With attorneys and disgruntled investors setting their sights on financial advisors, can lawsuits against them be far behind? The answer, say plaintiff attorneys, depends on the advisor.

It's not a growing number of lawsuits that are plaguing investment advisors. At least not yet. What's troubling them and their errors-and-omissions insurers these days is the uptick in mistakes advisors are making and then are trying to rectify in a highly expensive manner.

In fact, in some cases, advisors are fixing mistakes even before investors realize they've been made. "It's good for investors, but it's an interesting phenomenon," says John M. Gannon, deputy director of the Securities and Exchange Commission's Office of Investor Education & Assistance.

The people feeling the most heat for mistakes aren't investors, regulators or even advisors. It's the errors-and-omissions (E&O) insurers, who write coverage for advisors and are beginning to see red. "Advisors live and die by their reputations, and the last thing they want is a trial, so they want to correct errors in an effort to stem lawsuits," says Evan Rosenberg, senior vice president of Chubb & Son in Warren, N.J.

The concern for insurers is that advisors are tapping their "cost of corrections" riders-coverage that is no more than three or four years old-to pay for their mistakes. That, in turn, is blowing a hole in insurers' profits and may be driving up deductibles and premiums for errors-and-omissions insurance. The riders don't cover bad judgment or investment decisions, but they do cover errors.

"Say an advisor buys a block of stock and distributes it among clients, and a significant number of shares are deposited in a client account, where the client has given specific instructions that they don't want that stock," Rosenberg explains. "Then suppose the error isn't discovered for six months, until the stock tanks. That type of error has been happening a lot in the past year or so."

Rosenberg says the tremendous growth in the advisor industry and the assets it manages has taxed its infrastructure and its back-office capacity, causing more things to fall between the cracks. To pay for such errors, advisors are making an increasing number of "cost of correction" claims. Both Chubb and AIG say such claims have increased 50% in the past 12 months.

The claims Chubb is seeing "run between $200,000 to $2 million," Rosenberg says. A smaller investment-advisory firm with about $25 million in assets is paying about $8,000 to $10,000 in annual premiums for $1 million in errors-and-omissions coverage. Deductibles on such policies run between $25,000 and $50,000 a claim.

The problem for insurers is that advisor policies historically have been a relatively profitable business with few claims. Now, the increase in cost-of-collection claims is standing insurers' economics on its head and could make these policies pricier.

Still, it's not surprising that advisors try to correct problems or settle claims before they become lawsuits or, at the least, lead to lost clients. Whether or not an advisor is guilty, say experts, a lawsuit typically can cost more than $100,000 in legal fees and take five years to resolve.

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