Financial Advisers Fail (Again) In Protecting Individual Investors.

The Wall Street Journal published an article by Jason Zweig and Andrea Fuller on August 31, 2020 explaining their analysis of how financial advisers fell short in meeting their obligations to disclose important information to individual investors like you.[1] The Wall Street Journal analyzed the filings made by investment advisers on the SEC Form CRS.  The article and analysis revealed what seems to be disturbing lack of candor by investment advisers.

It is fundamental to full and fair disclosure that if an individual investor wants to know whether their financial adviser, or a financial adviser they want to hire, has any legal or regulatory problems, that this information is easy for an investor to obtain.  To that end, the Securities and Exchange Commission (“SEC”) sought to simplify the process by which an individual investor can access this information.  The result of the SEC’s efforts was the “Form CRS.”  “CRS” stands for customer (or client) relationship summary.

This information has been available.  However, for the average “Main Street” individual investor, the information was not easy to find.  And when the customer complaint and regulatory history was found, the disclosures were difficult to understand.  The Form CRS[2] was intended to address this complexity and difficulty through simplification.  Thus, the SEC created what SEC Chairman Jay Clayton said in November 2018 would be a “clear and concise” document.  I think they succeeded.  Wall Street, however, failed.

One question on the Form CRS asks is “Do you or your financial professionals have legal or regulatory history.”  This is a simple yes or no question.  Or so you would think.  The SEC’s instructions for Form CRS elaborate, telling financial advisers to answer ‘yes’ if they or their financial professionals have disclosed such legal or regulatory history.  The SEC instructs financial advisers to disclose if they or their advisers have disclosed any legal disputes with customers, regulatory penalties or have been terminated while working at prior employers.

Pretty straight forward, right?  Well, apparently not if you are a financial professional!  According to the Wall Street Journal’s analysis, an astonishingly high number of firms failed to report legal and regulatory issues.  1,300 firms failed to list disclosures on approximately 2,300 individual employees.  The Wall Street Journal reports that their analysis shows that approximately 1,600, or almost 70%, of the non-disclosures related to customer complaints.

The failure to answer ‘yes’ approximately 2,300 times by almost 1,300 financial firms on this Form CRS is more than a mistake.

It is the financial industry’s continued attempt to hide this important information from investors.  Transparency is important and by ignoring the rules and intentionally (or at least grossly negligently) hiding customer complaints from investors, these firms weaken investors’ trust.

This mass failure to be transparent can only be seen as an intentional attempt by Wall Street to mislead Main Street investors.

When seeking to hire a financial professional, the prudent investor will try to find out if the financial professional they want to hire is trustworthy or has any customer complaints.  This information is vital not only to protect individual investors, but it is important to help ‘clean up’ the financial industry by helping to rid the industry of those financial professionals that have significant or numerous customer complaints. Even with the SEC’s simple Form CRS, the Main Street individual investor is at a disadvantage since the firms are not properly disclosing the information.

It is my hope that the SEC acts strongly to prevent a re-occurrence of the Wall Street’s attempt to hide the truth from investors.  I also hope that Wall Street becomes more transparent so that individual investors can finally move towards having a level playing field.  Proper disclosure by financial professionals of their legal and regulatory history is a big step in the right direction.







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