Many advisers don’t realize cyber coverage doesn't protect them when claims are made for wire transfer mistakes or fraud. (Credit: MQ-Illustrations/Adobe Stock)
Nothing shatters peace of mind quite like believing that you are protected from a circumstance, only to find out that you are more vulnerable than you think.
This is happening more frequently around liabilities that financial advisers think they are insured against but aren’t. Despite the electronic nature of most transactions, many advisers don’t realize that cyber coverage does not protect them when claims are made for mistakes or fraud dealing with wire transfers.
For instance, let’s say an adviser processes a wire transfer after confirming with the client that the information on the wire request was accurate. Two weeks later, the adviser learns that this client had been attempting to email the adviser to say that the funds were never received. The problem? The adviser's email had been compromised, which explained why the adviser was not receiving the emails from the client. That led to the bad transfer.
Is this a cyber breach, covered under errors and omissions insurance? Not exactly. Advisers in this case would find that they weren’t covered if their policy didn’t protect against wire fraud specifically concerning client assets.
Wire fraud claims are becoming more common, with data pointing to a doubling of claims year over year. Yet, advisers accused of wire fraud may find that their errors and omissions coverage does not protect them, unless wire fraud is specifically part of the package.
In one recent claim of wire fraud, a fraudulent actor, posing as a participant in a 401(k) plan, called an adviser to initiate a distribution request. This interaction was captured in a recording and was part of a larger scheme that also included DocuSign approvals. The fraudulent actor facilitated the unauthorized distribution by sending a DocuSign form for the transaction, which was fraudulently signed by the participant and his wife, and subsequently approved by the third-party administrator sponsoring the retirement plan. Documents supporting these actions include signed DocuSigns, DocuSign certificates and distribution forms.
The activities continued with another phone call from the bad actor to the RIA, which was followed by a significant wire transfer from the custodian to an outside bank. Despite the RIA following identity verification protocols, a distribution request form was sent to the third-party administrator for approval. This form was again fraudulently signed. A few days later, the third-party administrator recognized the fraud and contacted the adviser and soon after the FBI.
How can an advisory firm protect itself to ensure that it isn’t on the hook for these kinds of claims? Here are three actions you can take today:
Perform a policy review
Make sure that you have sufficient coverage to handle claims for both wire fraud and cyber. With the financial advisory business constantly evolving, it should be a rule of thumb to review your coverage frequently. That demands taking a look to ensure your existing errors and omission coverage is sufficient for your practice.
It is possible that changes you have made to your business model may require an update to your coverage. For instance, performing bill pay on behalf of clients might require different coverage, and transaction-based or fee-based business models might affect your liability.
Your coverage should reflect all aspects of your business and client work.
Pay attention to the details
Again, there could be business scenarios in which cyber events lead to claims of wire fraud, but how your insurance carrier views a situation will matter when it comes to how your claims are handled.
The devil is truly in the details, and understanding precise terms and scenarios is key to ensuring that you are properly insured.
Get expert help
Almost every business uses some form of broker to help guide them through coverage, and for good reason: This is an important financial decision that needs expertise.
It’s vital to seek advice from someone who knows the complexity of the financial advisory business. This specialized help can go a long way toward ensuring that you secure the most comprehensive coverage at the best possible price.
Brian Francetich is director of Golsan Scruggs RIA, a corporate insurance brokerage firm serving the financial services industry.
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