Financial Advisor Conduct and Disclosures

Investor advocates agree that proper disclosures about financial advisors can help investors make better-educated decisions about which advisor to work with and protect themselves against fraud. However, the FINRA Investor Education Foundation recently sponsored a national study of American adults who used a financial services provider in the last 5 years, and found that only 15% did any due diligence on their provider. At BrightScope we believe this percentage is much too low and we aim to make advisor due diligence as easy as possible for investors. One key piece of information available to investors is an advisor’s conduct, which includes customer complaints, disciplinary events and financial matters on an advisor’s record. In this post we will discuss the types of disclosures available about financial advisors, how investors should consider these disclosures in the selection of a financial advisor and the personal experience we have with customer complaints.

Types of Disclosures

There are a variety of disclosures available about advisors from the SEC and FINRA. Below are examples of some of these disclosures and why they matter to investors:



Why it Matters to Investors

Customer Complaints Written customer complaints alleging sales practice violations and compensatory damages of $5,000 or more. Provides insight into the type and quantity of past complaints from other investors.
Arbitrations/Civil Proceedings Customer-initiated arbitrations or civil proceedings involving investment activity. Provides insight into issues other investors have had with the advisor.
Terminations Firm-initiated terminations of an advisor due to violation of firm policy, fraud, etc. Provides insight into an advisor’s conduct at previous firms as well as potential causes for changing firms.
Financial Matters Can include bankruptcies, liens or other financial matters. Financial disclosures that may impact the advisor’s ability to provide unbiased advice.
Sanctions A final sanction, including a bar, suspension or fine imposed by FINRA, the Securities and Exchange Commission or other federal or state regulatory agency. A final sanction or suspension is a serious matter that may indicate the advisor’s failure to follow industry rules and regulations.


How Investors can use Disclosure Information.

Investors can use disclosure information as a source of questions they plan to ask an advisor in their due diligence process. One or even multiple disclosures should not immediately disqualify advisors from a potential engagement, but should trigger a question from the investor and a conversation with the advisor about the disclosures. As one example, let’s look at customer complaints. Complaints can happen for a variety of reasons. The complaint could come from an advisor’s direct relationship with a client or their role in supervising other advisors. The complaint may arise from a unique event or it may reveal a general industry trend. For example if you review recent complaints, many of them relate to the performance of Auction Rate Securities (ARS). The failures in that market have led to a flood of disputes against FINRA brokers and member firms. In 2008, in response to this activity, FINRA established a separate, specialized arbitration process to deal with ARS complaints. Understanding a complaint triggered by a broad industry event and how that is different than a complaint from an individual client is important.

In our discussions with investors and advisors about the Advisor Pages we have consistently stated that the details of a given disclosure is as important as its existence. All disclosures are not equal. An advisor that has been in business for 30 years is much more likely to have a disclosure than one who has been in the business for 5. With a full 10% of advisors in our database having disclosable events there is a reasonable probability that when vetting advisors you will come across an advisor with a disclosure. If that advisor has a single disclosure or multiple disclosures related to a single event it is important for the investor to ask the advisor about that event’s unique circumstances and make a determination as to the impact of that event on their circumstances. Investors should be cautious when a pattern of disclosures emerges rather than a single event, although all disclosures should be taken seriously.

Our Personal Experience.

My brother Mike Alfred and I have worked as financial advisors and have been regulated by FINRA and the SEC. We have a customer complaint on our record, so we are very familiar with advisor disclosures. Our personal experience with the complaint process and the resultant disclosures is one of the primary reasons we embarked on a mission to make this data more transparent and accessible to investors.

We became financial advisors at AXA Advisors right out of college. In order to learn the business we both did a lot of joint work with experienced advisors. In one particular case a client of a more experienced advisor filed a complaint against the advisor. The complaint alleged that the client purchased “securities, policies, annuities and other financial instruments which were unsuitable, irresponsible, not reasonably needed and lacking a strategy for risk management.” Mike and I were named in the complaint because we received some of the commissions from the product sales.

We played no ongoing role in the arbitration and when AXA ultimately decided to settle (without admission of wrongdoing), we were not required to pay any of the settlement. However, we did learn a lot through this process about how FINRA arbitration works, about U-4’s and U-5’s, and perhaps most importantly about the suitability standard of care. FINRA-regulated brokers are held to a ‘suitability standard’ that requires that products sold must be suitable to the client. The sales culture of our firm at the time really pushed insurance product sales and that is how advisors were measured and compensated. While we really wanted to be trusted advisors, we realized through the process that we were looked at by our firm and by our clients as salespeople, not advisors.

Mike and I ultimately decided that the sales culture at our firm and the suitability standard did not fit the types of relationships we wanted to have with our clients. It was around this time that we discovered that there was another way to do business, as an RIA. We spoke with a few local RIA’s and realized that operating under the fiduciary standard and not selling any products was the way we wanted to work with our clients. We later left the broker-dealer world and established our own SEC registered firm, Alfred Capital Management. While running Alfred Capital Management we had great relationships with our clients and had no complaints or disclosure events. When we eventually shut the firm down to run BrightScope full time we did so on our own terms and helped our clients successfully transfer their accounts to other local RIA’s that we helped them vet.

We are absolutely committed to bringing transparency to the financial markets. Just like every one of the nearly 450,000 advisors/brokers in the database we have our disclosure history on our BrightScope Advisor Page profiles. You can view Ryan’s page here and Mike’s page here. We think this information is vital for consumers to ensure they can do thorough due diligence before hiring an advisor.