About the intelligent investor
The weekly column of ‘The Intelligent Investor’ by Jason Zweig, has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between the good advice and the one that just sounds good”
About Jason Zweig
One of the senior journalists of The Wall Street Journal. Author of the book “Your Money and Your Mind: How Neuroscience Can Help You Get Rich”, and the editor of the updated version of the bestseller “The Intelligent Investor”, described by Warren Buffett as “the best investment book ever written”
Stocks and bonds crashed again this week in the US, and inflation seems unstoppable. Maybe it’s time to hire a financial advisor. For years, people like me have been telling you that advisors must provide much greater disclosures than brokers, so you can make decisions about their services and fairness based on Better information.
But as I’ve discovered to my shock in recent weeks, financial advisors are sometimes obliged to reveal less than brokers – and what they don’t say can hurt you. For example, Vantage Consulting Group, an investment consulting company from Virginia, manages more than 2 billion dollars in assets.
Like all financial advisors registered with the SEC (American Securities and Exchange Commission), Vantage must also provide clients with a standard due diligence form, known as an ADV brochure. The latest brochure, filed on March 31, states that Vantage and its management “have no disciplinary incidents worthy of a report to detail them”.
Nowhere in the brochure will you be told that Vantage was sued for $4 million in April 2021 in a civil lawsuit alleging fraud and misrepresentation, after private funds it recommended to its clients lost millions of dollars.
Vantage did not respond to a request for comment. Her reports to the court deny any wrongdoing in this case, which is still being tried and may end in a settlement.
If she was a broker she should have reported
If Vantage were a brokerage firm, it would be required to report being sued on BrokerCheck, a site run by the Financial Industry Regulatory Authority (Finra), a self-regulatory body operated by Wall Street. Because it is registered as an investment advisory firm, Vantage does not have to provide disclosures about the claim in its ADV prospectus. The SEC does not compel advisers to provide disclosures on all civil claims.
Recent regulatory reforms have blurred the line between brokers and advisors. What’s more, some advisors register with Finra, and as a result have to post disclosures on BrokerCheck. But many are not registered with Finra – and therefore operate on a fiduciary basis.
As far as ADV disclosures are concerned, according to the SEC, it is the advisers’ own responsibility to determine whether events such as civil suits, client complaints and arbitration cases constitute material “concerning” clients, and should be notified of them.
Maria Fernbach, a 69-year-old retiree, claims that her advisers at Pinnacle Associates, a New York firm, implemented a stock options strategy against her will – forcing her to sell a position she had held for decades in Apple shares to finance more than $400,000 in losses on the options .
In August, a Finra arbitration panel ordered Pinnacle to pay Fernbach $825,000 in punitive damages and monetary compensation. Good luck trying to learn something about all this in Pinnacle’s brochure: the document states that the company “has not been subject to any legal or disciplinary events requiring disclosures in this regard.”
In its statement, Pinnacle said that the compensation it was forced to pay as part of the arbitration, and did not include a punitive amount, was the first that the company had to pay in its nearly 40-year history and that “Pinnacle provided disclosures on the matter in accordance with the relevant regulation.”
In September, in another type of disclosure to the regulator, called a CRS form, the company answered “yes” to the question “Do you or your financial professionals have any legal or disciplinary history?” The company did not amend the ADV brochure in a compliant manner.
How did disclosures by consulting companies become such an unsettled field? Regulators often treated brokers as salespeople, while the relationship between advisors and their clients is built on trust. This created an assumption that the consultants would do the right thing. But because advisers don’t have to provide disclosures about client complaints, civil suits or arbitration cases, it’s impossible to know how accurate that assumption is.
Regulators assume that this is a relationship of trust
I asked the consulting company Aite-Novarica to know who are the largest consulting companies whose consultants mainly serve private investors. Of the top 25 companies by assets, 20 say in their disclosures that they have no legal or disciplinary incidents to report. This is an impressively clean record for companies that collectively employ almost 4,100 people in consulting positions and manage approximately $900 billion.
It is possible that none of the 318,000 individual customers ever complained, sued or sought arbitration against these companies. And perhaps hundreds of customers did. Given the existing loopholes in the existing regulation, it is impossible to know.
Where is the SEC? The authority said it intends to study the use of arbitration clauses in contracts between consultants and clients, in order to “help identify problematic issues that affect those who purchase consulting services.” It was also reported that the Authority checks disclosure requirements such as ADV forms on an ongoing basis, to make sure that the information they contain is sufficient.
What I’ve learned convinces me that you should add these questions to the list when interviewing a financial advisor: Have clients filed written complaints or arbitration requests against you or your company? Has your company been sued by customers? In this way, the public will be able to distinguish between consultants with a perfect record and those who hide behind inclusive words, such as “nothing related to the matter to be reported”.
3 rules and recommendations for investment
1. Financial advisory firms are not required to provide disclosures about customer complaints, civil lawsuits or arbitration cases
2. According to the SEC, it is the responsibility of the advisors themselves to determine whether events such as lawsuits, complaints and arbitration cases concern clients, and should be informed about them
3. When interviewing a financial advisor, you should ask whether clients have filed complaints or arbitration requests against him, and whether his company has been sued by the clients