A recent story in the Wall Street Journal addressed the failure of many brokers to disclose bankruptcies, criminal convictions and customer complaints – so-called “red flags”. The article also addressed the increased likelihood that a broker with such marks on his or her record would have other issues or problems with their clients. Though the story did not directly address registered investment adviser representatives, we can take away an important lesson from the story.
Just as the applicable regulations and laws require disclosure of a broker’s bankruptcies, formal client complaints and criminal convictions, advisers are required to disclose the same types of information. The reasoning behind the requirements is plain: if a person you are going to rely on to provide financial advice and pay to handle financial transactions has a track record of financial problems and/or criminal activity, one would be apt to inquire further if not dispense with the services of such an adviser altogether. Informed decisions can only be made where a person- here an investor – is accurately informed, hence the disclosure requirements.
Another aspect of this problem area is the fact that brokers and advisers are largely self-regulating and the successful operation of the system requires voluntary adherence to the regulations. If a sufficient number of brokers and advisers do not make the required disclosures, there will be a movement towards greater regulation and control which may well not be wanted by advisers and which will most certainly be more expensive and time consuming for them in terms of compliance.
Perhaps it would not be such a problem if it were not for that fact that clients tend to experience far more problems and make many more claims against advisers who have criminal convictions, past bankruptcies and client complaints. The existence of such incidents on an adviser’s record are a clear indicator of potential future problems with that adviser. It is not before time for advisers – and their employers – to do a better job of self-policing and ensuring that full and proper disclosures are made. With your annual form ADV updates due at the end of March, it is a good time to make sure your record is complete and to remind your colleagues to do the same.