Registered Investment Advisors Contended with Increased Insurance Claim Payouts in 2023, Following 2022’s Broad Market Slump, according to Golsan Scruggs Data

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Registered Investment Advisors (RIAs) contended with a 213% frequency increase in total errors and omissions liability claims paid by their insurers in 2023, as they faced a sharp uptick in investor complaints due to 2022’s broad market slump, according to proprietary data from Golsan Scruggs, the corporate insurance brokerage firm serving the financial services industry.

The three-fold increase in claims paid overall is attributed to a 500% frequency increase in claims for suitability, primarily investor complaints that investments were not appropriate for their portfolios. Because suitability claims typically have higher payout amounts, the severity of all claims paid by insurance companies against RIAs rose 85%.

“We know from experience that claims follow the market, so we expected to see an uptick in actions against RIAs and claims paid given the historically poor market environment in 2022,” said Kenneth Golsan, Co-Founder and Managing Director of Golsan Scruggs. “But the size and severity of claims paid should be a wake-up call to advisors that liability claims can have an impact on your business.”

Wire fraud represented the second-largest category of claims paid in 2023. Wire fraud activity, which typically means defrauding a party using electronic communication, accounted for a 400% frequency jump in claims paid by insurers.

Though investor-complaint results against FINRA-registered brokers are public, the outcomes of most actions taken against RIAs, who are regulated by the Securities and Exchange Commission, are confidential due to arbitration. That makes the claims data a rare snapshot into the risks and liabilities for RIAs in a given year.

Other standard categories of claims under E&O policies remained largely flat. These include trade errors, regulatory actions, and cyber data breaches or ransomware claims.

Interestingly, the experience of claims settled for RIAs failed to match what most advisors expected to be the biggest liability risks to their businesses. Nearly nine out of every 10 RIAs surveyed listed cyber/privacy data breach as their most pressing corporate risk in Golsan Scruggs’ 2023 RIA Risk Survey. The second-highest risk concern for RIAs was regulatory compliance/audit, followed by trade execution/errors.

“Cyber and data issues are a concern because they represent a clear unknown risk for RIAs,” Golsan said. “Yet, the experience as shown in claims data shows that the breakdown in trust between advisors and their clients about their investments remains the greatest threat.”

Claims data were drawn from Golsan Scruggs’ 2023 aggregated “insured risk pool” of 2,042 U.S.-based RIA firms, which had an average of $400 million in assets under management and a median of $200 million. The smallest individual risk, or firm, in the pool was $15 million, while the largest was $30 billion. All individual risks in the pool are independent, privately held firms.

ABOUT GOLSAN SCRUGGS

Golsan Scruggs is a corporate insurance brokerage firm serving the financial services industry. Our specialists operate throughout the United States and specialize in registered investment advisor (RIA), private equity/hedge fund, and mutual fund professional liability errors & omissions (E&O) insurance. As one of the largest insurers of RIA firms in the U.S., Golsan Scruggs employs a dedicated staff that understands the special risks of the financial services industry to achieve superior results, making the underwriting process painless.

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The material and information made available in this release or from our web site are for informational purposes only and not for the purpose of providing legal advice or insurance guidance. The application and impact of the issues can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of the investment advisor’s fiduciary role, there may be omissions or inaccuracies in information contained within this report. While we have made every effort to ensure that the information contained within this report is reliable, Golsan Scruggs is not responsible for any errors or omissions, or for the results obtained from the analysis or use of this information. All information in this report is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Golsan Scruggs, its related partnerships or corporations, or the partners, agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this report, from our web site, or for any consequential, special or similar damages, even if advised of the possibility of such damages. It is incumbent upon the reader or user of the information to contact an attorney to obtain advice with respect to any particular question, issue or concern. Use of and access to this information or web site or any of the information contained within the site do not create a business relationship between the reader, user or browser.

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