After all, people like me have been telling you for years that advisors need to disclose a lot more about themselves than stockbrokers, so you can make more informed decisions about their services and their integrity.
As I’ve learned to my surprise in recent weeks, however, that’s not always true. In some ways, financial advisors have to disclose less than brokers, and what they don’t tell you could harm you.
This is truer than ever given the rise of the consulting industry. More than 14,800 SEC-registered advisers managed more than $128 trillion for 65 million clients at the end of last year. That’s an increase from the 10,500 advisers who managed $55 trillion for less than 20 million clients in 2012, according to ComplySci, a regulatory compliance firm, and the Investment Adviser Association. (These dollar amounts include some double counting between companies.)
What is the potential problem? Consider Vantage Consulting Group, an investment adviser in Virginia Beach, Va., that manages more than $2 billion in assets, mostly for retirement and profit-sharing plans, but also for at least one high-net-worth individual, according to a regulatory file.
Like all financial advisers registered with the Securities and Exchange Commission, Vantage is required to provide its clients with a standardized disclosure form called an ADV brochure.
Vantage’s latest brochure, filed March 31, says the firm must “disclose any legal or disciplinary event that is material to a client or potential client’s assessment of our consulting activity or the integrity of our management. “.
The document reassuringly adds that Vantage and its management “have no disciplinary events to disclose.”
Nowhere does the brochure tell you that Vantage was sued for $4 million in US District Court in April 2021 for civil lawsuits for fraud and misrepresentation after private funds recommended to clients allegedly lost millions of dollars.
According to a court filing, some of the money in those funds had been managed “for a time” by an outside portfolio manager who has since been sentenced to nine years in prison for running a $100 million Ponzi scheme. dollars.
In court, Vantage said no losses resulted from the former manager’s trades, although investors have not been able to withdraw money from the funds since March 2020 and no one can not rely on a fund’s two-year financial statements.
Vantage did not respond to requests for comment. His court documents deny wrongdoing in the case, which is still in court, with a possible settlement pending.
If Vantage were a brokerage firm, it would be required to disclose this lawsuit on BrokerCheck, a website operated by the Financial Industry Regulatory Authority, Wall Street’s self-regulator.
Because it is a registered investment adviser, Vantage has nothing to disclose about the lawsuit in its ADV brochure. The SEC does not require advisers to disclose all civil lawsuits.
Recent regulatory reforms have blurred the traditional boundaries between brokers and advisers. Additionally, some advisors register with Finra and are required to report on BrokerCheck.
However, many are not registered with Finra and therefore are on the honor system.
With respect to ADV disclosures, according to the SEC, it is up to advisers themselves to determine whether events such as civil lawsuits, client complaints and arbitration requests are “material” information that clients must to know.
“I find it a bit perverse that advisors who are supposed to be held to a higher standard of care and diligence have fewer disciplinary disclosure requirements than a brokerage firm,” says Courtney Werning, attorney at Meyer Wilson in Columbus. , Ohio. surprised me enormously when I discovered it not so long ago.”
Me too. In 30 years of writing about the financial advice industry, I have never learned that advisors can provide less comprehensive information than stockbrokers.
Listen to Maria Fernbach, a 69-year-old retiree. She claims her advisers at Pinnacle Associates Ltd., a New York-based firm, pursued an inappropriate stock option strategy against her will, forcing her to sell part of a decades-old position. in shares of Apple Inc. to fund over $400,000 in stock. option losses.
In August, a FINRA arbitration panel ordered Pinnacle to pay him $825,000 in damages and reimbursed costs.
Good luck learning this from Pinnacle’s official brochure: the document states that the company “has not been the subject of any legal or disciplinary events requiring disclosure in this article”.
Ms. Fernbach, who previously worked in the brokerage industry, thinks that’s not true.
“These registered advisers can say, ‘We have nothing to disclose,’ when they have a lot to disclose,” she says. “If your clients have losses but nobody knows about it because it’s all kept secret, then a lot of people are going to have no idea and other accounts will be slaughtered.”
In a statement, Pinnacle said the arbitration award, which did not include punitive damages, was the first against the company in its nearly 40-year history and that “Pinnacle has disclosed the matter in accordance with regulatory applicable”.
In September, on another regulatory disclosure called the CRS Form, the company answered “Yes” to the question, “Do you or your finance professionals have any legal or disciplinary backgrounds?” He did not modify his ADV brochure in the same way.
How did the advisory disclosures end up so patchy?
Regulators traditionally viewed stockbrokers as salespeople, whereas the relationship between advisers and their clients was built on trust. This created a presumption that councilors would do the right thing.
But, since advisors don’t have to disclose client complaints, civil lawsuits, or arbitrations, it’s impossible to know how accurate that presumption is.
I asked the consultancy Aite-Novarica Group for the largest independent firms whose advisers primarily serve retail investors. Of the top 25 companies by assets, 20 state in their filings that they have no legal or disciplinary events to report. That’s a surprisingly clean record for companies that employ a total of nearly 4,100 people in advisory roles and manage about $900 billion.
Perhaps not a single one of these firms’ 318,000 individual clients has ever complained, sued or filed arbitration claims against them.
Maybe hundreds of customers have.
Given the gaping loopholes in the existing regulations, it is impossible to say.
“These guys all look like angels on paper,” says Nicole Boyson, a finance professor at Northeastern University who studies brokerage and consulting. “But if I hire a financial adviser, do I have to spend a few thousand dollars to hire a private investigator to find out if the adviser is shady? And even then, that might not be enough,” because most of the results of arbitration are not public.
Where is the SEC? The agency said it intended to study the use of arbitration clauses in contracts between advisers and their clients to “help identify any problematic issues affecting retail advice clients”. adequate information.
What I’ve learned convinces me that you need to add these questions to your list when interviewing a financial advisor: Have clients filed written complaints or arbitration requests against you or your business? Have you or your business been sued by customers?
I also hope that financial advisors whose clients have never filed a written complaint, arbitration, or civil lawsuit against them will start disclosing exactly that, in language anyone can understand.
That way, the public would be able to distinguish between advisers with clean records and those hiding behind crazy words like “nothing material to disclose.”
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