminate deductibles for all. So again, always look for no-deductible E&O insurance as you research your purchase.

The experience and strength of your E&O insurer, appropriate coverage limits, and no-deductible E&O insurance —all combine to produce affordable, high-quality protection. Is your current E&O policy meeting this standard?

Print Your Own E&O Insurance Certificate

Quality is just one piece of our value proposition. Convenience is the other part. When you buy E&O insurance at EOforLess.com, you can literally shop for and purchase the protection you need in minutes. Compare this to the old method of buying through professional liability brokers and you’ll see why thousands of financial professionals today prefer the online alternative.

Take a look at our pain-free shopping experience:

  1. Visit EOforLess.com.
  2. Decide on the type E&O insurance you need—for life agents, P&C agents, RIAs, or Real Estate Brokers—and then click “see plans” to select the appropriate policy form.
  3. Determine an adequate coverage limit. Life/health agents who sell only those plans can choose base coverage. But if you also sell annuities, variable life/annuities, or mutual funds, upgrade to a higher protection level. Then click “buy now” to begin the payment process or “view coverage details” to read the policy provisions.
  4. Review the list of policy features and benefits, along with further information. We also highly recommend you download and carefully read the specimen policy.
  5. After scanning the details, click “buy now” to finalize your purchase. Then fill out the form to establish your account and determine your payment and billing-frequency options. After you finish entering the information, click “Pay & Proceed To Bind Your E&O”.
  6. If you are able to answer “no” to all the underwriting questions, click “pay” to bind your coverage.
  7. Ready to print E&O certificate? Just hit “print” to output your E&O insurance certificate.

The last step reinforces the power of buying E&O insurance online. In the “old days,” to get an E&O insurance certificate, you needed to contact an E&O insurance broker, go through a lengthy sales process, and then wait days or weeks for insurers to respond with premium quotes. Then you’d have to meet with or speak to the broker again to select the best policy and fill out a paper application. Finally, after much waiting, you would receive your E&O insurance certificate.

If you needed that document right away to pursue a sales opportunity, you’d be out of luck. The process simply took too long. However, if you had purchased your E&O insurance from EOforLess, you would have been able to print an E&O certificate in 5 minutes or less. It’s easy to see why thousands of insurance agents and financial advisors prefer to buy their E&O insurance at EOforLess.com. It’s simply a quicker, better way to buy.

In summary, if you’re shopping for E&O insurance for the first time—or switching to a new insurer—visit EOforLess.com now. We help busy insurance agents and financial advisors save time, money, and aggravation, while protecting their finances against catastrophic loss. What’s not to like?

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