Market Decline Triggers Fiduciary Liability Insurance Assessment

By Ken Golsan

23 Sep Market Decline Triggers Fiduciary Liability Insurance Assessment

Posted at 13:44h in Risk Tips by

Disputes, complaints, and damage demands from investors naturally spike when markets fall.  Regardless of case validity, advisors find themselves in a position requiring defense.   The potential for an abnormal volume of legal action and settlements coupled with increased severity levels can exist.  The relationship between the frequency of fiduciary claims against advisors relative to market declines is inverted.  Here’s the history (blue line S&P index v. red line annual cases filed):

*Chart Explanation: S&P 500 data is weekly closing price. Arbitration cases are annual cases filed with FINRA divided by a factor of 4.  Adjustment of cases done to bring data series into the same range as the S&P 500.  For example, in 2003 the S&P 500 closed for the year at 1,111 and the total arbitration cases filed were 8,945 and graphed at 2,236.25 (1/4th of the total).

Therefore, now is the time for advisory firms to consider the following:

  1. As “all insurance contracts are not made equal”, how confident are we that our firm’s E&O/D&O coverage (terms, conditions, exclusions, limitations, etc.) provides effective protection?
  2. To what degree has our firm’s unique fiduciary profile undergone an appropriate risk-to-contract correlation audit to determine if any insurance gaps or contractual language barriers exist that may need to be addressed?  Who conducted that audit and to what degree sufficiently experienced to do so?
  3. Knowing that market declines can bring multiple claims at once, are our total insurance limits adequate to the potential risk?  Are defense expenses taken into consideration?

While negativity is rarely an appreciated personality, these are the truths we face and best not ignore.  It is wise to prepare now for what we are experiencing and what may be ahead for the market over the next 2-3 years as historical and global asset deleveraging, inflation and fiscal policy actions play out.  Seek proper and specialized insurance counsel.

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.

At Golsan Scruggs, we believe it is incumbent upon us to earn the right to be appointed as your insurance and risk-management agent. Our RIASURE process exists to serve that purpose.

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