Will a broader application of the fiduciary standard be accompanied by higher insurance costs? Some broker/dealers are bracing for the possibility. The proposed financial overhaul legislation before Congress would provide rulemaking authority for the SEC to extend the fiduciary standard to brokers, following a six-month study of the issue.

“I think what it’s going to lead to is a lot of claims against broker-dealers. I think whenever you go to a fiduciary standard, you’re opening up a bigger window for the lawyers to drive through,” says John Rooney, managing principal at Commonwealth Financial Network, one of the nation’s largest independent broker/dealers. “We’d have to see how it plays out. If it did go through and the increase in claims that we suspect would actually materialize, we’d ultimately have to raise premiums.”

Errors and omission insurance is used to cover defenses of claims by investors against advisors. Those claims typically rise following a period of market turmoil; Rooney says there’s usually a two-year lag. And E&O premium increases usually follow increases in claims. The rate hikes can be sizable: Bud Bigelow, president at Markel Cambridge Alliance, which sells E&O policies to RIAs, recalls broker/dealers who saw increases of 200 percent in premiums in 2002 following the dot-com bust.

But higher claims don’t necessarily mean higher payouts, says Perry Even, vice president at Arthur J. Gallagher & Co., which insures broker/dealers. A lot of arbitrations that have emerged from the 2008 crash have not borne the same fruit for investors as the arbitrations that followed the prior bust in 2000; arbitrators see the two markets differently.

Prior to 2000, the markets “had been so robust for such a long period of time, (investors) could, with some credibility, say advisors never really talked with them about this going down. They didn’t appreciate that they had market risk to the degree that they did,” Even says. “They could legitimately say, ‘I really wasn’t advised that this could go down like this,” or, ‘If I was in other sectors that were diversified differently, I wouldn’t have experienced this loss.’ So market loss claims during that period actually had real economic value during arbitration.”

By comparison, the 2008 market went down across the board, Even notes. “Investors couldn’t say, ‘Gee, if I was in another area of the market, I wouldn’t have had this loss.’ Everybody had virtually the same loss. And they could not say, ‘I didn’t know this could happen,’ because it had happened within the past decade in a rather similar fashion.” Sharply higher market returns in 2009 also may have blunted investors’ dissatisfaction, he adds.

The difference between the two market events is reflected in E&O rates, Even says. Annual premiums in group programs that ranged from $1,000 to $1,200 per rep around 2000, grew to well over $2,000 in some cases after the dotcom crash, sometimes with reductions in the scope of coverage, he says. But in the last year or two, premiums have risen only slightly, he says; they currently range between $1,700 and $2,000.

Even isn’t sure that a new fiduciary standard applied to b/ds will mean more arbitration panel decisions against brokers. “We rarely see the panels spending much time determining whether or not there was a fiduciary duty owed or not,” he says. “That may be a legal distinction, but they don’t spend a lot of time on it. … If the panel believes the rep failed his client, they’re going to find for (the client.)”

If the SEC broadens the fiduciary standard to brokers, Even doesn’t expect underwriters to react immediately to it.

“Clearly if underwriters have an appetite to cover this risk as they have for some time, the fact that it’s now a fiduciary standard, I don’t believe, is going to send them fleeing from the category,” he says. Pretty clearly, arbitration judgments and court judgments that may flow from disputes will be scrutinized closely to see what the impact is.”

When it comes to reducing claims exposure and keeping E&O premiums down, advisor expertise is hard to beat, Rooney says. “The more experienced an advisor is, the more competent he is, and the fewer claims you’re going to get,” he says.