On June 5, 2019 the U.S. Securities and Exchange Commission (SEC) voted on and approved a CRS Relationship Summary also known as the ADV Part 3. The ADV Part 3 is designed to be a short and accessible disclosure for retail investors that helps them compare information about firms’ investment advisory offerings. The relationship summary is intended to inform retail investors about:
- the types of client and customer relationships and services the firm offers;
- the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services;
- whether the firm and its financial professionals currently have reportable legal or disciplinary history; and
- how to obtain additional information about the firm.
The SEC designed the ADV Part 3 to promote effective communication between firms and their retail investors. In creating the relationship summary the SEC tried to balance the need for robust disclosures with the risk of “information overload” and reader disengagement. To encourage reader engagement, the ADV Part 3 should:
- Be Written in plain English
- Follow a question-answer format. Ex. “What investment services and advice can you provide me?” ““How might your conflicts of interest affect me, and how will you address them?”
- Be a maximum of 4 pages
The following is a list of information that should be included on the ADV Part 3:
- relationships and services the firm offers to retail investors;
- “What investment services and advice can you provide me?”
- Conversation Starters Firms will include in this section of the relationship summary three prescribed conversation starters for retail investors to ask their financial professional.
- fees and costs that retail investors will pay
- “How does your investment adviser firm make money?”
- standard of conduct and conflicts of interest
- “How might your conflicts of interest affect me, and how will you address them?”
- disciplinary history
- The section will begin with the heading: “Do you or your financial professionals have legal or disciplinary history?”
Firms that are registered, or investment advisers who have an application for registration pending, prior to June 30, 2020 will have a period of time beginning on May 1, 2020 until June 30, 2020 to file their initial relationship summaries with the SEC. After June 30, 2020, newly registered investment advisers will be required to file their relationship summary with the Commission by the date on which their registration becomes effective.
Although this new Form ADV 3 may seem deceptively simple, RIA Compliance Consultants believes that an investment adviser needs to carefully craft this disclosure in order to avoid claims of misleading investment advisory clients. We encourage to attend our upcoming conference in Omaha, NE from September 11 – 12, 2019.