3 questions investors should ask their financial professional and which disclosure should answer them

Asking for advice is common human behavior in the face of any challenge. Starting to invest can certainly seem daunting when financial literacy is not common and the transition from retirement to 401 (k) s puts more strain on individuals. So while it’s understandable for investors to seek advice from professionals in the industry, many investors are unaware of the variety of ways in which professionals prioritize their goals.

When working with a financial professional, here are three questions investors should ask in order to clarify the prospect of the advice they receive:

  • How are you paid?
  • What am I paying you?
  • What conflicts of interest could influence the advice you give me?

As of June 2020, the answers to all of these questions are expected to be included in a disclosure called the Relationship Summary. Brokers / traders, RIAs and dual filers should present this document to investors when they start working together, but most companies do only the bare minimum to provide this important information.

Most companies ignore the details

In a recent article, we analyzed a sample of relationship summaries and found that few companies answered these three questions clearly and completely. We looked at 100 summaries of the three types of companies required to produce the disclosure, and companies with assets ranging from just over $ 1 million to the largest in the industry with close to $ 1,000 billion.

Understanding how companies compensate their finance professionals is essential to then assess their conflicts of interest. Of the companies we looked at, only 39% provided details or examples of their compensation model and company programs (rewards programs, bonuses, profit sharing or other compensation programs). Without this information, investors have no way to guess the magnitude of each type of compensation and assess the extent of the conflict it creates.

Companies should inform investors whether they will pay commissions or asset-based fees; however, most omit any quantification of these charges in the relationship summary. RIAs were the most likely to provide at least one example of the amount of fees a customer would pay, with 48% of the companies we looked at including this. Only 28% of brokers / traders and 20% of duplicate registrants did the same.

Even when the numbers are included, the lack of a consistent standard means that some companies have given minimums, other maximums, and only a few have described how an investor determines where in the range they fall. The diversity of specifics gives investors little opportunity to compare the costs of services offered by different companies.

Those with the most complex arrangements have exposed their conflicts the least often

Overall, companies rely on the boilerplate language found in the Relationship Summary instructions to explain their conflicts of interest and do little to enable their clients to understand the provisions that create those conflicts in advice that customers receive.

Many of the companies we reviewed accomplish only the bare minimum when dealing with conflicts of interest, repeating the same standard wording: “When we provide you with a recommendation, we need to make a recommendation that we believe is within. your putting our best interests ahead of yours. At the same time, the way we make money conflicts with your interests.

This language is confusing for investors because there is no elaboration on how these competing priorities are balanced.

Working with a finance professional from a dual-listed company, able to offer advice to investors as a broker / trader or RIA, might present the most complex choices for investors to understand, but these companies were the less likely to provide useful information about their conflicts of interest.

As shown in Table 1, only 12% of double filers present their conflicts of interest in a way that allows investors to understand and question the relationship, while 20% of independent brokers / traders and RIAs go beyond standard language. Additionally, many duplicate filers who begin their disclosures by presenting a side-by-side comparison of the services provided in a broker / trader and RIA capacity use a single general section to describe the conflicts for both. The combination of the discussion of conflicts of interest for the dual registrant broker / trader and RIA branches creates confusion as investors are unable to distinguish which conflicts fall under which business functions.

Table 1: Assessment of the content of companies included in conflicts of interest by type of company


Source: Morningstar analysis of the CRS Relationship Summaries form.

When companies explain their conflicts of interest, they also have the opportunity to explain how they mitigate them, but few companies have taken this approach. We once again found that RIAs and brokers / resellers mentioned conflict mitigation more frequently, with 28% of RIAs and 20% of brokers / resellers referring to their mitigation policies, while only 8% double declarers have done so. In addition, the quality of the descriptions of the mitigation plans is important.

Addressing conflict mitigation, when done poorly, can involve broad statements that only increase investor confusion. However, when properly conducted, such a discussion can allow investors to assess the suitability of the mitigation approach for the advice they receive.

What happens after

There are clearly gaps in most relationship summaries, particularly in their information on compensation, fees, and conflicts of interest, but we hope these will be addressed as the SEC inspects them. company disclosures and that companies will improve on their initial versions.

While the app so far has focused on companies that have failed to even produce a relationship summary on time, we believe the SEC has the ability to compel companies to provide more information. numerous and more detailed without additional regulation. The current guidance is not overly prescriptive, but involves a depth of information that companies have largely ignored, and the SEC could use the app to strengthen the standards.

The relationship summary could also be improved through rule changes, and we make several specific recommendations in our document. Ultimately, we believe companies should move towards the goal of the Relationship Summary: a simple English introduction to working with a finance professional that empowers investors to make informed decisions about people. with whom they work and from whom they receive advice. In the meantime, investors can still ask these three questions if they don’t get a full answer in the relationship summary.


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