Form CRS: Part II - Diving Deeper

In our last post, we started you on a long journey discussing the requirements of the proposed Form CRS. We are going to pick up where we left off with the Standard of Conduct, Fees, and Firm Comparison sections. As you’re reading along, remember this whole document needs to be kept to 4 or fewer pages.

Item 3, addresses Standard of Conduct. You will need to add the heading “Our Obligations to You,”

and the section will need to include the following disclosure, “We must abide by certain laws and regulations in our interactions with you.” If you offer advisory accounts to retail investors, you will need to state, “We are held to a fiduciary standard that covers out entire investment advisory relationship with you” and include a sentence describing the service you provide such as, monitoring the client’s portfolio on an ongoing basis. Also, you will be required to include the following statement, “Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand so that you can decide whether or not to agree with them.”

For Item 4, you will need to include the heading “Fees and Costs” followed by the statement, ”Fees and costs affect the value of your account over time. Please ask your financial professional to give your personalized information on the fees and costs that you will pay.” You will then need to detail your fees ensuring that they align with what is on your Form ADV. You must also include the following statement “The amount paid to our film and your financial professional generally does not vary based on the type of investments we select on your behalf.” There are also a few required disclosures based

on the type of fee charged. For instance, if your charge an asset-based fee, you must include the following: ”The asset-based fee reduces the value of your account and will be deducted from your account. ” For ongoing asset-based fee accounts, you will be required to state, ”The more assets you have in the advisory account including cash, the more you will pay us. We, therefore, have an incentive to increase the assets in your account to increase our fees. You pay our fee (e.g., monthly, quarterly) even if you don’t buy or sell.” If there is another type of fee charged, you should clearly detail the nature of those fees. We are going to spare you the instructions and disclosures for Wrap Fee Programs. We understand that this may seem onerous, but over the time that we were regulators, we handled plenty of complaints from clients over fees they were charged. This issue seems to be a hot topic, so hopefully, this additional disclosure will help mitigate that risk.

So, you want to compare broker/dealers to investment advisers??? We have an item for that! Item 5 should be titled “Compare with Typical Brokerage Accounts” followed by, “You could also open a brokerage account with a broker/dealer, where you will pay a transactional-based fee, generally referred to as a commission, when the broker/dealer buys or sells an investment for you.” You will then be required to include a bullet point section with required language titled “Features of a typical brokerage account include:…” These points will need to go into the differences between broker/dealers and investment advisers so make sure you are familiar with the differences. If you’re unsure, we can always help.

You may be thinking, “That’s a ton of information for 4 pages! Are we done yet????”

That’d be a big nope from Nopeville.

‘Til next time.

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