As an investment advisory representative, you work with your clients to build investment portfolios and recommend financial securities like stocks, bonds, and certificates. Your expertise in securities and professional experience make you a trusted source of information. However, when you work in the financial sector, an error on your part could lead to a significant financial loss for one of your clients. In these cases, the majority of customers are willing to accept a loss as an inevitable risk. Others, however, may decide to sue your firm.

In order to protect you and your business from lawsuits related to your professional work, consider the benefits of having comprehensive business insurance coverage. The right policy can give you the financial cushion needed in the face of lawsuits from unsatisfied clients. Moreover, there are a number of risks and liabilities unrelated to your professional work your business may be exposed to. From natural disasters to unfortunate accidents, the right insurance package can not only help safeguard your business in times of trouble, but also give you and your employees a sense of security.

Consider purchasing business insurance for your investment advisory if:

• You would like to insure your services and practice against claims of poor performance, or errors in your work
• You store customer or employee data like financial records or personally identifiable information (PII)
• You employ others
• You provide benefits to your employees like health insurance or a 401(k)
• You work in an office that you lease or own and store valuable equipment or property in that office
• Clients or vendors visit your office

What insurance coverage do I need as an investment advisor?

Most businesses share common insurance needs, which include such policies as general liability insurance and commercial property insurance. For businesses in the financial services sector like investment advisories, other types of insurance like professional liability insurance and cyber liability insurance may be necessary. Below are some of the most common business insurance coverages investment advisors should consider, along with a few examples of how these coverages might be applicable to your business.

Professional Liability Insurance or Errors and Omissions (E&O) Insurance

In your work as an investment advisory representative, you have a direct impact on your clients’ portfolios and savings. There is great potential to deliver healthy returns to your clients, but there is also the risk of losing your clients’ hard-earned money. While this risk is commonplace in the world of investing, serious errors or negligence on the part of your firm may expose you to client lawsuits. Moreover, whether or not your company is at fault for any client losses, you can still be sued. 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 investment advising duties.Covered areas for professional liability insurance include negligence, misleading statements, performance, and breach of duty.

Examples:

• Errors/Negligence: One of your employees informs your client that he believes R1 RCM, a healthcare revenue cycle management technology company, is the best stock on the market today. He mistakenly advises your client to invest in the stock RCMT, which is an engineering services company called RCM Technologies, rather than RCM, which is the ticker symbol for R1 RCM. The client loses money and decides to sue.
• Misleading statements: You recommend a client invest in a mutual fund with a low expense ratio of 0.25%. The client follows your advice, but soon realizes that while the management fee is 0.25%, there is an additional 12b-1 fee of 1%. He sues your firm for misleading statements.
• Performance: A client is hoping to retire within five years and hires you to help build his retirement portfolio. Over the course of the five years, the portfolio severely underperforms and, consequently, your client must postpone retirement. He sues your firm for poor performance.
• Lawsuit without merit: A client hires your firm to build her investment portfolio. She ends up following some, but not all, of your recommendations, opting instead to add a few high-risk IPOs into her portfolio. Her investments sour, and her portfolio loses 20% of its value. She sues your firm, alleging your advice resulted in her financial losses.

General Liability Insurance

General liability insurance, or commercial general liability, can protect your business from lawsuits claiming property damage or bodily injury caused by your business or your employees. The four types of coverage included in general liability insurance are: products & completed operations, property damage, bodily injury, and personal & advertising injury.

Examples:

• Property Damage: One of your employees accidentally microwaves tin foil along with his lunch, causing a small fire in the break room. The smoke from the fire sets off the fire sprinklers, causing water damage to your office and to the business occupying the floor below you. General liability would cover the damage to your neighbor’s office.
• Bodily Injury: One of your clients comes to your office for a meeting. A colleague swings the door into your client’s face by accident as she is attempting to enter the building. The incident breaks her nose. The client decides to sue.

Commercial Property Insurance

Commercial property insurance helps protect the property that is important to your business’s everyday operations. This includes the buildings themselves, the contents of those buildings, and the property of others in your care. If you have computer equipment, office furniture, or other items that are crucial to your investment advisory, consider investing in a commercial property policy. Commonly covered perils include fire, lightning, explosion, windstorm, hail, theft, and vandalism.

Examples:

• Buildings: You open a new office and have just finished installing a large monument sign. The sign is custom-made and cost over $5,000. Unfortunately, a severe windstorm loosens the newly installed sign from the wall, and it crashes to the ground. The damage is irreparable. You must pay to replace the custom sign.
• Contents: You have a system where employees can borrow laptops if they need them. All laptops are stored in a cart near an intern’s desk. One morning, an electrical fire breaks out by the intern’s desk, due to an overloaded power supply. The fire is quickly put out, but not before damaging the cart of laptops.
• Property of Others: You keep your most valuable documents, including personal papers that belong to clients, in a filing cabinet in your back office. A pipe bursts overnight, and the filing cabinet is drenched for over eight hours, ruining all of your clients’ documents. You may pay to recover your clients’ papers.

Cyber Liability Insurance

Cyber liability insurance covers your business against liability and property losses caused by cyberattacks such as hacks, data breaches, denial of service attacks, and viruses. Commercial general liability policies usually exclude coverage for cyber liability, so you may not have coverage for data breaches under your primary general liability policy. As an investment advisory representative, you deal with confidential and sensitive client data, so it is especially important to guard your business against the negative impact of any technological mishaps.

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

Example:

• A hacker breaks into your office network and steals files related to your clients’ investment history. Your clients sue you for this breach of confidential data.

Business Owner’s Policy

A business owner’s policy, also known as a “BOP,” can cover risks that are common to all business owners. If you own a small firm and work with customers inside of commercial space you rent or own, a business owner’s policy may be a good solution for you. Accidents, however unexpected, can always happen. In this type of plan, general liability, business interruption, and property insurance are bundled together to address your needs as a small business owner. A BOP can also help you save money, with lower premiums than buying the individual coverages separately.

Final Word

When you work as an investment advisory representative, your job is to inform clients about the best stocks, bonds, and other securities to invest their money in. In the course of your work, you may face lawsuits from clients who are unhappy with your work or who claim you made a mistake that led to financial losses for the client. Having the right insurance policy in place can give your firm the financial cushion it needs to stay afloat.

Additionally, simply running any business can expose you to a variety of risks and liabilities. A client could visit your office and slip and fall, or a fire may burn down your office building. 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.