One advisor, whose high-net-worth practice uses alternative investments, says his business sometimes "has to go naked." He adds, "Insurance companies just won't offer the coverage we need."

Another advisor, Ronald Rutherford, a certified financial planner in Naples, Fla., whose average client has a net worth of $5 million, says he has been searching "for two years for a carrier that will cover alternative investments." Rutherford says carriers repeatedly tell him these investments "are too risky."

Another certified financial planner said creditable professionals are hurt by the sins of those with low standards. "The problem is that there are not enough fee-only advisors. And there are too many unregulated advisors who are taking commissions and are causing most of the lawsuits. Because of them, it is difficult for all of us," according to Kanaly.

Other professionals believe that good advisors can self-insure. They believe that any problems that come up in the course of a practice-especially a practice that is based on fee-only principles-can be settled without the help of an insurance company. That's because most of the problems of the financial advisory industry come from the lack of independence in product selection, these professionals believe.

Not so, say many some planners and insurance executives. "Self-insurance has many problems. You inevitably have representatives who start to argue with you about what is covered and what isn't," says Goldberg. Royal Alliance's approximately 2,700 reps have an outside carrier.

Goldberg believes that every rep must have coverage and that firms should use third parties to provide the coverage. He also stresses that every rep should ask for an abstract of the E&O coverage that the broker carries. That's so the rep knows if the coverage comes from a third party or is provided by the brokerage. Many reps don't realize that their firm is insuring them, Goldberg warns.

A Securities and Exchange Commission spokesman said the regulator hasn't studied the problem of uninsured advisors. "Check with the NASD," the spokesman said. "We don't have any information on this," according to a spokeswoman for NASD.

Many insurance executives and planners contend that, regardless of the controversies surrounding these policies, the average professional has no choice.

"It just makes business sense to carry this kind of coverage," said Dale Brown, the chief executive officer of the newly created Financial Services Institute, a broker-dealer organization that is affiliated with the FPA. "It is so easy for anyone to be sued today."

This is a point that is constantly made by the insurance industry, which is pushing E&O policies.