THE OMISSION

THE MISTAKE.

An advisor of an RIA allocated 20% of a client’s portfolio to a long/short equity hedge fund per the investment mandate mutually agreed upon by both client and advisor. The hedge fund had quarterly redemption periods that require 90 days notice to liquidate and gates that prevent a redemption greater than 25% of the investor’s commitment. The client claimed that the advisor failed to properly disclose the liquidity provision of the investment and sued for a breach of fiduciary duty.

The Consequence

RIA
Deductible: $75,000
Lost Client: $137,000 in annual fees
Increase to E&O Premium: $22,000

Carrier:
Defense:                                 $94,000
Indemnity:                             $885,000
Total Cost to Carrier:   $904,000 (after deductible)