Finding the right insurance for your financial advisory business is an important step in protecting your firm and achieving long-term success.
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Financial advisors provide a wealth of services to address their clients’ financial needs, from giving advice on estate planning to creating a savings plan for retirement. The primary function of a financial advisor is to assess the financial situation and needs of a client and provide advice and guidance on how to achieve short- and long-term goals. From tax planning to investing to purchasing insurance, financial advisors can wear a number of hats, but most important of all is the role of trusted advisor. Clients depend on their financial advisors to serve in their best financial interests and help them to make the right money moves for their lives.
Because clients rely on financial advisors to help make critical financial decisions, it is inevitable that financial advisors face a number of risks and liabilities. Consider a client who loses a significant amount of money in the market based on his financial advisor’s guidance—it’s not hard to see that a lawsuit could arise, with the client claiming poor performance or simply negligence on the part of his advisor. Or consider the risk a financial advisor takes on by working with and storing his client’s personal financial records and tax information. With identity theft and data breaches on the rise, if something were to happen to this confidential client information, an advisor could be held liable.
In order to protect yourself and your business, consider the benefits of having a comprehensive business insurance policy in place. A coverage package that is uniquely suited to your firm’s risks and exposures could help to safeguard your business in times of trouble. Even if you feel like you’ve done all the right things for your business, sometimes unfortunate and unpredictable events do occur. Business insurance, while an investment up front, can not only help to give your business some financial cushion, but also ease your fears and keep you focused on what you do best—leading your clients to a successful financial future.
Consider purchasing business insurance for your financial advisory business if:
- You would like to insure your services against claims of poor performance or negligence
- You store customer data like financial records or personally identifiable information (PII)
- You employ others
- You provide benefits to your employee like health insurance or retirement plans
- You lease or own your own office building
- You store valuable equipment or property in your office
- Customers or clients visit your office
What insurance coverage do I need as a financial advisor?
Below are some of the most common business insurance coverages financial advisors should consider, along with a few examples of how these coverages might be applicable to your business.
Professional Liability Insurance
Professional Liability Insurance, also known as Errors & Omissions Insurance, can protect you and your business from potential client lawsuits stemming from the performance of your financial advising duties. When it comes to dealing with the personal finances of your clients, you can imagine that clients are particularly sensitive to changes in their portfolio or savings. If a client claims your services caused him financial loss, he may sue your business for damages. Professional liability insurance can provide financial protection for you in these cases and cover your legal fees and any judgement or settlement costs.
- Errors/Negligence: A client asks for your advice on the tax implications of selling his consulting business. The advice you give him ends up being outdated and contrary to today’s tax laws, and your client must pay penalties to the IRS. He sues your firm for negligence.
- Misleading statements: You recommend to a client a promising new no-fee mutual fund to invest in. Your client follows your recommendation, but later finds out there are several hidden management fees in the fund. He sues you for misleading statements.
- Performance:You are hired to build and manage an investment portfolio for your client, and over the course of five years, the portfolio severely underperforms the market. The client is unhappy with the results and sues your firm for poor performance.
- Breach of duty: You are sued by a client who claims your advisory did not act in the client’s best interest. He alleges many of the investment products you invested in performed poorly and only served to earn your firm sales commissions.
General Liability Insurance
General Liability Insurance protects your financial advisory firm financially from damages that arise while doing business. It covers property damage, bodily injury, and personal and advertising injury. It also covers the costs of any legal defense or attorney’s fees incurred while defending against covered lawsuits. General liability insurance is third-party insurance, which means it covers you against claims by third parties, which don’t include your business or your employees. Third parties may include clients, vendors, or landlords.
- Property Damage: You are at a client’s home for a scheduled meeting, and you accidentally knock over an expensive sculpture. General liability insurance can cover the costs of the damage.
- Bodily Injury: A client comes to your office to review his investment portfolio. As he is walking up the steps to your office, he slips on a patch of ice, injuring his ankle. He sues your firm for medical expenses.
- Personal and Advertising Injury: You mistakenly publish a piece of libelous information on a competitor in your online advertisements. General liability insurance would cover any resulting lawsuit.
Commercial Property Insurance
Commercial Property Insurance protects the investment you’ve made in your business property, including office space, furniture, equipment, computers, artwork, and other property that you use to run your business. Commonly covered causes of loss include fire, lightening, wind, hail, explosion, and vandalism. Note that commercial property insurance does not cover any vehicles your company owns. For that coverage, you’ll need commercial auto insurance.
- Buildings: Lightning strikes the roof of your office building, causing a small fire that damages the roof and top floor of the building.
- Contents: An employee accidentally puts aluminum foil in the microwave, causing a small fire and a lot of smoke. The smoke damages the artwork hung in the break room.
- Property of Others: An electrical fire breaks out in your office and damages the large-format printer you borrowed from a neighboring business.
- A Business Owner’s Policy (BOP) combines the major property and liability risks that small businesses face into one convenient package. It also helps you save money, with lower premiums than buying the individual coverages separately. This type of policy usually bundles together general liability, property insurance, and business income insurance into a single policy.
- Workers’ Compensation Insurance, often called Workers’ Comp, is a form of liability insurance that pays out benefits to an employee if he or she suffers a work-related injury or illness. If employees decide to accept these monetary benefits, they agree not to sue your business.
- Example: An employee suffers a repetitive stress injury from laptop use. Workers’ compensation can cover his medical and physical therapy costs.
- Cyber Liability Insurance protects your financial advisory firm from financial losses due to data breaches, hacking, viruses, and other similar cyber events. This type of insurance is particularly important given the sensitive client data your business likely handles.
- Example: A computer virus infects your network, sending your your client data, including financial records and tax information, to an unknown computer in Russia.
- Employment Practices Liability Insurance protects against lawsuits from your employees involving claims of wrongful treatment, such as discrimination or harassment, and covers any judgments or legal fees associated with these claims.
- Example: A disabled employee sues your firm claiming he was passed over for promotions because of his disability.
Financial advising can be a rewarding profession, particularly when you can see your clients succeeding and accomplishing their financial goals. The profession can be fraught with risks, however, and as a business owner, you must consider protecting you and your employees against any financial liabilities. If ever you’re faced with a litigious client who is unhappy with your services, or you make a material mistake that causes a client to suffer financial losses, it helps to have the appropriate insurance coverage to provide a financial safety net for your business.
Aside from the professional risks of financial advising, there are general, everyday risks that come with operating a business and hiring employees. From a natural disaster that can damage your office and property to an employee who suffers an injury on the job, there are various insurance coverages that can help protect your business in a variety of unexpected scenarios. Having the right set of insurance policies in place can not only help to safeguard your business from the financial damages of lawsuits, but also protect your employees from any unfortunate events.