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Understanding Financial Advisor Disclosures

Disclosures allow you to assess a financial advisor’s disciplinary history, including regulatory or legal actions. We explain how they work and why they’re so important.

When you’re looking for a financial advisor to work with, it’s important to be sure they’re trustworthy and of a high quality. One way to do so is by investigating their Form ADV to look for anything out of the ordinary. This document contains disclosures related to any given firm, which refers to legal proceedings or regulatory actions.

In this article, we’ll define financial advisor disclosures, as well as explain why they’re so important. You’ll also learn how to read and interpret them on a firm’s Form ADV. Finally, we’ll outline any other red flags to look for as you search for a company or individual to hire.

What Are Disclosures?

Financial advisor disclosures are crucial to maintaining transparency, trust, and accountability between the client and the firm. In general, these provide information regarding an organization’s business (types of clients, fee structure, etc.), conflicts of interest, as well as past disciplinary actions. Typically, when one mentions disclosures, they’re referring to legal events, proceedings, or any criminal penalties against a company or any of its investment advisor representatives (IARs).

You can find disclosures listed in a firm’s Form ADV, a document that registered investment advisors (RIAs) with the SEC must file annually. This is due to the Investment Advisers Act of 1940. Form ADVs for financial advisor firms have three parts:

  • Part 1, Uniform Application. This is a fill-in-the-blank and check-the-box form that firms fill out. It provides information on a company’s identity, corporate structure, employees, clients, compensation, and disciplinary history.
  • Part 2, Brochure. This is a client-facing document that outlines, in great detail, every aspect of a firm’s advisory business. You can expect to find information regarding fee structures, services, types of clients, code of ethics, and conflicts of interest. Additionally, this section gives a further explanation of an advisor’s legal or disciplinary history.
  • Part 3, Client Relationship Summary (CRS). This breaks down all of a firm’s services, fees, conflicts of interest, and past disciplinary actions. Additionally, it serves as a summation of what clients can expect from working with a given firm.

In the next section, we’ll explain how you can interpret a firm’s Form ADV to look for important disclosures. For now, be aware that typically, you can find them generally listed in Part 1, but explained in further detail in Parts 2A and 2B.

According to Matt Willer, Managing Director at Phoenix Capital Markets, LLC, disclosures are important because clients “want to know who [they’re] working with when entrusting them with capital.” As you search for a financial advisor firm to hire, you’ll be able to freely access information about a company’s (or individual advisor’s) disciplinary history. This can help you identify red flags, such as a criminal penalty or mishandling of prior clients’ assets.

How to Read a Firm’s Form ADV for Disclosures

As mentioned earlier, you can find a firm’s disclosure history in its Form ADV. These are publicly available via the SEC’s Investment Adviser Public Disclosure (IAPD) website. To search for a company, simply enter its name or SEC number. Alternatively, you can search for an individual advisor via the same method. From there, you’ll be able to access an organization’s latest Form ADV, including Parts 2 and 3.

Once you’re on a firm’s Form ADV, it can be quite overwhelming if you haven’t seen one before. The bullet points in the previous section can help break down exactly what you’re looking at, but, in its simplest form, it’s a summary of everything involving the company. To jump to specifics about a firm’s disclosures, look for the section entitled “Item 11 Disclosure Information.”

In the “Disclosure Information” section of the Form ADV, a firm must disclose whether or not it or any of its representatives have been involved in any criminal, regulatory, or civil judicial action. In the case that it has, it must provide background information, as well as share if the issues in question are resolved.

For example, consider that you’re researching a firm and decide to take a look at its disclosure history. As you scroll down, you may see that it didn’t keep adequate records and was fined by the SEC for that very reason. In Form ADV Part 1, you’ll generally see a brief paragraph on the topic. On the other hand, Parts 2A and 2B explain disciplinary actions in further detail (i.e., two paragraphs or more).

When to Reconsider Working with a Firm

As a client, it’s important to stay sharp and keep an eye out for anything out of the ordinary. Before you even sit down with an advisor, it’s always a good idea to do your due diligence and look into a firm’s disclosure history. This is one of the surefire ways to spot any obvious red flags.

However, you may be thinking, “How many disclosures are too many?” or, “What types should I specifically be on the lookout for?” as you conduct your research. Willer explains that, for him, “Any event that requires disclosure would give me initial pause.” He recommends that when you come across an event of concern, such as a “material corrective action, fines, penalties, or anything else,” he would, “at a minimum, ask for a response from the firm’s compliance department to ensure you are comfortable, and, if not, move on.”

Ultimately, the decision to work with a firm is up to you. You’ll need to decide what you’re willing to accept and where your line is, so to speak. As you conduct your research, don’t shy away from asking questions when necessary. If your advisor is transparent and honest, that’s a good sign. However, as Willer recommends, it may be time to simply move on to another company if they are vague or seem off to you.

Other Red Flags to Look Out For

While disclosures are a good method to assess a firm’s quality, there are other red flags you should be aware of. One to pay attention to is whether an advisor can provide adequate references. According to Willer, one should request “more than one reference” and, “if they cannot provide them, move on.”

It’s also important to pay attention to how your first interactions with your financial advisor go. For example, if they’re aggressively trying to sell you products or services in your initial consultation, that may be a bad sign. Additionally, if you just can’t see yourself working with them for some reason, don’t be afraid to look elsewhere. The professional you choose may end up being by your side for several years, so it’s important to find someone of a high quality and who you trust.

Frequently Asked Questions

How do I access a firm’s Form ADV?

You can find any RIA’s Form ADV via the SEC’s IAPD search tool. Additionally, firms commonly offer Parts 2A, 2B, and 3 on their websites. You can also find a wrap fee program brochure on the sites of firms that offer it.

What should I do if my advisor has several disclosures?

Large firms that’ve been around for years tend to have several disclosures. However, you should carefully research the nature of these. If any of them give you pause, be sure to call the firm and ask about them. But, if you’re not satisfied with the response, it may be time to look elsewhere.

What sorts of disclosures should I be on the lookout for?

Keep an eye out for disclosures related to criminal penalties or for any that your advisor doesn’t seem transparent about. You should also be sure to look at the disciplinary history, if any, of your advisor.