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Questions to ask your financial adviser

November 11, 2018

Every investor will be impacted by the upcoming changes in regulatory standards that will apply to financial advisers. This development started last April, when the U.S. Securities and Exchange Commission proposed rules that would, among other things, change how financial advisers present themselves to investors.

At the same time, the SEC engaged RAND Corp. to conduct a nationwide survey (along with interviews of investors) to gauge reactions to the sample Form CRS Relationship Summaries. These would be new disclosure documents that would be required to be provided to investors to hopefully help lessen the confusion that they have about the differences in “services offered, fees charged, and legal standards and obligations.”

The results of the RAND study have just been made available.

Let’s talk about one aspect, a list of questions that would be answered for you by your financial adviser.

As you read through the questions (quoted from the proposal), think about whether the answers would be helpful to you. “Advisory” and “brokerage accounts” would be defined for you.

“1. Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account?

“2. Do the math for me. How much would I pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees?

“3. What additional costs should I expect in connection with my account?

“4. Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments?

“5. What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account.

“6. How will you choose investments to recommend for my account?

“7. How often will you monitor my account’s performance and offer investment advice?

“8. Do you or your firm have a disciplinary history? For what type of conduct?

“9. What is your relevant experience, including your licenses, education, and other qualifications? Please explain what the abbreviations in your licenses are and what they mean.

“10. Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a broker-dealer? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to?”

The SEC’s rationale for the list was “to encourage retail investors to have conversations with their financial professionals about how the firm’s services, fees, conflicts and disciplinary events affect them.” What is your reaction?

When RAND surveyed investors about these questions, opinions varied, as I would have expected. There was no bright line that separated the good questions from the bad. Most people felt that the list was appropriate in length. The questions were not too difficult to understand and not too uncomfortable to ask.

What about the following additional questions? Would they be helpful?

“If I give you $1,000 to invest, how much will go to fees and costs, and how much will be invested for me?

“If I trade more investments in my brokerage account, do you (my broker) make more money?

“If I add more money or investments to my advisory account, do you (my investment advisor) make more money?

“If I invest in funds created or managed by your firm, do you or your firm make more money than if I buy a fund created by (or managed by) someone else?

“How do you (my broker or adviser) get paid?”

In all cases, those surveyed were generally likely (“very likely” and “somewhat likely”) to ask these additional questions, according to the RAND report.

To read about the proposal, “Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles,” go to https://www.sec.gov/rules/proposed/2018/34-83063.pdf.

To read the RAND report, called “Investor Testing of Form CRS Relationship Summary,” go to https://www.sec.gov/about/offices/investorad/investor-testing-form-crs-relationship-summary.pdf.

If you would like to share your views with me, take this quick survey: https://www.surveymonkey.com/r/FormCRS. The survey will help me understand what questions you think are important to ask.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit www.juliejason.com/events.

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