5 Tips to Prevent Errors & Omissions for Your Registered Investment Advisor (RIA) Firm
5 Tips to Prevent Errors & Omissions for Your Registered Investment Advisor (RIA) Firm09.26.2022
Investment Advisors, or RIAs, are in the business of helping their clients take
appropriate risks in order to enjoy the rewards that investing can provide. By
comparing the risk with the potential reward of a given investment and aligning
that with a client’s investment objectives, RIAs help to grow and manage their
When you take a risk, there is always the possibility that things will not turn out as planned. In addition, everybody makes mistakes. This is why it’s important for RIAs to take steps to prevent errors (things you did that you shouldn’t have) and omissions (things you should have done that you didn’t). These five tips can help.
1. Understand your clients. Doing a thorough fact find before you make a single recommendation is critical. Collect as much information as you possibly can about their current situation and what they hope to accomplish, and document everything you find. Providing your client with a written summary of what they’ve told you and asking them to sign it will prevent many claims.
2. Do your due diligence. Before you make a recommendation to a client, make sure you understand the risks of the investment so you can explain them to the client. Then, make sure the client understands all risks involved by asking your client to explain them to you.
3. Document everything. Often, you will find that a client does not remember everything that was discussed at a meeting, particularly the parts they don’t really want to hear. In many cases, you will find that simply reviewing your notes from the meeting with the client will show them that you did, in fact, explain that alternative investments are riskier than money market funds, or that their IRA that’s invested in mutual funds will not grow as fast as the S&P 500.
4. Keep an eye on your technology. RIAs are as vulnerable to data breaches as any other organization. If your computer system is hacked, you could be liable for costs associated with any theft of personally identifiable information. Even if your data is compromised unintentionally and your clients don’t suffer any financial loss, you may be required to provide credit monitoring.
5. Address any complaints immediately. By talking openly with an unhappy client, you may be able to avoid having to go through regulatory channels to resolve the complaint. If you ignore a client complaint, you can be sure they will escalate the matter to the point where it becomes a legal or regulatory issue.
The regulatory landscape for RIAs is becoming more and more demanding, and clients know this. They know that they have the right and the ability to take action if they feel they have been treated unfairly. By maintaining good client relationships, ensuring transparency in all your dealings, and addressing any issues that clients raise promptly, you may be able to prevent your business from being the target of an E&O claim. Sometimes, however, no matter how diligent you are, you may find yourself the subject of a claim. Be sure that you’re adequately insured.
Regulatory requirements do not always indicate that RIAs need E&O insurance. However, any RIA who doesn’t maintain it is playing with fire. Some RIAs will try to do a cost benefit analysis to justify the premium. But taking the total amount that all RIAs pay in claims and dividing by the number of firms is flawed logic. You need to protect yourself against the largest claim, not the average claim, in order to avoid a catastrophic loss.
Preventing a claim in the first place is always preferable from having to defend yourself against one. But if you do find that someone has made a claim against you, having insurance to fall back on will give you peace of mind.