Proposed ADV revisions are sound

The Securities and Exchange Commission is to be applauded for its proposal to revise Part II of Form ADV.
FEB 25, 2008
By  MFXFeeder
The Securities and Exchange Commission is to be applauded for its proposal to revise Part II of Form ADV. A revision to make the form more useful to clients and prospective clients is long overdue. In fact, the SEC proposed a revision in 2000 but ultimately backed away because of objections by investment advisers and their lawyers to a requirement that the advisers reveal their disciplinary history. The SEC commissioners voted unanimously Feb. 13 to propose rule amendments requiring investment advisers to prepare and deliver to clients and prospective clients a narrative brochure written in plain English. The brochures would be made available to the general public on the SEC's Investment Adviser Public Disclosure website. The narratives are expected to disclose to investors more-detailed information about an investment adviser's business practices, the types of advisory services the adviser provides, the investment risks, any soft-dollar arrangements, possible conflicts of interest and disciplinary history. Currently, advisers typically take a "check the box" approach to disclosure on Part II of the ADV, and that is encouraged by the form. But that approach provides only a skeletal impression of an adviser's business practices and policies. The form's appearance, in fact, can deter investors from wading through it, making the disclosure of only theoretical value to them. A narrative approach, in plain English, would be more inviting and might encourage more prospective clients to read the forms and understand more about the advisers they are considering hiring. That presents both opportunities and dangers for investment advisers. Plain English will allow advisers to distinguish clearly their services and fees from those of brokers. It also will allow them to explain their investment approaches and the benefit of their fiduciary role. If clients, when they hire advisers, better understand what the advisers propose to do and how they propose to do it, they should be more content in the long run and thus more likely to stay in the fold through difficult markets such as this one. But the new approach could be problematic for any advisers who have a disciplinary history. Any adverse arbitration award, criminal charge or even a personal bankruptcy would have to be revealed in the narratives. This uneven disclosure playing field could provide brokers, who don't have to provide that information (although it is publicly available), with a competitive advantage. This potential for harm could be reduced if advisers are allowed to provide an explanation of any disciplinary history — an opportunity advisers should demand of the SEC. There is also a danger that imprecise language in the form might leave advisers more open to lawsuits somewhere down the line if clients become dissatisfied with performance or service. Given this open-ended liability, lawyers may be so cautious in the wording of the brochures that they become almost unreadable, defeating the whole purpose of the SEC's proposal. Of course, it will be impossible for advisers and their lawyers to react to the SEC's proposal until they see the details, which the agency will publish in the Federal Register. After that, the industry will have 60 days to react with comments. Advisers and their lawyers should carefully examine the details of the proposal when they become available. During the comment period, advisers should suggest improvements or modifications if they feel such changes are needed. But in considering the proposals, and any changes they might desire, advisers should bear in mind the needs and interests of clients, not just their own concerns. Advisers should ask themselves: What will be of most use to the clients? That's because, in the long run, what's best for clients is also what's best for advisers.

Latest News

Want to get the most out of alts? You’ll have to do your homework
Want to get the most out of alts? You’ll have to do your homework

Advisors who expect an edge from alternatives' illiquidity premium – without understanding the underlying terms and explaining them to clients – have a world of learning to do.

'Finfluencer' Ponzi scheme defrauds investors of over $20M
'Finfluencer' Ponzi scheme defrauds investors of over $20M

The social influencer Tyler Bossetti pleaded guilty to wire fraud and aiding in the filing of false tax documents as a result of the real estate scheme, which ran from 2019 to 2023 and used platforms including Facebook and YouTube.

US annuity sales see sixth straight $100B+ quarter
US annuity sales see sixth straight $100B+ quarter

The latest LIMRA data release shows continued growth in RILAs, variable annuities, and FRD products, though researchers argue more education is still needed.

RIA moves: Thiel's Indivisible welcomes Ride Wealth Partners, $4B Beacon snaps up Astor
RIA moves: Thiel's Indivisible welcomes Ride Wealth Partners, $4B Beacon snaps up Astor

Indivisible Partners builds on its strategy to take turf in the independent space with its latest move in Colorado.

Advisor moves: LPL adds $425M Evermark Investment Partners, $300M Merril Lynch group hops to Ameriprise
Advisor moves: LPL adds $425M Evermark Investment Partners, $300M Merril Lynch group hops to Ameriprise

LPL's latest addition, a San Diego team defecting from RBC, represents a milestone for the broker-dealer giant's Strategic Wealth model for wirehouse breakaways.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave