Financial Advisory firms and financial advisor (FA) are playing a critical role in advising their clients on financial matters. They have a fiduciary duty to act in the client’s best interest without any hidden agenda. Every financial advisor is therefore exposed to many risks and even the most professional ones may be sued by clients for wrong advice or other issues.
How to stay safe from litigation issues as a financial advisor or financial advisory firm?
There are numerous doable actions advisors can take to stay out of court. Below are a few key points a financial advisor can consider
- Requesting for transparency from client
- Protecting client assets and information
- Making sure your organization has the right insurance coverage
When are financial advisors liable in court?
Financial advisors have a fiduciary duty to protect the assets of their customers and operate in their best interests. Financial advisors are frequently exonerated from criminal charges if they can show that their activities were taken with good intentions regardless of the result. However, a customer may have grounds for a lawsuit if an advisor behaves rudely or does not operate in the client’s best interests.
In spite of careful practice, there may be instances where clients may complaint and enter into litigation for various issues that may occur whilst offering financial advisory services. However, the profession is highly regulated in Singapore to avoid any wrongdoings and the right insurance will help financial advisors or financial advisory services secure such risks.
Official requirements from Monetary Authority of Singapore (MAS)
Any financial advisory firms registered under Monetary Authority of Singapore (MAS) will need to buy professional indemnity insurance. The limit fixed by MAS varies according to the services provided. If you only advise others by issuing or promulgating research analyses or research reports concerning any investment product only, then a limit of coverage of SGD 500,000 is enough. For all other services, the limit of coverage is SGD 1,000,000 if turnover is below SGD 5,000,000 or SGD 10,000,000 or 20% of turnover if the later one is over SGD 5,000,000.
As for the deductible, it cannot be more than 10% of applicant’s paid-up capital or base capital This insurance is mandatory and need to be provided to MAS prior to issuing the FA license.
Personal Data Protection Act (PDPA) issue and cyber risks
Financial advisors have access to many private information so it is important that you are compliant with Singapore Personal Data Protection Act to avoid any lawsuits. All information, including investment strategy and funds details must be kept very secure. It is important to put in place an emergency response strategy in the event of cyber hacking to reduce impact for your clients. Cyber insurance will be recommended to reduce your company exposure.
Directors and Officers liability insurance
As management of a financial advisory firm, you are in the first line if something goes wrong. You and your company can be sued by regulators if one of your staff is not compliant. Client could also filed a complaint directly under management name for lack of supervision or compliance. So directors and officer’s liability insurance is paramount while running your operation.
Advisors’ Protection for Financial Advisory Business
Your financial advisors team may be your biggest company asset. If this is the case, it is important to protect it like any other assets as it can impact seriously your company cash flow if this person is on leave due to medical reasons. Making sure that your financial advisors are properly covered with health, accident and critical illness is essential to recover swiftly. For key FA, you may consider as well keyman insurance.
Being properly insured is a must to operate as a financial advisor in the highly regulated financial industry of Singapore. Compliance will become even trickier as authorities wants that Singapore becomes the hub in Asia for wealth and funds management, so insurance will be key to cover the liability of financial advisory firms and their financial advisors.
Contact us at firstname.lastname@example.org to review your insurance policies.