According to a recent survey by State Street Corp.’s investment management arm and Knowledge@Wharton, only 43% of investors said they understood their registered investment adviser’s fee structure “completely” or “fairly well” (retrieved online from InvestmentNews). The results from this study reminded us of a September 13, 2005 NASAA news release. According to the news release, one of the most common deficiencies found during examinations of state-registered investment advisors was inaccurate disclosures in the Form ADV. Our own experience supports the results of both of these studies, and we are not surprised that many investors don’t understand how fees are earned by registered investment advisors.
While the Form ADV is a registration document filed with securities regulators, it is first and foremost a disclosure document that must be provided to all investment advisory clients. Registered investment advisors need to take the Form ADV seriously and ensure that it accurately discloses all services, fee arrangements, conflicts of interests, outside activities, and material arrangements. The goal of the Form ADV is to provide fair and full disclosure.
The Form ADV should be used to meet what we consider one of the most important goals when communicating with investment advisory clients, which is to make sure all clients understand the investment advisory fees being charged by the registered investment advisor firm. Clients must also understand the other fees charged in connection to the management of their account but not necessarily retained by the investment advisor firm.
A registered investment advisor should verbally explain all fees being charged to the investment advisory client to buttress the information provided in the Form ADV. Appropriate disclosures (both written and verbal) will include an accurate description of the firm’s investment advisory fee schedules, arrangements, and billing cycles.
Does your Form ADV accurately explain the firm’s investment advisory fee arrangements? Do all of your investment advisory clients understand how you are compensated? Do all of your investment advisory clients understand the other fees they are charged as a result of your investment recommendations and/or brokerage arrangements? If you would like RIA Compliance Consultants to provide an objective review and consultation of your Form ADV and fee arrangements, please give us a call today.
Posted by Bryan Hill
Labels: Form ADV