Deciding which broker-dealer (BD), financial marketing organization (FMO), or registered investment advisor (RIA) with whom to affiliate is never a trivial matter. Typically, financial advisors and insurance agents choose to contract with those organizations that provide the optimal mix of payout, product choice, marketing support, technology prowess, sales/marketing assistance, and compliance expertise. However, many advisors fail to consider the errors-and-omissions coverage provided by (or referred through) their partners. This can be a costly mistake.

The good news is most such organizations provide access to some form of E&O coverage. If the partner is ethical and committed to building a long-term relationship with you, the E&O protection should be affordable and of high quality. Yet, not all organizations are ethical or committed to their producers. Do your due diligence to confirm you’re getting a good deal.

As with all things financial, complexity rears its head quickly when discussing E&O coverage. Practices vary based on whether the entity is a BD, FMO, or RIA. Further, within each type of organization, there’s no standard way of delivering E&O coverage. Here are some broad guidelines to consider.

If you’re a registered securities representative, selecting a broker-dealer means you’re required to buy the firm’s errors-and-omissions coverage. The BD arranges for a block of coverage from an insurance company. Then, it divvies up the block among its contracted reps, charging each one a fee. Now, here’s where things get complicated. Some BDs will simply charge their reps their cost. Others will view E&O as a profit center, “marking it up” to a greater or lesser degree. What’s more, some will treat all reps the same, charging a standard rate. Others will vary the rate based on the rep’s production. Still others might play favorites, charging a better price to reps whom they “favor.”

Despite these complexities, getting E&O from your broker-dealer makes more sense than not. Selling securities in volatile times, especially to high net-worth clients, creates substantial risk for advisors. Getting covered through your BD simply makes good business sense. And since the BD wants you to be covered in order to minimize its own risk exposure, it will hopefully do its best to procure high-quality and affordable coverage. In the rare event a BD overcharges for E&O, registered reps will have to factor that into their overall BD assessment. If the firm is lacking in other areas—say, its product portfolio is weak or its computer support is lacking—then it might make sense to shop for another BD.

But be careful. A BD that charges a low amount for E&O might be capturing profits elsewhere in the relationship through higher securities transactions costs (or other costs). Evaluate the BD’s E&O offering in the context of its total product and service quality.

In the insurance world, agents have more flexibility to source their own E&O protection. As with BDs, FMOs typically require agents to have E&O insurance as a condition of contracting. However, unlike BDs, FMOs don’t access a block of coverage for agents to draw upon. Instead, they often research the market and make referrals to one or more “preferred” E&O providers. Since agents aren’t required to follow the FMO’s recommendation, they should evaluate them on their merits:

  • Do the recommended E&O policies provide high enough coverage limits?
  • Do they cover your specific products and business activities?
  • Is the insurance company highly rated and financially stable?
  • Does the company have a solid track record of paying claims?

As with BDs, the good news is that FMOs are unlikely to refer you to a grossly inadequate E&O insurer. That’s because they want to reduce their own financial liability by creating a risk buffer at the agent level. Once again, price may become an issue for some agents. If the recommended policies are too expensive, be sure to shop around for better deals.

Avoid the common practice of simply signing up for E&O insurance in order to provide the FMO with a coverage certificate, then dropping the coverage at the first opportunity. According to E&O experts, this may save you money in the short run, but will create potential financial problems in the long run due to coverage gaps. If you’re committed to staying in financial services, don’t just buy E&O to generate a certificate.

For investment advisor representatives, the options depend on the type of RIA selected. If the RIA is a wirehouse type, then advisors will be required to purchase the RIA’s E&O (see earlier BD discussion). If the advisor is affiliated with an independent RIA, then E&O practices will mirror those of insurance FMOs. So the onus again will be on the RIA to shop for a reasonable deal. In either case, it is crucial to fully review the coverage supplied and make sure it’s suitable to your business model.

Finally, when it comes to errors-and-omissions insurance, our best advice is perhaps the simplest. Do your due diligence before buying E&O insurance, make sure you’re not overpaying for it, and keep it in force continuously. Also, do business in such a way that you will never need to use it. That’s the savviest E&O decision you can make in today’s litigious environment. Good luck!

For more information on reducing your errors-and-omissions insurance liabilities, please visit our E&O Headquarters at

Ask National Ethics Association…

Q: I am a financial advisor who’s required to have errors and omission coverage. What do I need to look for in an  policy?

A: Before we give you the answer, here’s a short introduction on E&O that may be helpful.

Errors-and-omissions insurance, or E&O, is an important business expense for financial professionals such as financial advisors, CPAs, and life insurance agents.  In our litigious society, where responsibility is consistently pushed onto another party, one in seven of these professionals will face a lawsuit[1].

Fortunately, most financial professionals are ethical and responsible and take great care managing the details of their work.  With proper focus, advisors can avoid a potential lawsuit.  However, even the most careful are not immune to a legal attack from a former or current client.  Without the benefit of errors-and-omissions insurance, a lawsuit can be financially devastating.

What You Need to Look for in an E&O Policy

Not all E&O policies are the same.  And depending on your specialty, there are certain elements you may need that others do not.  Here are some of the features you should look for in a high-quality E&O policy:

Adequate liability coverage

All E&O policies include liability coverage that protects you from financial loss due to a lawsuit arising from your error or omission.  Liability coverage has two parts:

  • Per Individual Claim – Usually, there is a limit per incident or claim.  The typical individual limit is $1 million.  This means that any single liability claim resulting from a lawsuit will pay no more than $1 million.
  • Aggregate – Each E&O policy has an annual aggregate that limits how much an insurance company will pay each year.  The usual annual aggregate is $2 million.  That means the insurance company will pay for multiple claims up to, but no more than, $2 million.  Some insurance companies state a lifetime policy aggregate limit rather than an annual aggregate.  Be sure the lifetime limit is adequate if you go this route.

Remember, a general liability policy only covers incidents that affect bodily injury due to negligence from property or product safety.  It does not cover financial loss to clients.  Be sure to get adequate professional liability coverage from a high-quality E&O policy.

Legal and court costs

Whenever you are served legal papers that name you in a lawsuit, it will cost money just to defend yourself.  Legal fees and potential court costs add up quickly and can turn even a small claim into a giant financial burden when you consider the total court and legal fees involved.  Look for this important provision in your E&O policy to shield you from these damaging expenses.

Post-retirement claims coverage

E&O claims do not always arise while you are in business.  They may surface years later after you’ve retired and a past client files suit against you.  Your E&O insurance policy should have a provision to cover any claims that occur post retirement. This assures you will not be exposed to great financial risk after you stop working.

Employee or administrative coverage

Most financial professionals have employees or staff who serve clients directly.  When they make a mistake or fail to carry out a required task, you will be held accountable. Employee or administrative coverage protects you from employee E&O risk.

Coverage extension to spouses, domestic partners, legal representatives, or beneficiaries

Nobody wants to have their family or other loved ones affected by a lawsuit.  Some cases may name spouses as an actual defendant, even though they had nothing to do with the main financial professional’s business.  Protect your loved ones with this important coverage feature.

Coverage flexibility

Make sure your E&O policy can be adjusted for whatever products and services you provide. Basic policies cover you for the sale and servicing of life, accident, and health products. But also look for optional coverage for fixed and indexed annuities, variable products and mutual funds, disability insurance, and RIA Series 65.

Brought to you by National Ethics Association, sponsor of Preferred Risk E&O insurance for qualified financial professionals.


[1] Source: Errors and Omissions Insurance Resource Center