Friday, July 23, 2010

No Place to Hide

The SEC has finally approved changes to the standard disclosure document for Registered Investment Advisers. The final guidelines should be posted on the SEC web site sometime next week. Currently, Registered Investment Adviser firms have not had to publish the background information of the individual that advises the client, unless that individual happens to also be an officer of the firm. Going forward, this new narrative brochure as it is called will have to enclose a brochure supplement at the end of it disclosing the background of the individual dispensing the advice. Not only will potential clients see the disciplinary history and background of the officers of the firm, but now, they will also see the background of the individual trying to obtain their business.

The problem in the past has been getting access to the disciplinary background of the person trying to obtain the business from the potential client. If the person trying to obtain the potential client's business was not an officer of the firm, then a potential client would not find anything in the current disclosure Form ADV II. Now however, there will be this new brochure supplement that will have to disclose to prospective clients a resume like disclosure with information about their educational background, business experience, other business activities, disciplinary history and their qualifications such as designations and licenses.

Prospective clients will now be able to compare brochure supplements and brochures on the firm with other Registered Investment Advisers and their Investment Adviser Representatives. This in my opinion is a giant step forward in terms of disclosure and I applaud the efforts of all involved.

I can see the future implementation of this process whereby prospective clients will now be able to ask for the brochure supplement from the Investment Adviser Representative who is trying to obtain their business. Guess what? If the person trying to get a prospective client's business does not provide this brochure supplement, then odds are they are either hiding something, or they are not properly licensed as Investment Adviser Representatives.

Let's take a harder look at this situation. Assume that you go into a firm that has insurance agents in it who sell annuities and are not licensed as Investment Adviser Representatives. In addition, there are also one or more Investment Adviser Representatives affiliated with the insurance agents in some way. If a prospective client is being advised to sell their securities by the insurance agent who is not licensed, then the prospective client can ask for their brochure supplement. Of course, if they are not licensed, then they will not have this brochure supplement. In case you do not know, insurance agents cannot advise anyone to sell their securities to buy annuities unless they are also licensed as an Investment Adviser Representative or a Registered Representative.

Further, if the insurance agent in this example tells you that someone else in the firm is the Investment Adviser Representative, then why are they not the one sitting in front of you, giving you the advice and disclosing their brochure supplement to you? As a prospective client, you do not want to stand for this kind of shady relationship. It is obvious that the insurance agent and the Investment Adviser Representative are in cahoots, so to speak, and may be trying to direct you straight to annuities which may not be in your best interests.

Demand to see the brochure supplement of the person giving you the advice. If they fail to produce a brochure supplement, then run, do not walk out the door. You do not want to do business with these people.

This brings me to another point. Registered Representatives who are also Investment Adviser Representatives are known as dually registered. These dually registered advisers will have to provide these same brochure supplements. The same goes for insurance agents who are also Investment Adviser Representatives.

The end result is that this is finally something that favors prospective clients.

My advice to all prospective clients is to demand the brochure and the brochure supplement. These new documents will give you the best opportunity to learn about conflicts of interests, compensation methods, educational backgrounds, business experience, professional designations, licenses and disciplinary history of the individual trying to obtain your business. Again, if the person trying to get your business fails to produce these disclosure documents, specifically the brochure and brochure supplement, then do not do business with them. Odds are there is something wrong with their background or disciplinary history.

I look forward to creating these new documents on behalf of my prospective clients. Stay tuned.