What you don’t know about your financial adviser

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 integrity.

However, as I have learned to my shock over the past few weeks, this is not always true. In some ways, financial advisors have to disclose less than brokers, and what they don’t tell you can hurt you.

This is truer than ever with the boom in the consulting business. At the end of last year, more than 14,800 SEC-registered advisors managed more than $128 trillion for 65 million clients. That’s more than 10,500 advisers in 2012, doing $55 trillion for less than 20 million clients, according to regulatory compliance firm ComplySci and the Investment Advisers Association. (These dollar amounts include double counting between companies.)

What is the possible problem? Consider Vantage Consulting Group, an investment adviser in Virginia Beach, Wash., that manages more than $2 billion in assets, mostly for pension and profit-sharing plans, but also for at least one high-net-worth individual, according to a regulatory filing.

Like all financial advisers registered with the Securities and Exchange Commission, Vantage must provide clients with a standardized disclosure form called the ADV brochure.

Vantage’s latest prospectus, filed on March 31, said the firm must “disclose any legal or disciplinary events that are material to a client’s or prospective client’s assessment of our consulting performance or the integrity of our management.”

The document confidently adds that Vantage and its management “have no reportable disciplinary events to disclose.”

Nowhere in the brochure does it say that in April 2021, Vantage was sued in US District Court for $4 million in civil claims of fraud and misrepresentation after the private funds it recommended to clients allegedly lost millions of dollars.

According to the court filing, some of the money in those funds was “temporarily” managed by an outside portfolio manager who has since been sentenced to nine years in prison for running a $100 million Ponzi scheme.

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Vantage said in court that there were no losses from the former manager’s dealings, although investors have not been able to withdraw money from the funds since March 2020 and two years of financial statements for one fund cannot be relied upon.

Vantage did not respond to requests for comment. Its filings deny any wrongdoing in the case, which is still in court and a potential settlement is pending.

If Vantage were a brokerage, it would have to disclose this lawsuit to BrokerCheck, a website run by the Financial Industry Regulatory Authority, Wall Street’s self-regulator.

Because Vantage is a registered investment adviser, it is not required to disclose anything about the lawsuit in its ADV brochure. The SEC does not require advisers to disclose all civil claims.

Recent regulatory reforms have blurred the traditional lines between brokers and advisors. In addition, some advisors register with Finra and are required to disclose information to BrokerCheck.

However, many are not registered with Finra and therefore placed on the honor system.

When it comes to ADV disclosures, according to the SEC, advisers must determine for themselves whether events such as civil suits, client complaints, and arbitration claims are “material” information that clients should know about.

“It seems a bit counterintuitive to me that advisers, who are supposedly held to a higher standard of due care and diligence, have fewer disciplinary disclosure requirements than a brokerage firm,” says Courtney Werning, an attorney at Meyer Wilson in Columbus, Ohio. surprised me when I found out not so long ago.”

I also. In 30 years of writing about the financial advisory industry, I have never learned that advisors can provide less comprehensive information than stockbrokers.

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Listen to Marie Fernbach, a 69-year-old retiree. She alleges that her advisers at Pinnacle Associates Ltd., a New York-based firm, implemented an inappropriate stock options strategy against her wishes, forcing her to sell part of a decades-old position in Apple Inc. in the promotion to raise more than $400,000. option losses.

In August, a FINRA arbitration panel ordered Pinnacle to pay her $825,000 in damages and compensatory fees.

Good luck finding that out in Pinnacle’s official brochure: the document says the company “has not been subject to any legal or disciplinary events that should be disclosed under this item.”

Ms Fernbach, who used to work in the brokerage industry, believes this is wrong.

“These registered advisers say, ‘We have nothing to disclose,'” she says. “If your clients have a loss and no one knows about it because it’s all being kept quiet, then a lot of people will. I have no idea and more accounts will be killed.”

In a statement, Pinnacle said the arbitration award, which did not include punitive damages, was the first against the firm in its nearly 40-year history and that “Pinnacle has disclosed the case in accordance with applicable regulations.”

In September, in another regulatory disclosure called Form CRS, the company answered “Yes” to the question “Do you or your financial professionals have a legal or disciplinary history?” It has not similarly amended its ADV brochure.

How did disclosure of advisory information become so motley?

Regulators traditionally viewed stockbrokers as salespeople, while the relationship between advisers and their clients was based on trust. This created an assumption that the consultants would do the right thing.

However, since advisers are not required to disclose client complaints, civil suits or arbitrations, it is impossible to know how accurate this assumption is.

I asked the consulting company Aite-Novarica Group for the largest independent firms, whose consultants mainly serve individual investors. Of the top 25 companies by assets, 20 state in their disclosures that they have no legal or disciplinary events to report. That’s a surprisingly clean record for companies that collectively employ nearly 4,100 people in advisory roles and manage roughly $900 billion.

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Perhaps none of these firms’ 318,000 individual customers have ever complained, sued, or filed arbitration claims against them.

Maybe there are hundreds of customers.

Given the shortcomings of the existing regulation, it is impossible to say.

“These guys all look like angels on paper,” says Nicole Boyson, a finance professor at Northeastern University who studies the brokerage and consulting business. “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 dubious? And even then that might not be enough,” because most arbitration results are not publicly recorded.

Where is the SEC? The agency has said it plans to investigate the use of arbitration clauses in contracts between advisers and their clients to “help identify any problematic issues affecting retail advisory clients.” A spokesman says the SEC is constantly reviewing disclosure requirements, such as Form ADV, to ensure they provide adequate information.

What I’ve learned convinces me that the following questions should be added to the list when interviewing a financial advisor: Have clients filed written complaints or arbitration claims against you or your company? Have customers sued you or your company?

I also hope that financial advisors whose clients have never filed a written complaint, arbitration claim, or civil action against them will begin to disclose exactly that in language everyone can understand.

That way, the public would be able to distinguish between advisors with pristine records and those hiding behind words like “no material to disclose”.


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