More stringent regulation in the 401(k) industry has made it a risky business to be in for financial advisors. Plan participants sue advisors for bad advice, high fees and plummeting retirement assets.
That's why financial professionals should consider purchasing ERISA fiduciary insurance, said David Levine, a principal with the Groom Law Group.
There are many ways an advisor can get drawn into litigation, including selection of investment funds that go bad, selection of vendors where ongoing operational problems occur and fee disclosure errors, he said.
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When deciding on what fiduciary insurance coverage to buy, Levine recommends buying one that covers current and past activities. Determine how much coverage you want and if you want a choice of counsel clause.
"Just as advisors can bring unique talents to their retirement plan clients, a good insurance broker can be invaluable to a retirement plan advisor," Levine said.
If you are sued by a client or the Department of Labor opens up an investigation into your practices, you need to notify your ERISA fiduciary insurance carrier of a potential claim. Some policies won't provide coverage if you don't give them enough advance notice that a lawsuit is happening.
Fiduciary insurance is a good idea because it protects the financial professional and their clients in case something goes wrong. Levine recommends looking at fiduciary insurance options the next time you are in the middle of a request for proposals.
"It could just be that one additional factor that helps you win the confidence of a knowledgeable prospective client," he said.
Also read: MassMutual suit alleges fiduciary breach
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