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Financial advisors and their firms need to understand the significant impact that a history of disclosures can have on their errors and omissions (E&O) insurance premiums.
What is E&O insurance?
E&O insurance is a type of professional liability insurance that is designed to protect financial advisors and firms from the expense of customer claims, such as those of negligence, errors, or omissions in the performance of an advisor’s professional duties. Such policies typically cover the legal costs and damages associated with a claim made against the advisor or firm — in an amount up to the limit specified in the policy and once the deductible, or “retainer,” is met.
E&O insurance is particularly important for financial advisors and firms because they are exposed to a range of risks associated with their role and profession. For example, a customer may file a claim against an advisor, alleging that the advisor provided poor investment advice, made incorrect calculations, or failed to disclose important information to the customer while providing investment advice. E&O insurance can help to mitigate these risks and provide advisors with a safety net in the event of a claim.
When an insurance company is underwriting a financial advisor’s E&O policy, it will typically review the advisor’s history of disclosures. Disclosures on an advisor’s record may include customer complaints, regulatory actions, lawsuits, etc., and insurers use this information to assess risk and determine the cost of E&O coverage.
In some cases, advisors with a high number of disclosures or serious claims may face substantial increases in their E&O insurance premiums, which can be a significant financial burden for both the advisors and their firms. On the other hand, financial advisors with clean records and few or no disclosures are typically viewed as lower risk by insurance companies, and those advisors may be able to secure lower premiums for their E&O insurance coverage.
To address this issue and control rising costs, some independent firms have introduced an alternative, whereby advisors with checkered pasts are given the choice between two expensive options. They may either:
- pay a third party to expunge their disclosures through the FINRA Dispute Resolution forum; or
- pay an increased fee for the advisor’s E&O premiums every month.
What can advisors do?
Keep Their Disclosures
For advisors who choose to keep disclosures on their records, it can be an incredibly costly decision. The cost of increased premiums for E&O insurance can be exorbitant, with reports indicating that some premiums have increased by as much as 250%. This means that the ongoing costs for insurance could be much more expensive than simply expunging and removing disclosures from the advisor’s records.
In addition to the financial implications of increased E&O insurance premiums, advisors with a history of disclosures may also face reputational damage. Customer complaints, regulatory actions, and lawsuits can tarnish an advisor’s reputation, making it difficult for them to attract and retain customers. This is particularly true in the age of social media, where negative reviews and comments can spread quickly and have a lasting impact on an advisor’s business.
Further, financial advisors who have a history of misconduct may also be subject to increased scrutiny from regulators. The Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), and other regulatory bodies may view advisors with a history of disclosures as higher risk and subject them to increased oversight and regulatory compliance requirements.
Remove Their Disclosures
Given the potential impact of a history of disclosures on advisors’ E&O insurance premiums, it’s understandable why some advisors may seek to expunge their records. By doing so, they can reduce the financial burden of increased insurance premiums and protect their reputation and business.
Additionally, expungement can provide advisors with a fresh start and allow them to move forward with greater confidence in their ability to serve their customers. It can also help to improve the advisor’s chances of being hired by a new firm or attracting new customers who may have been hesitant to work with them in the past.
Ultimately, the decision to seek expungement is a personal one that should be made in consultation with legal and financial professionals. There are a number of potential benefits associated with seeking expungement, and advisors should consider all available options to protect themselves and their customers.
AdvisorLaw has removed 2,246 disclosures.
While the cost of E&O insurance premiums will vary depending on a range of factors, it’s clear that advisors with a history of disclosures face growing challenges. Because the cost of E&O insurance premiums for advisors who have not taken steps to mitigate their risk could skyrocket, the option of expunging their disclosures could likely be a more cost-effective choice.
AdvisorLaw specializes in helping financial advisors to remove meritless, false, or defamatory disclosures from their public records. We can provide expert guidance and representation to advisors seeking to expunge their disclosures through the FINRA Dispute Resolution forum. With our extensive knowledge of FINRA rules and regulations, as well as our experience navigating the complex expungement process, AdvisorLaw can help advisors to protect their reputations and businesses by removing inaccurate, misleading, or malicious disclosures from their records.
The process of expunging a disclosure can be complex and time-consuming. It can involve detailed documentation, legal filings, and appearances before FINRA arbitrators. AdvisorLaw will review your record, identify any meritless disclosures, and develop a strategy for expunging them. We will also work closely with your customers to gather the necessary evidence and documentation to support your case.
Contact us today!
AdvisorLaw understands that a disclosure on an advisor’s record can have serious consequences — not just in terms of increased E&O insurance premiums, but also in terms of damage to the advisor’s reputation and ability to attract new customers. That’s why we’re committed to helping advisors protect their livelihoods by removing meritless disclosures. With our comprehensive knowledge of FINRA rules and regulations and our dedication to serving the needs of financial advisors, AdvisorLaw is a trusted partner for advisors seeking to protect their public image and livelihood.