Although it will go largely unnoticed by most consumers, there has been a major change within the investment industry.
All registered investment advisors must now provide a “Plain English” disclosure document to all clients and prospects outlining their business practices as well as any potential conflicts of interest. Some disclosure was required previously, but in a much less readable and less comprehensive way. Despite the mandate for advisors to write in “plain English,” the government regulators have titled the new document Form ADV Part 2 Brochure. Although the name lacks panache, it is a positive step for consumers and serves a useful purpose.
Many firms have spent countless hours and thousands of dollars on consultants to prepare their new Brochure. As you might expect, this has led to griping and moaning within the industry. I suppose that I’m in the minority, as I actually like the new format. Most of the requirements are what I tell clients anyway on my website and in my other materials. I have always wanted to be as transparent as possible. For example, most advisors do not put their fees on their websites, whereas I have always posted my fee structure so there are no surprises.
The biggest problem is that these requirements only pertain to investment advisors who are registered by either the SEC or one of the states. Brokers and insurance salespeople are not required to provide this information as they are not fiduciaries, which means that they are not required by law to act in the best interests of the client. They fall under an entirely different regulatory requirement which has a lower standard of care for customers. If your advisor does not provide you with a copy of the Form ADV Part 2 Brochure, then you can be sure that they are either a broker or insurance salesperson.
If you do receive this document, congratulations! This means that your advisor is probably a fiduciary. However, your due diligence should not stop there. I would encourage you to read it carefully. You will learn exactly how the advisor is paid and if there are any conflicts of interest that could prevent him or her from giving you the best advice possible.
Author and columnist for Forbes, Rick Ferri, recently wrote in his blog Advisors’ Pay Tells What They Do that many people who call themselves financial planners do not actually do financial planning. The new disclosure document can help you uncover the truth. My disclosure document is available in a couple locations on this website, and is provided to each client before each client engagement.
Reducing legal language and incoherent financial jargon is a good thing for consumers. Even so, advisors will still find creative ways to hide what they don’t want you to know. I’m speaking plainly when I tell you that 1) it is up to you to learn as much as you can about your investments and 2) get the best type of help possible. At least the new disclosure brochure will give you a fighting chance.