In a litigious world, E&O coverage is needed for "anyone who gives advice, makes educated recommendations, designs solutions or represents the needs of others," declares an online advertisement by the Hartford. And specializing in certain kinds of planning practices will not insulate an advisor from these kinds of risks, says Bigelow of First Specialty. "Because you are a fee-only advisor, there is no basis whatsoever for believing that you can't be sued," he says.
Some advisors believe that carrying these policies will increase the potential for lawsuits, and others believe that if they are independent and if they don't accept commissions they will not be sued, Bigelow argues.
"The incidence of lawsuits against fee-only advisors isn't less than it is for commission advisors. Some of our largest claims have come against fee-only advisors," he adds. In a typical year, Bigelow says, 3% to 5% of those carrying these policies will have some kind of dispute, and the rates rise to 6% or more in a bear market.
Ellen Turf, chief executive officer and executive director of the 1,100 member, fee-only planner group the National Association of Personal Financial Advisors (NAPFA), says it is a complex question. Turf agrees that even fee-only planners need coverage because they can be sued.
Still, the issue of E&O isn't as easy as saying that protection is a good thing so one should obtain it. First, there is the issue of quantity-there are so few carriers. Most planners say they knew of two or three. And there is also the issue of quality; many professionals with coverage wonder if they're protected by these policies when they have a dispute.
David Drucker, an advisor in Albuquerque, N.M., has reduced his practice from 45 clients to just five high-net-worth clients and from $65 million to $15 million of assets under management. Yet Drucker says that he still needs insurance.
"We have also heard a lot from our [NAPFA] members that these policies often have so many exclusions that there would be no point in carrying them," Turf noted. On this point Drucker, an E&O advocate, cautions that the answer is not for the planner to self-insure.
"If you go that route, then you're going to have to document everything that you do and every single thing that the client says. Most planners are not going to be able to do that," Drucker warns.
Nevertheless, Drucker concedes that critics of these policies also have their points. "It is very difficult to get coverage for those advisors who are working with clients who have alternative investments," he says.
The problem, he notes, is that no two planners have quite the same practice, so many different kinds of coverage are needed. And Brown, another executive who recommends that every professional carry coverage, says that coverage can be so expensive that some planners or reps pass on it.