For example, a financial advisory firm might purchase a fidelity bond to protect itself and its clients from losses if an employee embezzles funds or engages in fraud. These bonds are most prevalent in industries like finance, real estate, and healthcare, where the stakes are high and trust is paramount.
Why are fidelity bonds important?
Fidelity bonds can be important, particularly for companies that can't afford legal repercussions or financial losses. Many businesses will buy fidelity bonds for the following reasons:
Protection against employee dishonesty
Almost everyone knows about the Bernie Madoffs and Sam Bankman-Fried, but most fraud and theft occur with lower-level employees. Fidelity bonds protect businesses against financial losses caused by employee dishonesty, such as theft, fraud, and forgery. For example, if an advisor at a financial firm is secretly getting kickbacks from certain funds and financial products where they've steered clients, a fidelity bond can protect against future litigation against the company.
Building trust and regulatory compliance
Beyond financial security, fidelity bonds also build trust with clients by demonstrating a company's commitment to eliminating fraud and following ethical practices. In industries like financial services or real estate, where the stakes are high, a fidelity bond tells clients that their interests are protected. In some sectors, fidelity bonds are a regulatory requirement; not having one can carry a penalty. For example, financial firms registered with the U.S. Securities and Exchange Commission (SEC) and businesses managing retirement plans under the Employee Retirement Income Security Act (ERISA) are required to carry fidelity bonds to safeguard their clients and participants from potential mismanagement or fraud.
