Small Investment Advisers Commonly Lack Funds or Insurance to Compensate Clients

Posted on July 29th, 2019 at 11:35 AM
Small Investment Advisers Commonly Lack Funds or Insurance to Compensate Clients

From the Desk of Jim Eccleston at Eccleston Law LLC:

In many cases, small investment advisers do not possess enough capital or insurance to compensate clients when its advisers have wronged investors. Those advisers often operate from small offices that lack constant oversight from financial regulators. In fact, those money managers are 1.5 times as likely to file for bankruptcy within a year of a legal settlement resulting from a client dispute. Additionally, these same advisers are 3 times more likely to retain an unpaid judgement on its record.

Recent regulatory and structural changes have favored the practice of charging steady fees rather than trading commissions, which has fueled growth in the investment adviser business model. For instance, the number of individual investors that utilize investment advisers instead of brokers has increased by 33% since 2008. Small investment advisers are often feebly capitalized, which hinders those firms from carrying sufficient insurance to cover any large legal settlement that occurs. Investors that aim to sue smaller money managers typically discover that the firm is too small to necessitate an attorney’s involvement.

In January 2018, Oregon became the first state to require at least a $1 million “errors and omissions” insurance policy for brokers and advisers. This statute aims to protect investors from risks other than only theft, such as negligent advice directly causing losses. Numerous investment advisers claim that insurance is not necessary because brokers and banks often hold clients’ securities, which effectively mitigates the risk of failure or theft. Nevertheless, the SEC is considering whether to implement some form of insurance requirement for money managers nation-wide. According to the SEC, 91% of federally regulated investment advisers possess direct responsibility for the securities that exist in its clients’ portfolios.

The attorneys of Eccleston Law LLC represent investors and advisors nationwide in securities and employment matters. The securities lawyers at Eccleston Law also practice a variety of other areas of practice for financial investors and advisors including Securities FraudCompliance ProtectionBreach of Fiduciary DutyFINRA Matters, and much more. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.

Related Attorneys: James J. Eccleston

Tags: james eccleston, eccleston law, eccleston law llc, eccleston, investment advisers, insurance, financial compensation, sec, tradiing commissions

Return to Archive



As a financial advisor with over 20 years of experience, I feel fortunate to call Jim my attorney and friend. He is a fantastic lawyer and trusted advisor. He is skilled in the matters necessary to do the job well. He uses his thoughtful approach and calm demeanor to achieve a positive outcome for the client. If you want to feel confident that nothing will be missed and that you will be represented in a highly professional manner, call Jim Eccleston.

Bill C. and Dan M.


February 22, 2024
Key Considerations for Advisors When Assessing the Financial Soundness of Annuities

While rating agencies like Fitch and S&P Global Ratings generally highlight the strength of annuity issuers, advisors still should scrutinize certain factors in their assessment process.

February 21, 2024
SEC Alleges Fraud Against Morgan Stanley and Former Executive in Block Trading Business

As reported by the Wall Street Journal, the Securities and Exchange Commission (SEC) has charged Morgan Stanley & Co. LLC and its former head of equity syndicate desk, Pawan Passi, with a multi-year fraud involving the disclosure of confidential information related to block trades.

February 20, 2024
Challenges Persist: Firms Struggle to Comply with Regulation Best Interest

FINRA's annual report for 2024 reveals a concerning trend among broker-dealers, with numerous instances of violations of Regulation Best Interest (Reg BI).