Stock prices are rising. Investors are happy. So advisor liability insurance rates are going down—right? Wrong.
Investment advisor liability insurance premiums have typically gone down when markets go up because investors are not trying to recoup their losses from their financial advisors. But in the wake of the 2008 financial crisis, with the increased level of scrutiny by the Securities and Exchange Commission, blended directors and officers (D&O) and errors and omissions (E&O) rates are expected to climb 5 percent to 10 percent this year.
“The carriers all point to significantly more cost of investigations claims as the primary reason for the rate jumps. What has to be kept in mind is that legal costs to address the formal investigations mount up whether or not the investigation uncovers any wrongdoing or not,” said a recent report by the adviser/fund unit of Willis, a leading business insurance broker.
D&O insurance covers company executives and board members in legal action related to business decisions outside of criminal conduct. E&O policies protect advisors from claims of negligence or mistakes.
Even with the heightened vigilance by the SEC, however, investment advisors are seeing lower rate increases than other segments of the financial services industry.
“Carriers are seeing financial advisors face less scrutiny from SEC than hedge funds, as hedge funds have been tied into the insider trading scandal and the credit crisis and are faulted by the regulator for having a lack of transparency,” said Chris Pass, a broker who handles professional liability and executive liability with RT ProExec.
Experts off a number of ways in which advisors can attempt to keep rates down.
Start shopping for insurance early, at least 45 to 60 days before your current policy expires, they say. Have face-to-face meeting with senior insurance reps, who should be asked about their insurance companies' internal operations and compliance policies and procedures.
Noble “Noby” Powell, a senior vice president at Willis, said another way to cut insurance costs and claims is to purchase compliance software to monitor transactions.
While computers can mistakes just like people, Powell said software can spot potential problems more quickly and efficiently.