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As digital assets and tokenization reshape the financial landscape, investment advisors are facing new professional liability exposures—from crypto-related losses to evolving regulatory challenges.
Published on October 14, 2025
At Markel, we’ve always believed the best risk management starts with a conversation. Just recently, one of our underwriters shared how in meetings with insureds they often hears, “What do we need to do to make ourselves better?” These direct, open discussions—where best practices are shared and lessons are learned—are at the heart of how we help policyholders navigate new risks. It’s not just about selling a policy; it’s about building trust and helping our clients grow stronger.
We’re having lots of conversations like that recently, focused on the rapidly changing professional liability landscape for our financial institution policyholders—driven by cryptocurrency, asset tokenization, and proposed regulatory changes.
Crypto goes mainstream: new risks, new responsibilities
Investment advisors are now facing liability exposure at both ends of the experience spectrum. Newer advisors may over-concentrate client portfolios in digital assets, while seasoned advisors may feel they lack the expertise to navigate crypto’s unique pitfalls. The most acute risk is “mysterious disappearance,” where crypto assets can vanish instantly due to hacking, scams, or simple operational errors.
Choosing the right custodian can be important in protecting client assets, and insurers are now scrutinizing which custodians advisors use, often listing preferred custodians and excluding coverage for mysterious disappearance unless specifically endorsed.
As the crypto market grows, some lessons from early, highly publicized failures are also becoming clearer. For example, the 2022 collapse of cryptocurrency exchange FTX appears not to have been a crypto problem, but a controls problem, with millions in customer funds evidently having been lost due to the commingling of assets, a lack of governance, and an absence of appropriate segregation of funds.
The 2023 banking crisis likewise exposed the dangers of liquidity risk and deposit concentration. Silicon Valley Bank and First Republic failed because they were overexposed to a narrow segment of depositors, and lacked diversification and stress testing.
As the crypto market grows, some lessons from early, highly publicized failures are also becoming clearer.
How tokenization is creating new challenges for investment advisors
President Trump's August 2025 executive order, "Democratizing Access to Alternative Assets for 401(k) Investors,” directs the US Department of Labor and the Securities and Exchange Commission to create a new regulatory framework governing alternative assets. This relates closely to tokenization, which allows investors to own shares of assets—like real estate or private companies—using secure digital tokens.
Tokenization makes investing more accessible, but it also creates new challenges for advisors. Legal rules about token ownership remain unclear, and disclosure standards vary, increasing the risk of fraud or mismanagement claims.
While new approaches are democratizing access to alternative investments, they are also introducing new risks—illiquidity, lack of transparency, and higher volatility. Advisors must carefully vet which clients are suitable for these assets, as mistakes can trigger both errors and omissions (E&O) and fiduciary liability claims.
Recent lawsuits highlight the growing liability risks for advisors. In July 2025, a New York resident sued her financial advisor after losing her IRA to a crypto scam, alleging the advisor failed to question the withdrawal or provide adequate guidance.
Cases like these, with their significant potential for reputational as well as financial impact, are worrisome for the clients we serve. They underscore the importance of robust risk management and insurance support.
Tokenization makes investing more accessible, but it also creates new challenges for advisors.
What should investment advisors expect from their specialty insurers?
For investment advisors, one important takeaway is the wisdom of adopting multi-tiered protection. Even small firms should act like big ones, conducting annual audits and maintaining rigorous controls. Given the rapidly evolving environment, advisors will benefit most from working with insurers who:
Customize coverage
Insurers should work closely with brokers and advisors to identify which digital assets and custodians are involved in the client’s portfolio. By naming specific tokens and custodians in policy endorsements, carriers can reduce ambiguity, ensure clarity at claims time, and help both parties understand the scope of coverage.
Conduct direct underwriting conversations
Underwriters should engage directly with brokers and advisors to understand advisors’ risk appetite, internal controls, and governance structures. These conversations allow carriers to tailor coverage, set appropriate terms, and ensure that robust safeguards—such as asset segregation and custodian vetting—are in place.
Exclude or supplement risky exposures
Because “mysterious disappearance” is a unique risk in crypto, policies should clearly state whether this exposure is covered or excluded. If carriers offer optional endorsements or sublimits for this risk, they should communicate these options transparently to clients.
Manage limits appropriately
Coverage limits should reflect the advisor’s client base, asset mix, and overall exposure to digital assets. Insurers should use detailed risk profiles, historical claims data, and ongoing monitoring to calibrate limits, ensuring they are neither excessive nor inadequate for the actual risk.
Support claims management
When handling claims, carriers should develop clear protocols to differentiate between good-faith errors and negligent or reckless conduct. This approach ensures fair treatment for advisors and helps maintain trust in the insurance relationship.
Prudence and due diligence remain paramount
Despite the rapid evolution of products and regulations, the core responsibilities of investment advisors have not changed. Prudence, due diligence, and client protection are still the foundation of the profession. Specialty insurers play a critical role, but advisors must also take ownership of their practices, continuously educate themselves, and maintain the highest standards of governance.
As alternative assets and crypto become more accessible, the potential for both growth and liability increases. In an age of tokenization, advisors who embrace best practices, partner with proactive insurers, and maintain a client-first mindset will be best positioned to thrive.
