Should You Work with a Financial Advisor or Firm That Has Disclosure Events?

Form ADV & FINRA Broker Check

In the world of financial advising, trust is key. Very few consumers take the time to review the various documents they receive when they commence a relationship with an advisor. Failing to review these documents can result in regret and possibly financial loss. We think it is important that consumers review two important forms prior to commencing an advisory relationship; Form ADV (comprised of two parts - ADV 2A & ADV Disclosure Brochure 2B) and FINRA broker check. These forms reveal important information about both the firm’s conduct as well as the individual advisors within the firm.

What Are Financial Advisor Disclosure Events?

Disclosure events encompass a range of issues, from regulatory infractions to customer complaints. They're reported and tracked to maintain transparency for consumers. Registered Investment Advisory firms (RIAs) file an annual report with the SEC which can be found at the SEC’s Investment Advisor Public Disclosure website. The ADV Disclosure brochure also provides details on the individual advisors within the firm. Investment Advisor Representatives (IARs) have more detailed information at FINRA’s website known as BrokerCheck. We think it’s important to view both.

What Type of Disclosure Events Should be Concerning?

Not all disclosure events are equal, and it is up to you, the consumer, to decide if any of the disclosure events are sufficiently serious as to eliminate the firm / advisor from consideration. Events that raise red flags in our opinion would be things that go directly to integrity, trustworthiness and competence. Here are a few examples:

• Declaring bankruptcy, civil judgments, or tax liens

• A history of customer disputes or a single dispute involving a significant sum of money

• Employment separation after allegations of impropriety

Our belief is that it’s best to avoid a firm or advisor with disclosures altogether. The old adage that a zebra doesn’t change its stripes also applies to those who you entrust with your money. We think it’s also important to note how transparent the firm is with regulatory issues.

Capital Financial Advisory Group Reviews

Here’s an example of differences between disclosures between FINRA BrokerCheck and ADV 2B:

On page 34 of the Capital Financial Advisory Group’s ADV 2B Brochure it notes no disciplinary disclosures for Martin Hensley, one of the firm’s advisors. However, on BrokerCheck, Martin Hensley has 4 disclosures of various kinds including customer disputes and an unsatisfied judgment (link here).

Unfortunately, state registered RIAs can have different reporting requirements than SEC registered RIAs.

The decision to work with a financial advisory firm is an important one, and consumers should conduct thorough due diligence and carefully review all disclosure forms to be sure there aren’t red flags about either the firm or advisor they are considering working with.