Monday, August 9, 2010

Demand to See their Form ADV Part 2 (b) Brochure Supplement

The SEC has come out with their final rule on the much needed revamp of the Form ADV. In the past, a lot of pertinent background history could fall through the cracks as far as retail investors were concerned. Imagine if you received investment advice from someone who worked at a large Wall Street firm. Well, if this was the case, then the old Form ADV II did not have to disclose the background history of the person dispensing the investment advice. It only was a requirement to disclose the background history of the principal officers of the Wall Street firm. A glaring gap in disclosures that the SEC has now closed in conjunction with the states.

Now, with the new Form ADV, there will be a Part 2 (a) and a Part 2 (b). Both Parts will be in a new narrative form with easy to read language instead of the former check the box format. In addition, Part 2 (b) will be a new Brochure Supplement that will have to disclose the background of the person dispensing the investment advice to you.

Caution: If there are two people talking to you about investment advice in a meeting, then you should demand (that's right, I said demand) to see the Brochure Supplements of both people. If they only produce one Brochure Supplement, then this should raise a red flag with you. This might be indicative of one of the people giving you advice not actually being licensed, or they could be hiding their Brochure Supplement. Why would they do this? They may hide their Brochure Supplement because it contains their bad background. To get around this, they may bring to the meeting someone else in their office who has a cleaner background for disclosure.

I would be very concerned if someone whom you know to be insurance licensed is advising you to sell all of your investments in order to buy their annuities. Especially, if they do not produce a Brochure Supplement and instead produce a Brochure Supplement of someone else in the meeting or not in the meeting at all. First of all, an insurance agent who is not registered as an investment adviser cannot advise you to sell any of your investments without being licensed. It is against the rules of most, if not all, states in the country. Secondarily, doing business this way should raise a red flag with you. If they are hiding this, then what else are they hiding? Also, if they give you a Brochure Supplement of someone who is not even in the meeting, then I highly recommend not doing business with this firm. They are hiding something for sure.

Of course, it makes further sense that if an insurance agent is advising you to sell your investments to buy their annuities and they do not produce a Form ADV Part 2 (a) to Part 2 (b), then they are violating state rules and regulations in giving you that advice. You probably did not even know that.

Another thing to watch out for is if you only receive Form ADV Part 2 (a) and you do not receive a Part 2  (b) at all. This also is against these new SEC and state rules regarding full disclosure.

Even though, this new rule revolving around the new Form ADV Part 2 (a) and Part 2 (b) is a giant step forward, there are still reasons to stay on your toes. Now that these two Parts will be in a narrative format, it will be much easier to read and I would highly recommend that you do so.