HOT TAKE: Your E&O Limits Are Lower Than You Think

As assets grow, client expectations rise, and litigation becomes more expensive, many RIAs are carrying insurance limits that no longer match their exposure.

When was the last time your E&O limit grew in comparison to your firm’s growth?

The modern RIA looks very different than it did five years ago, yet many firms are still carrying the same E&O limits.

Over the past several years, RIAs have experienced significant growth in AUM, revenue, and client relationships while also expanding the services they provide.  At the same time, rising litigation costs and increasingly complex business models have materially changed the risk landscape these firms are managing.

While portfolio risk, revenue growth, and client acquisition are closely monitored, insurance limits and coverage structures can be left unchanged and undiagnosed for years.

According to Charles Schwab’s 2025 RIA Benchmarking Study, the average RIA experienced a 12.6% compound annual growth rate in AUM from 2019 through 2024, reaching an average of $615 million in assets.  Revenue and client count also increased substantially during the same period.

That growth is a sign of a healthy industry, but it also changes the potential severity of an E&O claim.  A trading error, suitability dispute, breach of fiduciary duty allegation, or other client claim today could involve a significantly larger relationship and potentially higher alleged damages than the same claim would have just a few years ago.

Industry consolidation adds another dimension.  Schwab found that 19% of RIAs participated in mergers or acquisitions during 2024, while 23% recruited advisors who brought existing client assets.  Growth through either avenue can introduce new client relationships, supervisory responsibilities, and exposures that may not immediately be reflected on through the minds of the acquiring party.

Meanwhile, $1 Million Doesn’t Buy What It Used To

A $1 million E&O limit has been a common baseline for advisory firms for more than two decades.  While size and complexity of RIAs have changed considerably over that time, the baseline limit has remained constant.

The cost of defending claims is also rising materially.  According to LexisNexus, average law firm partner rates have compounded roughly 26% since 2020.  Partner rates at leading firms can exceed $1,600 per hour for complex matters, increasing the potential cost of litigation, arbitration, and regulatory defense.

Even if claim frequency remains stable, higher defense costs mean insurance dollars may not stretch as far as they once did.

In other words, a $1 million E&O limit purchased five years ago doesn’t necessarily buy $1 million worth of the same defense today.  Even before considering higher settlements or judgements, a greater portion of the limit may be consumed simply by the cost of counsel.

Your Limit May Not Actually Be Your Limit

This is where the conversation becomes even more important.

Seeing “$2 million” on the declarations page doesn’t necessarily mean $2 million is what’s available to settle a claim.  RIA E&O policies include defense expenses eroding the limit, while multiple claims and insureds may share the same aggregate.

Consider an RIA carrying $2 million E&O limits.  If a significant client (or group of clients) disputes and generates $650,000 in covered defense expenses prior to settlement discussions, the firm could enter negotiations with appropriately $1.35 million remaining, not $2 million.

Legal fees, expert witnesses, document review, and arbitration expenses can consume a meaningful portion of limits before the underlying dispute is resolved.

Limits Are Only Part of the Equation

RIAs should not focus on evaluating higher limits exclusively as a $5 million policy isn’t automatically “better” than a $2 million policy simply because the limit is larger.

These are legal-binding contracts, therefore how the policy responds matters.  Two policies with identical limits can create very different outcomes.  Feel free to view other articles outlining this as such: https://gsria.com/risk-tips/

Final Thoughts

Advisory firms may be purchasing insurance based on the firm they used to be, rather than the firm they are today or plan to be tomorrow.

AUM growth, larger client relationships, M&A, expanding services, and rising legal costs each have changed the risk landscape in their own ways, but at the same time, the mechanics of E&O can mean the headline limit overstates the amount ultimately available to resolve a significant claim.

What was an appropriate E&O program twelve months ago shouldn’t automatically be assumed to be appropriate today.

By Bryant Wood – Golsan Scruggs

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

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