Offering expert financial advice can mean putting your reputation — even your business — on the line, even when your counsel is sound. Consider the following case study:
Case Study: A Costly Win
The Securities and Exchange Commission (SEC) launched a formal investigation into allegations that several investments made by a hedge fund violated securities laws. After a 24-month probe, the SEC concluded that neither the hedge fund nor its employees had done anything improper, and that no further action was necessary.
But in the meantime, the hedge fund had incurred more than $5,000,000 in legal bills. These expenses were covered under the firm’s Professional Liability policy, and the only impact on the hedge fund was lost time and a $150,000 deductible.
The moral? If you’re offering financial advice, you should ensure your business has the Professional Liability protection to back you up — even if you never make an error.
Be Prepared: Two Common Sources of Professional Liability Lawsuits for Financial Advisors
1. Individual investors
If their personal investment doesn’t perform as expected, a retail investor may claim they didn’t understand the product you recommended, demand their money back and seek to hold you liable for bad advice.
Even when you’ve agreed upon the investment type, a pension plan executive can claim that you didn’t properly manage their organization’s fund, and question your professional counsel. They can also claim improper due diligence or failure to quickly make adjustments. These particular lawsuits can drag on, since most institutional investors have the capital to fight you in court.