Weighing In: Financial Disclosure Statements Needed for Investors

financial disclosureFinancial advisors change firms for big money based on the amounts and types (fee, commission) of revenue that they produce for their firms. The higher the percentage of clients they take to their new firms the bigger their bonuses. However, no advisor is to say: “I want you to follow me to my new firm so I can maximize the amount of upfront money they are willing to pay me”. They will make-up a story that makes it sound like they are making the change to benefit their clients and not themselves. The standard phrase might be: “I am making this change so I can do a better a job for my clients”. It is vague, but it works. Most investors do not ask how the advisor will “do a better job”.

The financial disclosure requirement is definitely a step in the right direction.  See Mark Schoeff’s article Finra backs Incentive comp disclosure rule.  But, how does FINRA know what the advisor said to the investor or provided to the investor? There is only one way. The financial disclosure statement has to be written and the investor has to sign a document that says he has reviewed the disclosure and he understands it. This document is required for all investors who follow the advisor to the new firm. And, the new firm’s compliance department is responsible for managing the process. FINRA auditors will add this process to their agenda.

If FINRA does not enact this type of process we will know this is one more half-hearted attempt at doing what is best for investors. Even though, Rick Ketchum, FINRA CEO said: “This proposal reflects our commitment to transparency and investor protection“, the truth is investors are not protected if there are no provisions for enforcement.

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