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Can a financial advisor commit malpractice?  

courtWhen most people think of malpractice the first thing that comes up is the idea that a doctor made a serious mistake that caused great harm, injury, and perhaps the death of a patient. This is certainly the type of malpractice cases that attorneys work with all the time. However, there are other types of malpractice, which may be less known by the public; however, they are also very common.

Errors and Omissions

In the financial services industry, malpractice has different terminology and insurance coverage. In this sector, malpractice is called errors and omissions (E&O) insurance. This is the kind of insurance that should be carried by all the firms and the financial professionals working at the firms, such as accountants, financial planners, stock brokers, real estate agents, and many others.

When Does E&O Insurance Apply?

A common example of an E&O insurance claim comes from a mistake made by a stockbroker when trading for a client. If the client calls a full-service stockbroker on the phone, the calls are usually recorded, which is proof if something went wrong. If a broker makes a mistake when taking a client’s order over the phone and does the wrong thing, then the broker, the firm, and the company providing an E&O insurance policy may face liability for the damages caused.

This is why when a broker takes an order over the phone, they usually repeat it back to get the client’s further explicit confirmation. Still, even when being careful mistakes can be made. A broker may buy a stock instead of selling it. The resulting loss in the client’s account may be substantial. That is a typical E&O mistake. It can literally happen by the broker pushing the wrong button.

Criminal Acts are Not Usually Covered by E&O Insurance

One word of caution that most investors do not know about, is that E&O insurance does not usually cover intentional criminal acts or fraud. In fact, the trend over the past decade was for all financial firms, which hold client funds, to have specific exclusions in their insurance policies for criminal acts.

This major change was made somewhat quietly by the financial industry and insurance companies, almost without much public awareness. This means if a stockbroker makes a mistake and loses $1 million of a client’s money by entering a buy order instead of a sell order that act may be covered by E&O insurance. However, if that same stockbroker steals $1 million of the client’s money and runs off with it that theft may not be covered by E&O insurance.

Disputes may come up as to whether something is a mistake or a crime. That’s when you need the help of a competent malpractice attorney.

If you have not already suffered a financial loss, it is a good idea to proactively consult with an attorney to check for this problem. Then, get a separate insurance policy to protect your assets from criminal theft or fraud.

If you already experienced a significant financial loss caused by a mistake made by a financial professional, you should engage a competent attorney for legal help in recovering the loss.

Financial Safety Tips

When it comes to important financial matters, if you rely on the advice of a financial professional, before you engage their services, ask for and get a copy of their E&O insurance policy. Make sure you have protection under this E&O policy and that any funds the professional manages for you are covered.

Also, before funding your account at a stock brokerage be sure the account is covered under SIPC. SIPC is an insurance program created by federal regulations to protect investors from a loss, if a covered financial firm becomes insolvent.

If the funds involved are substantial, consulting with an attorney is a prudent idea before you have a problem.

augusta free press
augusta free press