What Are Financial Advisor Disclosures And Why Do They Matter?
Your financial advisor is like a guardian of your hard-earned money. You may rely on their suggestions and make decisions based on their suggestions that could potentially lose you a lot of money if they do not work in your favor. Hence, it is important to ensure that the advisor you are working with has your best interest at heart, is authorized to offer professional consulting services, does not have a criminal record, and, more importantly, has not ripped their past clients of money. However, you might not be able to gauge these factors upfront and may need to dig a little deeper to check the disclosures of your financial advisor.
In the world of finance, disclosures refer to important information that companies, including financial advisory firms, public corporations, brokerage firms, etc., are obligated to disclose to the public to ensure transparency and fairness in operations. For instance, financial advisors should register with the U.S Securities and Exchange Commission (SEC) and disclose all conflicts of interest and disciplinary actions to their current and prospective clients. There are some disclosure forms, such as Form U4, Form CRS, Form ADV, and more, that financial advisors are expected to share when they sign on a new client.
Working with a financial advisor is a smart decision. Indeed, people who engage with a professional financial advisor are twice as likely to achieve their retirement goals and fulfill other financial objectives. Alternatively, having the right financial advisor can also improve your investment returns. According to a study, professional financial advice can likely increase investment returns by approximately 3% each year. This added return percentage is also known as the ‘Advisor’s Alpha’. This research was corroborated by a report that stated hiring a skilled financial advisor can increase annual investment returns by 3.75%. On the other front, hiring a financial advisor also has non-monetary benefits. As reported by a recent study, 67% of people who work with a financial advisor are clear about spending their money wisely and saving for the future. The study also specifies that 59% of the people who work with a financial advisor are better prepared for retirement.
However, to get all these benefits and more from working with a financial advisor, it is imperative to assess the professional in detail and ensure you are hiring the right person.
Here is everything you should know about financial advisor disclosures and why they matter:
What is a financial advisor disclosure?
Typically, disclosure is the process of presenting facts or information to the public. In terms of financial advisors, disclosures refer to a report where the advisory firm publicly reveals information, such as operational methods, background, fee structure, conduct, past records, etc. These details are mentioned exhaustively in Form ADV, an investment advisor disclosure that is necessary at the time of registering with both the SEC and state securities authorities. The Securities Act of 1933 and the Securities Exchange Act of 1934 require all financial advisory firms to present Form ADV. They are also mandated to update Form ADV annually to ensure it captures relevant information.
The details about the advisory firm, services, fees, and legal and disciplinary actions are captured in Form ADV Part 2A. When you hire a financial advisor, check their Form ADV thoroughly. However, remember that the details in the form are not final figures. For instance, the fee captured in the form gives you a fair idea about the charges of the concerned professional. However, in reality, the advisor might charge you a sum lower than the one stated on the form. Also, Form ADV Part 2A is easily available for advisors that charge a fixed fee. However, it can be slightly challenging for you to find Form ADV Part 2A for advisors who earn income through commissions.
This form is supplemented with Form ADV Part 2B which has insights about the individual advisor, including their educational qualifications, discipline records, licenses, professional experience, and more. Form ADV Part 2B disclosure contains information about any past regulatory, criminal, or disciplinary actions against the professional. It also mentions the education and business experience of the professional. All these details are also a part of Form ADV Part 2B, along with other data like allegation resolution, penalties, and more. The intensity of financial advisor disclosures can vary from severe issues like forgery and criminal proceedings to minor issues like civil proceedings, customer complaints, sanctions, terminations, etc. The financial advisor is expected to present Form ADV Part 2B to you before they enter a contractual arrangement.
The objective of disclosing all relevant information to the public is to promote fair engagements by allowing you to make informed and wise decisions.
Other Financial Advisor Disclosures
Form CRS
Apart from Form ADV, you can analyze a financial advisor through Form CRS, which depicts the customer relationship summary. The advisor or broker will present Form CRS when they initiate a relationship with you or when your account changes. If the details of your contract or terms of your engagement alter over time, the advisor will give you a new relationship summary or communicate the modifications through another disclosure. You can expect to receive your relationship summary form by the month of July every year.
The objective of Form CRS is to tell you about the types of services offered by the advisory company, the fees, any other costs or charges, conflicts of interest, and any standard code of conduct. The form will also specify if the advisory company or the concerned professional has any legal or disciplinary history and how you can get more facts about the company.
Form U4
Form U4 is a vital financial advisor disclosure that you should ideally evaluate before committing to any contractual engagement with the professional. Form U4 (Uniform Application for Securities Industry Regulation or Transfer) helps you know if the financial advisor is authorized to provide professional advisory services. Broker-dealer firms, investment advisors, and security issuers have to register their representatives with appropriate jurisdictions and/or self-regulatory organizations (SROs), such as FINRA (Financial Industry and Regulatory Authority).
The Form U4 contains significant details about the financial advisor, such as name, address, employment history, criminal history, litigation records, personal finances, history of regulatory or disciplinary matters, and more. The financial advisor files this Form U4 with the Central Registration Depository (CRD), and you can access the details publicly. Further, U4 disclosure requirements are best described as a living document because this form needs to be updated within 30 days of any event that gives rise to this disclosure. Examples of triggering events include new advisor registration, a criminal record, disciplinary action, bankruptcy history, adverse litigation records, and more.
If you wish to check your U4, you can visit the FINRA website and type the name of the financial advisor to get their Form U4 disclosures. When conducting a background assessment of the financial advisor, carefully evaluate the Form U4 criminal disclosure to be sure that you are hiring a person who does not have a criminal history.
How to find the financial advisor disclosure documents you require
As a client, your financial advisor will give you Form CRS and Form ADV Part 2A and Part 2B themselves before they begin the contract. However, if you want to verify information on these forms, check their filings online on the FINRA or SEC Action Lookup website. You can search by the financial advisor’s name or enter the identification number (all licensed brokers, brokerage, and advisory firms have a unique Central Registration Depository (CRD) number).
Alternatively, you can find Form ADV by searching for the management firm name on the IAPD (Investment Advisor Public Disclosure) website. For Form U4, you can use the FINRA website to find details about the financial advisor.
While you search for these forms for big financial advisory corporations, you might need to skim through several pages listing fines, court cases, and charges levied against the firm. It is quite common for these corporations to have fines and court cases, which ideally should not be a cause of concern for you unless the advisor you engage with has specific adverse records. In contrast, if a small advisory firm or a financial advisor has a record of litigations, conflicts of interest, or rulings against them, it can be a matter of concern for you. Hence, due diligence is a requisite in both cases.
However, if your advisor has not presented any brochure, failed to give you a copy of Form ADV, Form U4, or CRS, or you have not been able to find any relevant background details about the professional on FINRA or SEC website, then the advisor might not be the perfect choice for you. To ensure transparency, you can consider changing your professional advisor.
How to interpret a financial advisor’s disclosures
When you study a financial advisor’s disclosures, it is crucial to distinguish between relevant and irrelevant information. Not all the details mentioned in these forms are of significance. Some might carry less weight than others. Legal complaints can happen for various reasons, which could be under the purview of the financial advisor. For instance, the 2008 market crash resulted in huge losses for investors. In some cases, people understood that it was outside the power of the financial advisor, whereas a few clients filed complaints against their advisors, which still reflects in their disclosures. Moreover, a professional who has been in business for decades is likely to have a negative disclosure on their record compared to an advisor who has just started in the industry. In some situations, the disclosures might be too far in an advisor’s past and might not be directly relevant to your engagement.
Regardless, you should conduct your own in-depth research about a financial advisor and assess the disclosures on their records. If the advisor has multiple complaints or a few recent complaints of grievous nature, it could be a red flag for you. Alternatively, a large number of past complaints in the disclosure forms could indicate a track record of dissatisfied clients. Fines imposed by SEC or any other federal regulatory authority could mean failure to comply with industry regulations and more.
It is best to consider all circumstances, check all disclosure forms, do your own due diligence, and consult industry peers before you initiate a formal agreement with your advisor. Do not hesitate to ask your advisor about any clarifications you want. It is advisable to re-evaluate an engagement if you are uncomfortable with any information.
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How to find the right financial advisor for your financial needs
Finding the right financial advisor can be challenging, but if you conduct appropriate research using the below steps, you can find a suitable professional for your needs.
- Assess your needs before beginning to look for a financial advisor. For instance, if you need holistic financial planning support, you could consider finding a CFP (Certified Financial Planner). Alternatively, if you require specific assistance like retirement planning, you can contact an RICP (Retirement Income Certified Professional), CRC (Certified Retirement Counselor), or RMA (Retirement Management Advisor). If you need support with tax optimization, you could engage with a Certified Public Accountant (CPA), who has proficiency in tax services but may or may not offer comprehensive financial support.
- Ask your friends, family, and peers to recommend you a few financial advisors.
- Create a list and do your research by looking at the firm’s website, Form ADV, Form CRS, and Form U4. Ask questions and seek clarification if you have any doubts about their brochures and disclosures. It is an added advantage if the person you work with is a fiduciary.
- If you are unsure about where to begin or who to approach for the suggestion, consider using smart tools like the Wiseradvisor’s Advisor Match Tool to find your ideal financial advisor. The tool searches across thousands of advisors and uses advanced algorithms to find pre-screened financial advisors in your area. You can also get handy information about their fee structures, employment history, and more. You can shortlist a candidate and further ask them for disclosures or check their financial disclosures on the FINRA and SEC websites.
To summarize
While these forms are seemingly innocuous, the information they contain or any failure to timely update them can derail a financial advisor’s career. The primary objective of assessing the financial advisor disclosures is to know everything about the professional before you hire them. You would not want to take any risk with your hard-earned money, your personal information, and your future financial wellness. Hence, when it comes to assigning someone the control of your funds, be sure to check their disclosures. Also, compare the disclosures of different advisors before making the final decision. After you have narrowed down the person, set up your meeting, and conduct interviews to choose an advisor that best suits your needs. The ideal financial advisor has the potential to add real value to your financial wellbeing. Be careful and thoroughly assess the professional financial advisor to make an informed decision.
Before you hire an advisor, ensure that you have gone through their disclosure that contains information with respect to their operational methods, background, fee structure, conduct, past records, etc. Use WiserAdvisor’s free advisor match service to find highly qualified and vetted fiduciary advisors who match your needs. Answer a few questions about yourself and get matched with 1-3 fiduciary advisors that are suited to meet your financial requirements.
