What are Financial Advisor Disclosures and Why Do They Matter?

Isn’t it always better when you know what to expect? When you buy a house, you want to know whether the neighbourhood suits your vibe. When you plan a vacation, you check if the destination has good places to eat and things to do before booking your tickets. Even at work, when you hire someone, you look into their background and past experience. You need to do the same when you decide to work with a financial advisor. You are trusting someone with your money, so it is important to ensure there are no conflicts of interest.

Financial advisor disclosures can help you better understand your advisor. It can give you a glimpse into how they work, the compensation method they use, and the services they offer. 

Let’s take a closer look at what a financial or investment advisor disclosure is and why it matters so much.

What is a financial or investment advisor disclosure?

A financial advisor disclosure is a document that tells you who the advisor really is and how they operate. A disclosure covers a few key areas. One of the most important is compensation. It explains how the advisor earns money. This can be a commission, a flat or hourly fee, or a percentage of the assets they manage for you.

Another critical part of disclosure is conflict of interest. An advisor must tell you if any conflicts exist. For example, if an advisor earns commissions by recommending one product over another, they need to disclose that. Disclosures also include information about a financial advisor’s background and history. It helps you check customer complaints, regulatory actions, or employment terminations. Some disclosures are minor and administrative. Others can be more serious. 

In the United States, most registered investment advisors are required to file Form ADV with the Securities and Exchange Commission (SEC). This form is one of the most important disclosure documents you will come across. It outlines the advisor’s services, fees, conflicts of interest, and any disciplinary history.

Advisors must update this information at least once a year and anytime there is a major change. Form ADV can also give you a comprehensive overview of an advising firm’s operations and any disciplinary actions or customer complaints that have been filed against the firm or its advisors. Let’s find out a bit more about Form ADV. This form is divided into two parts:

• Part 1 contains basic information about the financial advisor’s business. This includes who owns the firm, the number of employees, any professional affiliations, and general business practices. It gives clients a summary of the company and the people running it.
  
• Part 2 goes into greater detail. Financial advisors are required to disclose information that directly affects clients, including the types of services offered, the advisors’ education and professional background, and a schedule of fees for each service. If fees are negotiable, that should be noted as well.
  
  Additionally, Part 2 requires disclosure of any other sources of compensation the financial advisor may receive beyond the standard service fees. This ensures you know if there is a financial incentive that could influence the advice you are being given. Financial advisors are also required to disclose their professional affiliations. These disclosures also cover conflicts of interest. Advisors must identify potential conflicts and ensure full transparency. 
  

There are other disclosure documents you might encounter as well. These can include Form CRS, often called the relationship summary, and the Form U4. You can check all these forms to verify claims and get a better insight into who your financial advisor is. You can also check FINRA’s BrokerCheck website. A financial advisor disclosureis publicly available, making it easy for anyone to access and read. In fact, the disclosure is normally shared by the advisory firm itself. 

When it comes to investment advisors, you can use the Investment Adviser Public Disclosure (IAPD) database. This database contains registration documents filed by investment advisory firms that register electronically through the Investment Adviser Registration Depository (IARD). You can find registration information for individuals working as investment adviser representatives, as well as their professional background. The database also includes information about any disciplinary history against the professional. All the information that advisers file on Form ADV is available through IAPD. 

Financial advisor disclosure requirements

Financial advisors are required to provide all relevant information about their business practices, fees, and any disciplinary history. This information is primarily documented in Form ADV, as mentioned above. 

Here are some other financial advisor disclosure requirementsthat professionals need to follow:

• Financial advisors are required to provide clients with a written copy of this disclosure at least once per year, free of charge. 
• Copies of all disclosures must be maintained by the financial advisor, including records of any updates or revisions. 
• Professionals also need to track when disclosures were sent to both new and existing clients, ensuring everyone has up-to-date information about the advisor’s business and practices. 

What if there are financial advisor disclosure events?

You should automatically avoid a financial advisor or firm if there is a disclosure event against them. But it is not always that simple. Disclosure events can range from minor regulatory issues and customer complaints to more serious legal problems and major financial fraud.   

Once you have found a financial advisor disclosure event, the next step is understanding whether it is a genuine concern. Some disclosure events are relatively minor. Others, however, can be bigger red flags. Events that typically warrant extra caution include bankruptcy filings, civil judgments, or tax liens.

You should also be alarmed if you spot a pattern of customer disputes. An advisory firm or individual who has repeatedly made the same mistakes may be a red flag. Employment separation following allegations of misconduct is also something you should not ignore. 

These kinds of issues can be cause for concern, and it may be better to avoid working with the firm or advisor. In case of minor findings, you can research the nature of the event further and speak with the firm or a professional for clarity.  

How can a financial advisor’s disclosure help you?

First, a financial advisor disclosure allows you to check the advisor’s professional record. You can see their educational background, certifications, and licenses, which help you confirm that they are properly qualified. You can understand the regulatory oversight the advisor has and also gauge what their experience is likely to be.

Second, disclosures make it possible to identify red flags. You can review any customer complaints, regulatory actions, legal issues, and more in the advisor’s past. In case of any allegations against the financial advisor, you can make an informed decision about whether or not you want to hire them. This can protect you from working with fraudsters or people with a shoddy professional track record. 

Third, a financial advisor disclosure helps you understand how the advisor gets paid. The document clearly specifies the fee structure that the advisor follows. For example, in many cases, financial advisors may charge commissions for the products they recommend. This can create a conflict of interest. However, the disclosure can help you understand how the advisor is compensated. The disclosure will also help you understand whether the advisor charges a commission or prefers a flat monthly or annual fee, a percentage of assets under management, hourly compensation, or a combination of these. You can make an informed decision based on the information in the disclosure. 

Disclosures also allow you to evaluate the firm, not just the individual advisor. You can see whether multiple advisors within the same firm have a history of complaints or disciplinary actions. If issues recur across the firm, that may suggest deeper problems with practices and management. 

What is a financial advisor’s confidentiality agreement?

A financial advisor’s confidentiality agreement is a legal document that ensures that your personal and financial information is protected. Since financial advisors may be privy to your personal and financial information, having such an agreement in place can be helpful. Regulatory bodies have established strict standards requiring financial advisors to protect and safeguard client data and use it only for legitimate business purposes. Advisors must take steps to protect client information from cyber threats or unauthorized access, basically anything that results in improper disclosure.

For example, the Certified Financial Planner (CFP) Board sets detailed rules around client confidentiality for Certified Financial Planners. Under the CFP Code of Ethics, a CFP can share client information only with the client’s consent and only with a limited group of people, such as employers, accountants, partners, attorneys, auditors, etc. Even then, the information shared must be relevant and necessary.

The SEC also enforces confidentiality requirements for Registered Investment Advisors (RIAs). These rules restrict sharing client data even after an employee leaves the firm and require advisors to notify their chief compliance officer of any risk of data exposure or if an exception to confidentiality is being considered.

NAPFA also takes an equally firm stance on financial advisor confidentiality. NAPFA’s code of ethics states that members must keep all client data private unless the client gives explicit permission to share it. Financial advisors are also expected to handle documents carefully and dispose of them securely. 

For you as a client, a financial advisor confidentiality agreement can ensure that your financial information is not discussed, shared, or leaked without your permission. The agreement protects your details and provides legal protection if your information is mishandled or disclosed without your consent.

Financial advisor confidentiality agreement vs. financial advisor disclosures

Financial advisor disclosures are designed to ensure that all relevant information about a financial advisor is accurately recorded and shared with you in a timely manner. These disclosures help you make an informed decision before hiring and trusting an advisor with your money and personal financial details. They provide clarity on the financial advisor’s background, experience, licenses, regulatory status, potential conflicts of interest, and compensation.

In short, disclosures exist to help you understand who your financial advisor is, how they operate, and what to expect from the professional relationship.  

A financial advisor’s confidentiality agreement, on the other hand, is meant to protect your interests. It ensures that your personal, financial, and sensitive information is not shared with third parties without your permission. This agreement sets clear boundaries on how your data can be used, stored, and disclosed. It safeguards your privacy and ensures that anything shared between you and your advisor remains strictly confidential, unless disclosure is legally required or explicitly authorized by you. 

While these two documents are very different from one another, they work together to protect and empower clients. 

Conclusion: Why advisor disclosures deserve your attention

A financial orinvestment advisor disclosure, although it is the financial advisor’s or firm’s responsibility to update and share, also requires your active involvement. Many people are not even aware that such a document exists, which is why they never bother to check it. Make it a point to ask for the disclosure, read it carefully, and understand what it says. If you have questions, speak openly with the financial advisor or the firm. If you notice any obvious red flags, do not ignore them. Take them seriously and avoid working with such individuals.

At the same time, pay close attention to the financial advisor’s confidentiality agreement and discuss it clearly before hiring an advisor. Your financial and personal information is sensitive and can be misused in several ways, so protecting it should never be optional. 

It is also essential to always rely on verified, trusted sources when choosing a financial advisor, such as our financial advisor directory, to ensure you are working with a credible, transparent professional. 

Frequently Asked Questions (FAQs) about a financial or investment advisor disclosure and confidentiality agreement

1. What happens if a financial advisor lies on Form ADV?

It is illegal for a financial advisor to provide false or even incomplete information on Form ADV. Advisors are legally required to disclose accurate details about their business practices, fees, conflicts of interest, and disciplinary history. If an advisor intentionally lies, they can face serious consequences, including penalties, suspension, and even criminal charges. 

2. What rules are in place to prevent financial advisor misconduct?

Regulators like the SEC have established several rules to reduce the risk of misconduct and protect investors. Two important ones include:

• Rule 206(4)-1 (Investment Advisers Act): This rule requires financial advisors to disclose any conflicts of interest that could influence the advice they provide. 
• Rule 204-3: Under this rule, financial advisors must provide clients with disclosure documents, including Form ADV. They must also maintain proper records of all written agreements with clients. This includes compensation structures and the scope of services offered, among other things.

These rules operate alongside Form ADV and are designed to improve transparency.

3. Why should you check a financial advisor’s disclosure?

Reviewing a financial advisor’s disclosure helps you understand who you are working with. Disclosures allow you to learn about the advisor’s experience, licenses, certifications, compensation methods, and any potential conflicts of interest. They also highlight any past disciplinary actions or complaints. This information can help you make a more informed decision.

4. What happens if a financial advisor breaches a confidentiality agreement?

If a financial advisor breaches a confidentiality agreement by sharing or misusing your personal or financial information without permission, you may have the right to take legal action.