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As an investment advisor, you play an active role in managing your client’s financial assets. You are skilled in research and can successfully communicate important information about investing to your clients. You may even make financial decisions and actively trade on their behalf. Though you may have more expertise than the average professional, the financial markets still carry risk, and investing on behalf of your clients comes with a number of liabilities.
When it comes to investing, your clients are willing to accept a certain level of risk. However, if a client suffers serious financial loss due to an error caused by your firm, or if a client is especially litigious, you could find yourself in the middle of a lawsuit.The negative impact that a potential lawsuit could have on your firm is unknowable. Though many business owners think that they will never be sued because they are careful, some individuals might opt to sue a business even if it is unmerited.
To protect your company from the risks and liabilities that come with advising clients on investments, consider purchasing a comprehensive business insurance policy. As an investment advisory firm, you will likely want to focus on insurance that can protect you from professional error lawsuits. Additionally, because you store valuable data and perform most of your work on a computer, cyber liability insurance is also a good fit. Finally, if you own or rent office space, you will want to protect yourself from unexpected damage or injury to your property and visiting clients.
You may be interested in purchasing insurance for your investment advisory firm if:
- You would like to insure your services and practice against claims of poor performance or errors in your work
- You store sensitive customer or employee data like financial records or Social Security numbers
- You employ others
- You provide benefits to your employees like health insurance or retirement plans
- You work in an office that you lease or own
- You store valuable equipment or property in your office
- Clients or vendors visit your office
What insurance coverage do I need as an investment advisor?
Common insurance policies for an investment advisory firm often include plans that appeal to all businesses, like general liability insurance. For companies operating in the financial services field, professional liability insurance is important coverage to obtain as your professional work has a direct impact on your clients’ finances. Listed below are the major insurance coverages you should consider.
Professional Liability Insurance
Everybody makes mistakes, but in your work as an investment advisor, those mistakes can cause financial losses for your clients. If your clients believe that your work was substandard or error-prone, they can sue your firm for damages. Professional liability insurance can protect you from client lawsuits stemming from the poor performance, or even the perceived poor performance, of your investment advising duties. Covered areas for professional liability insurance include negligence, misleading statements, performance, and breach of duty.
- Errors/Negligence: One of your newest advisors invests in a hot technology company called Zoom Video Communications on behalf of a client. However, instead of purchasing shares of Zoom Video Communications (ticker ZM), he accidentally purchases shares of a Chinese company called Zoom Technologies (ticker ZOOM), consequently losing the client a significant amount of money. The client sues your firm for negligence.
- Breach of duty: A client sues your firm, claiming you did not act in his best interests. In his suit, he alleges many of the financial products you invested in performed poorly and only served to earn your firm sales commissions.
- Lawsuit without merit: After reviewing your client’s portfolio and making sure you understand the level of risk she is willing to take on, you recommend that she buy 100 shares of Disney. Your client agrees, but within six months the stock plummets and she loses $10,000. She wants to sue you for the money she lost.
General Liability Insurance
General liability insurance can help protect you and your firm from the financial burden of a lawsuit that is unrelated to your work. The four types of coverage included in general liability insurance are: products & completed operations, property damage, bodily injury, and personal & advertising injury. 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 visit a client’s home for a scheduled meeting. As you are walking through the foyer, you accidentally knock over an expensive art sculpture. General liability insurance can cover the costs of the damage.
- Bodily Injury: A client is walking down the stairs in your office when he trips on some loose carpet and tumbles down two stories, sending him to the hospital with a concussion. He sues your company for the cost of his medical bills plus pain and suffering.
- Advertising Injury: In a recent advertisement, you claim that your firm earns twice the returns of your competitor. Your competitor sues your company for libel.
Commercial Property Insurance
If there is extensive physical damage to property or equipment that you lease or own, the expense of replacing it can negatively affect your bottom line. Commercial property insurance helps protect you from these costs, by paying for you to replace or rebuild damaged items or structures. The included damage can happen to a building or item that you rent, lease, own, or have borrowed from someone else. Covered items include 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.
- Buildings: You own the one-story office building that you work out of. A client visiting your office accidentally backs up his car into an expensive fence on the perimeter of the parking lot. You must pay to either repair or replace it.
- Contents: You recently bought a very expensive 8-piece suede couch. You put it next to an aquarium filled with tropical fish to complete your waiting room decor. Unfortunately, the tubing around the aquarium springs a leak and ruins the suede upholstery. You must pay to replace the items.
- Property of Others: You borrow three expensive desks from a nearby office. One of your secretaries brings in her 15-year-old son, who etches graffiti into the desks with his Swiss Army knife. You must cover the cost of damages.
Cyber Liability Insurance
As an investment advisor, most of your work will be done with a computer, which likely connects to private and public networks and stores private information on employees and clients. This might include personal identification, financial, or payment information, or Social Security numbers. Cyber liability insurance ensures that you are covered in the event of a data breach, denial of service attacks, virus, or even if a laptop containing sensitive information is lost. These damages are commonly excluded under commercial general liability policies.
Cyber liability insurance also covers the costs of:
- Lawsuits against you for lost data
- Notifying customers and business partners about a data breach
- Marketing to restore your reputation
- Lost income
- Lost or damaged electronic data
- You rely on special software to keep track of your client’s portfolios. A hacker breaks into your computer system and tinkers with the software until it is unusable, forcing you to temporarily halt business to repair the damage. You will still have to cover costs like salary and rent despite the fact that you are not earning any income.
Business Owner’s Policy
A business owner’s policy, also known as a “BOP,” can cover risks that are common to all business owners. A business owner’s policy 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.
As an investment advisor, you help your clients achieve their financial goals by managing their investments and providing information on securities and well-tailored financial advice. Unlike a broker, you are held to the fiduciary standard of putting your clients’ interests first. However, financial markets are unpredictable. Disappointed or aggrieved clients may believe you are to blame for a significant financial loss and sue you for damages. Moreover, unpredictable events like natural disasters or accidents may happen over the course of running your business. 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.