Although a handful of states have requirements in place, surprisingly few Registered Investment Advisors (RIAs) across the country carry liability insurance to protect clients from their own wrongdoing leaving investors as the only party left to bear the brunt of losses when things go sideways.
The professional liability insurance industry for Registered Investment Advisors (RIAs) has been described by one in the industry as, “the Wild West.” There is immense uncertainty as to the number of independent RIAs who carry professional liability insurance as well as extreme variability within the specifics of the policies offered to RIAs. While there are some states that require RIAs to carry insurance, most states do not have mandates in place, and the federal government has yet to draft any laws on the matter.
At the forefront of requiring RIAs to maintain insurance coverage are Oregon and Oklahoma. In 2018, Oregon became the first state to pass legislation requiring RIAs registered with the state to carry professional liability insurance. The Oregon law requires RIAs to carry at least $1 million in coverage and to show proof of such coverage during the state’s licensing process. Similarly, in 2020, Oklahoma passed legislation requiring RIAs registered with the state to carry professional liability and cybersecurity insurance. Curiously, the Oklahoma law fails to indicate how much insurance coverage is required for RIAs. If you are an investor in Oregon, Oklahoma, or any other state, who believes you have lost money due to your RIA’s wrongdoing, you should consult with a Securities Law Firm like Malecki Law.
Where most states and Congress are lacking, some financial institutions have attempted to pick up the slack. Back in 2021, Charles Schwab became the first major financial institution to put insurance requirements in place for the RIAs using their platforms. More recently, Fidelity Institutional introduced a similar mandate for RIAs using their platforms. Both institutions purport to require their RIAs to maintain at least $1 million in coverage to protect against various kinds of losses. If you are an investor whose investment account at Charles Schwab, Fidelity, or any other financial institution has lost value due to your RIA’s wrongdoing, it could be beneficial to speak with an experienced Securities Attorney, like the ones at Malecki Law.
Although some states and institutions have implemented insurance requirements, it’s important to explain how RIA insurance policies generally work. For starters, most policies in the industry only protect against losses from certain types of claims. The types of claims usually covered are Investment Losses, Negligence, Breach of Fiduciary Duty, Errors and Omissions, Breach of Contract, and Failure to Supervise. Despite these coverage areas, most insurance policies do NOT cover claims originating from riskier financial products, such as Hedge Funds, Private Equity Funds, Real Estate Investment Trusts (REITs), or Derivatives. Importantly, most policies do NOT cover claims arising from intentional wrongdoing on the part of a RIA. If you are an investor that has lost money in high-risk financial products recommended by your RIA, it may be worthwhile to speak with a reputable Securities Lawyer, like the lawyers at Malecki Law.
So, how can understanding if investment advisors have insurance help you, the investor?
- If you are an investor whose investments are managed by a RIA in either Oregon or Oklahoma, chances are high that your RIA has a professional liability insurance policy that could protect you from investment losses due to RIA wrongdoing.
- If you are an investor whose investments are held by a RIA associated with either Charles Schwab or Fidelity, there is also a likelihood that your RIA has a professional liability insurance that could protect you from investment losses due to RIA wrongdoing. It is important to note that, since these firm specific requirements are relatively new in nature, there is no guarantee that every RIA associated with Charles Schwab or Fidelity has secured insurance coverage yet. Investors should speak with their RIA before assuming the RIA has a policy in place.
- For any other investors, it may be beneficial to inquire with your RIA to see if they are covered by any professional liability insurance policies. Similarly, investors should check with their financial institutions to determine their relevant policies regarding insurance maintenance for RIAs.
If you have suffered investment losses due to wrongdoing on the part of your RIA, the New York City law firm, Malecki Law, is eager to hear from you to see what can be done for you and other investors in a similar position. The initial consultation is always free and various fee structures, including contingency, can be discussed, we look forward to hearing from you to discuss your situation in a pressure-free environment.