Ask Brad: How Does E&O Insurance Work as an RIA?

This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.

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At its core, transitioning your practice to the RIA model is an exercise in identifying what your current firm/affiliation model provides for you and replicating it on your own – preferably with more flexibility and at a lower cost.

For an advisor at a broker/dealer, errors and omissions insurance (“E&O”) is generally not only provided but is forced upon you. The latter is not bad per se, as having E&O coverage is a universally accepted best practice.

Depending on the type of broker/dealer affiliation model you are under, you might pay for the coverage as part of your payout or as a separate expense line item. Whether or not it is transparently shown to you, you are paying for the coverage.

Many large broker/dealers with the financial strength to do so often self-insure their advisors’ E&O policies. While you might pay a monthly “E&O fee,” that premium is not necessarily going to a third-party insurer and instead is going to an in-house risk pool. That risk pool is managed and financially backed by your firm.