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SEC Disclosure Requirements for Advisors

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sec disclosure requirements
Because registered investment advisor firms (RIAs) have a fiduciary duty to act in their clients’ best interests, they are subject to scrutiny and regulation by the Securities and Exchange Commission (SEC). This means RIAs are required to disclose certain financial and business details to their clients — essentially, information investors would want to know about.

What Are RIAs Required to Disclose?

SEC disclosure requirements are designed to protect investors from unfair or deceptive practices, while promoting transparency in the advisor-investor relationship. If you’re working with an RIA, it’s good to know what they’re required to disclose. Or if you’re interested in connecting with one, it’s helpful to find out if they have a disclosure on record.

Two federal laws passed in the 1930s, at the height of the Great Depression, outlined what type of information an investment advisor has to disclose to clients. The SEC also has guidelines for which information an RIA needs to share with their investors.

What an RIA is required to disclose falls into two broad categories: details relating to the advisor’s business practices and information about any past disciplinary actions involving the advisor.

When working with an RIA, keep in mind that they’re obligated to share the following with you:

  • Types of advisory services offered.
  • Schedule of the fees associated with those services and whether those fees are negotiable.
  • Other sources of compensation received beyond service fees.
  • Professional affiliations with another advisor or broker-dealer, or a securities issuer.
  • Who provides the services if the advisor works within a larger advisory team.
  • Potential or existing conflicts of interest.
  • Education and business background information.

Advisors are also required to disclose any past disciplinary or legal action brought against them, or actions involving regulatory complaints. The disclosure must include details about the cause of the action, how the action was resolved and what penalties, if any, were imposed against the advisor. For example, if an advisor was sued by a previous client for a breach of fiduciary duty which resulted in a civil judgment against them, they’d have to include that in the disclosure. Less serious actions, including customer complaints, would also need to be recorded.

Disclosure Reporting

The SEC has a uniform process advisors have to follow when reporting disclosures. RIAs are required to disclose any and all relevant information pertaining to their business practices or disciplinary actions on Part 2 of Form ADV. This is the form investment advisors use to register with the SEC and the securities authorities in the state where they do business.

Part 1 of this form includes basic information about the advisor’s business, such as who owns it, how many employees there are, any professional affiliations and business practices. Part 2 requires advisors to convey this information to their clients in a brochure that plainly spells it out.

Advisors are required to give clients a written copy of this disclosure once each year, at no charge to the client. Copies of the disclosure have to be maintained by the advisor, including records of any changes or revisions and the dates when disclosures were sent to new and current clients.

It’s illegal for advisors to falsify or omit information from Form ADV. An advisor who misleads clients intentionally on their disclosure form can face legal consequences, including imprisonment and a fine.

Why Disclosures Matter for Investors

sec disclosure requirements
The primary objective behind the SEC disclosure requirements is to ensure that consumers are getting a fair deal when they work with professional investment advisors. RIAs are fiduciaries, meaning they’re held to a higher ethical standard of conduct than broker-dealers, who must only follow a suitability standard. The disclosure rules serve to reinforce the standards that RIAs must follow.

As an investor, having disclosures available can help you decide whether you want to work with a specific advisor and whether you’d trust them with your money. If an advisor has a past criminal or disciplinary action on their record, that’s likely something you want to know before you sign on with them.

How to Review an Advisor’s Disclosures

If you’re looking for a new advisor to work with, the SEC makes it easy to find and review their Form ADV. You can search the Investment Advisor Public Disclosure website using either the advisor’s name or the name of their firm, or their registration number.

Once you’ve found the person or firm you’re looking for, the next step is to decode their Form ADV. Both Parts 1 and 2 can include information about disciplinary, regulatory or legal actions. Part 1 functions as more of a summary, while Part 2 has the full details, including what happened, who was involved and the eventual resolution of the issue.

If the advisor has zero disciplinary or other actions reported on their form, you may feel at ease working with them. But what if there are one or more actions on record?

That’s when you can and should actively research to learn more about the nature of the action. You can find this info independently by looking through SEC records, but the easiest course of action may be to go straight to the source and ask the advisor about it directly. Getting some background information can help put negative actions or complaints in perspective.

Consider how long the advisor’s been in business, the number of actions taken, when the most recent one occurred and what was disclosed. The more detail and supporting information you’re able to uncover, the better off you’ll be when making a final decision on hiring a particular advisor.

The Bottom Line

sec disclosure requirements
As an investor, you have tools at your disposal to help you make sound choices when it comes to your money and who manages it. Reviewing an investment advisor’s SEC disclosures and Form ADV goes a long way in performing due diligence.

If an advisor doesn’t seem forthcoming about giving you a copy of their disclosures or you suspect that they aren’t being entirely truthful with you, that could be a red flag. At that point, it’s probably best to find another advisor better suited to the job.

Tips for Choosing an Investment Advisor
  • First, consider what you want an advisor to help you with. For example, do you just need investment advice, or are you looking for someone who can also help you with college planning or estate planning? Evaluating your needs and goals first can help you clarify your expectations and assess whether an advisor is able to help you meet them.
  • Ask the right questions. Start by ensuring that they’re a fiduciary, then find out crucial details — for example, how much in fees do they charge? Are they fee-based or fee-only? What is their preferred investment style? How often do they like to meet with clients and how do they prefer to communicate?
  • If they don’t automatically share their Form ADV, ask to see it. Review the form carefully for disciplinary actions and ask follow-up questions if needed.
  • Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

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