Advisors using Schwab as a custodian will now be required to show proof they have a $1 million errors & omissions (E&O) insurance policy, according to an email the financial services giant sent out in early October.

The Schwab directive also requires advisors to obtain and maintain coverage for “social engineering, theft by hacker incidents and theft by employee (if applicable),” according to a copy of the email obtained by Financial Advisor magazine.

“Each firm needs to have an aggregate minimum of at least $1 million of coverage,” said Schwab, adding that the firm has seen “an uptick in risks.”

E&O insurance, also known as professional liability insurance, can help cover the cost of lawsuits related to performance, a sign that Schwab is at least doing strategic planning for a market downturn.

“There are probably a lot more RIAs than we know who don’t have [an] E&O policy or Schwab would not have issued this requirement,” said Scott Salaske, founder and CEO of FirstMetric, an RIA firm. “A part of it is they’ll be named in any lawsuit, so if they can push that on advisors’ insurance rather than eating it down the road, that’s good practice.” Other custodians could follow, he said.

A senior Schwab executive said the move was prompted by the growing operational risks both Schwab and RIAs face. “Independent advisors have been growing quickly, and while this growth and success is overwhelmingly positive for investors and RIAs alike, it does bring increased operational risks as firms expand and day-to-day operations become more complex,” said Ian Muir, a managing director of advisor controls and trading at Schwab Advisor Services.

“This complexity, combined with rising industry fraud, cybercrime and trading volatility, means it is critical for advisors to evaluate how well their firm is protected,” Muir added.

Schwab said it was working with a selected group of insurance providers to secure preferred pricing for Schwab clients. Salaske said that most E&O policies don’t have coverage for all the new Schwab requirements, so “additional coverage through a fidelity bond, sometimes referred to as a financial institution bond, will be required as well.”

The median cost for an E&O policy for advisors starts at about $220 per month, or $2,610 a year, for coverage of $1 million per occurrence, and has a $5,000 deductible, according to Insureon, an online E&O insurance broker.

Cyber liability insurance costs another $105 per month, or $1,260 per year, for coverage of $750,000 per occurrence and covers legal fees and recovery costs stemming from data breaches. That brings the total annual cost for the E&O policy Schwab is requiring to about $3,870 per year.

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