What is Financial Advisor Insurance?

As a financial advisor, your role involves providing advice and recommendations to clients, which exposes you to potential risks if your advice does not meet their expectations or if they suffer financial losses as a result. Financial advisor insurance, also known as professional liability insurance and errors and omissions insurance, can provide crucial protection for financial advisors in the event of such claims or allegations.

Join us as we delve into the importance of professional liability insurance and how it can safeguard your practice and reputation in the dynamic financial advisory industry. Let’s take a look at a few situations when professional liability coverage becomes a must-have and the type of protections you can expect from your policy.  

Understanding Financial Advisor Insurance

Financial advisor insurance is a type of insurance coverage specifically designed to protect financial advisors and their businesses from potential lawsuits and claims arising from professional errors or omissions in their services.

This insurance provides financial protection by covering the costs associated with legal defense, settlements, judgments, and other related expenses that may arise from client grievances, allegations of negligence, or failure to provide accurate or suitable financial advice.

Financial advisor insurance is essential for you as it helps safeguard your reputation, assets, and livelihood in the event of a claim or legal dispute, ensuring that you can continue to provide trusted and reliable advisory services to your clients.

What Does Professional Liability Insurance Cover?

No matter if you work in the construction industry or the medical field, you’ll inevitably make a mistake at some point in your career. However, as a professional insurance advisor, even a minor mistake can cause your clients to lose a significant amount of money. Clients may even claim misconduct even if they just become unhappy with you and your services. 

Professional liability insurance can help protect you and your business against claims of misconduct. Remember that a client (or even a friend or family member) can make a negligence claim even when offering advice in a casual setting, making liability coverage crucial for the continued survival of your business. 

Liability insurance can aid in lawsuits when a licensure board gets involved or a claim gets taken to small claims court. This type of coverage usually protects you against a range of claims made by clients and other business owners, including negligence and copyright infringement.

How Much Coverage Do You Need?

The amount of coverage you need will need to be enough to protect yourself or your employees in the case there is a huge claim made against you. A different amount of coverage will be needed for different professionals. Some factors to consider are: the industry you are in, the number of employees you have, where your business is located and more. You want coverage that matches your industry’s level of risk.

You also want to take a hard look at what the coverage you’re buying is actually offering. There are a lot of exclusions that you may not have noticed which can result in a problem if that exclusion is becoming an issue for you or your business. Review every aspect of your coverage and consult with an insurance professional to ensure you are getting the best coverage.  

The coverage you sign onto could end up saving you from financial troubles if you get sued and you are having to pay legal costs, a possible cost of settlement, and any other punitive damages costs. Business owners often underestimate just how much they might spend in legal costs and punitive damages, which are not capped in many states. As a general rule, most professional advisors should expect to carry a policy with at least $1 million in coverage. 

Do Insurance Companies Offer Legal Advice?

Insurance agencies do offer legal advice when you need to use your policy. However, most insurance companies will look for the fastest way to settle your claim, as this usually saves money for the insurance provider. 

It’s a good idea to consult with a trusted personal business lawyer or legal advisor because they will be able to provide the most accurate information and advice. It’s also best to find an agent that is familiar with your industry so you aren’t just being given general advice and end up with some aspects being overlooked.

Who Needs Professional Liability Insurance?

While professional liability insurance may not be required for some professionals and industries, the following professionals should consider a professional liability policy to be an absolute must-have for their business. 

Insurance Agents

Though clients consult with insurance agents to protect themselves from risk, you’re still a business owner exposed to risks and mistakes yourself. You could miss a renewal or arrange the wrong policy, which can lead to a client suing you. Professional liability insurance gives protection in the case you make a mistake.     

Registered Investment Advisors

Though not required by most, some institutional product vendors and other clients may require RIAs to have professional liability insurance. This insurance will help in the case of claims of negligence, breach of fiduciary duty, breaches of the advisory agreement, failure to supervise brokers and more.   

Financial Planners

Clients can easily sue a financial planner if they lose money, even if it was not directly due to a mistake on the side of the planner. Financial markets can be fickle, which can result in unanticipated market movements and loss of investment capital. Insurance will cover breach of fiduciary duty, legalities and lack of regulatory compliance. 

Pension Consultants

The services pension consultants provide can be impactful to many people, including both the policyholder themselves and their family. When providing advice on financial matters, there is a high level of liability and risk. As a pension consultant, you have access to financial and personal information that is sensitive and confidential. If you breach the trust, or are thought to have breached the trust, it could cause major legal issues for you.  

Broker-Dealers

As a broker-dealer, your network security can be exposed or a client can make a claim that you did not inform them of something specific when placing an order or submitting an offer letter to invest in a security. Whether a real estate broker, or a securities broker, you are open to the same risks. Professional liability insurance protects you from claims of negligence arising from everything from claims of questionable advising services to new tech implementations that damage a client’s hardware or leave their personal information at risk. 

Investment Management Consultants

If your client listens to your professional opinion, whether it was for how to allocate money for their children’s education or in preparation to buy their first home, they could blame you if the results aren’t what they anticipated. With professional liability insurance, you can insure your services against claims of poor performance or errors.  

Investment Advisory Representatives

 As with any financial advising position, you risk the client being unhappy with your services. You work to build investment portfolios and recommend certain stocks or bonds. Then if your recommendations lead to a financial loss for your client, they could sue you or your firm. 

Divorce Financial Consultants

Most divorces involve some degree of dealing with asset allocation and distribution of funds gained over the course of a marriage. If a client believes that you have caused them to lose out on property that they should have secured during the divorce proceedings or pay a higher rate in alimony thanks to poor advising, they may sue you or your office. 

Registered Representatives

As a registered representative of anything, you are required to meet certain professional and ethical standards when it comes to disclosures and choosing assets for clients that you recommend. Even if you meet all of your local standards, your client may be unhappy with the results of their investment plan and sue your company. Insurance offers protection in the case of error or financial loss for your client.  

Accountants

As an accountant, you are subject to lawsuits due to alleged errors, breach of professional duty, misinterpreted statements and more. Professional liability insurance can minimize or eliminate the burden in the case there is a claim made against you or your firm. 

These are only a few examples of the many types of finance and advising professionals that need to have professional liability insurance. The last thing you want is to find out that you don’t have sufficient coverage after a client decides to sue. 

Not sure where to start your search for financial advisor insurance? Consider a few of our favorite providers below when you first begin comparing all of your coverage options.  

Protecting Your Business With Professional Liability Insurance 

No matter if you’re an independent contractor or an advisor working with a major firm, you need professional liability insurance. Operating your business without professional liability insurance can leave you on the hook for potentially millions of dollars’ worth of legal expenses if a client decides to sue. 

Even the most careful financial professional can make a mistake when it comes to advising their clients — so if you don’t already have this protection, we recommend starting your search for insurance coverage today. 

Frequently Asked Questions