Would you want to know if your financial advisor was a criminal? What about if they’d ripped off another client? Or if they’ve been incentivized to sell you products that aren’t in your best interest?
Of course you would. And that’s why financial advisor disclosures came into being — and why you should care about them.
Disclosures can also show you exactly how (and how much) you’re paying your advisor. Unfortunately, it’s not as straightforward as you might think. Here are the major financial advisor disclosures, what they cover, why they matter and where you can find them.
What Do Financial Advisors Disclose and How?
Financial advisors are required to disclose certain items when you sign on as a new client. These range from your standard client agreement to meatier disclosures such as:
— Form ADV Part 2A. This form provides 18 disclosure items about an advisory firm, including services, fees and legal or disciplinary actions.
— Form ADV Part 2B. This “brochure supplement” includes information about individual advisors, such as education, disciplinary history and professional experience.
— Form CRS. The client relationship summary provides a more truncated version of the information on Form ADV.
— Form U4. This form contains similar information to Form ADV Part 2A and 2B as well as disciplinary and work history, and regulatory and customer disputes.
Form ADV is one of the more revealing disclosures that advisors must file with either the Securities and Exchange Commission or their state, depending on their location. Both registered investment advisory firms and advisors themselves are required to file them.
Form ADV Part 2A pertains to the advisory company and must be given to clients in a brochure before they sign on. “It contains information regarding the firm’s owners, the services offered, the fees the firm charges, legal and/or disciplinary issues involving the firm and all conflicts of interest,” says Mario Chilin, chief compliance officer and partner at EP Wealth Advisors in California.
Don’t assume that because an advisor’s fees are listed on Form ADV 2A, it means they’re nonnegotiable, says Michael Zovistoski, managing director at UHY Advisors New York. “An advisor may have fee flexibility and charge a client fees lower than those stated in the ADV Part 2.”
He adds that while Form ADV Part 2 is required to be distributed to fee-based clients, if an advisor charges only commissions, the form may not be as readily available.
Form ADV Part 2B pertains to the financial advisors themselves, who must also provide it as a brochure to potential clients before they enter into an agreement. It describes the education, disciplinary history and business experience of the professional.
There is also Form CRS, the client relationship summary. Like Form ADV, the CRS “is required to be delivered prior to or at the time of signing an investment advisory agreement,” Chilin says. It’s a much more truncated version of the Form ADV information that’s limited to two pages, including services, fees, conflicts of interest, standard of conduct required when delivering services and any reportable disciplinary or legal history, he says. It also provides key questions you should ask a financial professional.
“Every investor and institutions of all sizes continue to (be vulnerable) to fraud, both cyber and human,” he says. “It’s important to understand how your private identifiable information is handled and the extent that it is safeguarded.”
The other major disclosure form for financial advisors is Form U4, which is used by broker-dealers and investment advisors and includes similar information.
The information here, however, can be a little juicier.
Not only does it contain disciplinary and work history, it contains criminal and civil judicial records. Regulatory and customer disputes would also be on here, showing the allegations, dates, resolutions and penalties your advisor may have lurking in their past. Advisors have to submit their fingerprints to the Financial Industry Regulatory Authority, or FINRA (you can’t see those, sorry), for this form.
Other disclosures are generally more minor and commonplace.
Prospectuses, oral disclosures and initial service agreements are all fairly routine. Before signing on with an advisor, you should ask for an itemized list of all costs, fees and commissions, direct or indirect, that you’ll be charged, says Benjamin M. Greenfeld, partner and chief investment officer of Waldron Private Wealth in Bridgeville, Pennsylvania.
“This list of fees should be included in your agreement with the advisor, so that there can be no misunderstandings down the road,” Greenfeld says.
As for Form ADV, CRS and Form U4, just knowing about them doesn’t do much good — you need to know how to access them.
How to Find Financial Advisor Disclosure Documents
ADV Part 2A and Part 2B and Form CRS must be delivered as brochures to clients. But if you want to do some digging or are afraid to ask your advisor or financial management firm for copies, you can find the filings online.
You can search by your advisor’s name, an identification number called the CRD#, or the management firm name on the Investment Adviser Public Disclosure (IAPD) website adviserinfo.sec.gov to find Form ADV.
That’s the good news.
The bad news? When it comes to big advisory firms like Raymond James or Merrill Lynch, these forms can run hundreds of pages long. Sadly, pages of fines and court cases are pretty common with the industry’s biggest firms. If you find a small-time advisor with a litany of conflicts and rulings against it, however, you’re far more justified in your concern.
“At a minimum, an investor should review the firm’s Form ADV Part 2A and the Part 2B with the advisor with whom they’ll work and research them on the IAPD website,” Chilin says. “A quick Google search is always a good final check.”
Form U4 can be found on a different website run by FINRA. Since even your advisor’s fingerprints and Social Security number shouldn’t be plastered all over the internet, you won’t find the original Form U4 in your search results, just a summary of the public information.
The website, called BrokerCheck, can be found at brokercheck.finra.org.
If an advisor has any litigation in his or her history, Zovistoski says, you may be able to get more details about it on the SEC’s Action Lookup site at sec.gov/litigations/sec-action-look-up.
At the end of the day, if you can’t find the necessary financial advisor disclosures on either of the above websites, if you don’t have any brochures or emails, if online searches have failed you, and if your advisor has rebuffed your requests for transparency, you need a new advisor.
The Bottom Line
Frankly, most advisors and financial management companies should be open to and understanding of requests for transparency. It’s in their own interest to be trusted and forthcoming with their clients.
“We feel as though 90% of our job is educating the client, so that they’re comfortable in working with us and comfortable making decisions regarding their financial goals and the path to achieving those goals,” Zovistoski says.
The purpose of researching a broker or advisor is to identify any past wrongdoings, so they can be discussed and you can enter the relationship with full awareness, he says. “Sometimes bad things happen to good people; sometimes people do not learn from past mistakes, and they have a tendency to recur.” The more relevant information you have and can discuss with the advisor, the more transparent your relationship.
You should be able to know anything and everything (within reason) you want to know about your financial advisor. From the basics, such as what you’re invested in and how they’re getting paid, to the behind-the-scenes data regarding complaints and conflicts of interest, it’s all potentially germane to your own financial goals.
And now that you know where to find it, it’s all yours to scour.
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Update 06/24/21: This story was published at an earlier date and has been updated with new information.