Advisors' E&O insurance premiums have fallen sharply for one risk asset group

With inflation having driven up costs for registered investment advisors in the past year, finding things that have actually become less expensive is always welcome.

And despite continued concerns of regulators about digital assets, especially cryptocurrencies, this is one group of risk assets for which advisors should find lower costs for the errors and omissions insurance.

A new report from financial services industry focused corporate insurance brokerage Golsan Scruggs, reveals that premiums for E&O coverage for digital assets has fallen by around one half in the past year as insurance carriers becoming more comfortable offering this coverage to advisors.

“About a year ago, advisors who wanted to add cryptocurrencies to their clients’ portfolios often had to do so without the protection of insurance, since premiums were often prohibitive, assuming they could even find coverage,” said Brian Francetich, shareholder and director of Golsan Scruggs. “The environment has changed dramatically, and now RIAs can better mitigate their own risks if they feel their clients could benefit from increased exposure to the asset class.”

There are several reasons why premiums have fallen, including insurers’ view that the regulatory landscape around digital assets is becoming clearer with the SEC and Finra providing greater oversight of how advisors communicate with clients and prospects about cryptos.

The way that digital assets are custodied is another shift, and there has also been a change in the advisory industry.

“Most financial advisors have been cautious about adding cryptocurrencies, but it is clear that client demand has prompted the industry to do more diligence,” Francetich said. “Advisors are becoming more experienced in the asset class, and insurers have taken notice.”

IMPORTANT CAVEATS

However, before rushing into widespread use of cryptos and other digital assets in client portfolios, advisors should be aware that insurers are still cautious and are more likely to offer coverage for portfolios where direct digital assets represent less than 10% of total assets under management.

Some insurers will also not offer coverage for some digital assets, with the better known cryptos such as Bitcoin and Ethereum more likely to be included in E&O coverage.

Advisors will also need strong compliance procedures and programs including ADV disclosures, as well as presenting a general maximum allocation to digital assets for specific clients and not rolling it out to all clients regardless of risk tolerance.

Additional disclosures where clients acknowledge the risk and volatility within the space should also be considered.

And Francetich says that the landscape is shifting, often relatively fast.

“RIAs in particular should be talking with their insurance broker more frequently about the landscape around crypto, since it changes so quickly,” he said. “What was true six months ago may not be true six months from now.”