187,416 financial advisors have a disclosure on their record. The Form ADV disclosure consists of criminal, civil and disciplinary actions such as robbing a bank, committing massive fraud, offering a product that doesn’t match one’s financial goals or receiving disciplinary action from an advising board. But what does that mean to me?

When you take a look at every single person who is licensed to work in the financial services industry, there is quite a shocking number of disclosures that were issued out in one’s lifetime. In fact, there are over 345,870 disclosures total that are listed in the world of financial advisors. If you take the total financial advisor population with disclosures on their record and the amount of disclosures that have been issued out per advisor, it would even out to each advisor having 1.85 disclosures on their record.

That’s a lot of disclosures. And it means that nearly any advisor that you could work with, or the one that you’re working with already, has a disclosure on their record. There numbers aren’t distributed evenly, however. Some advisors may have more than one mark on their record, while the highest amount of disclosures under one single person is 246; the next being 209 and then another with 109. There are 123 registered advisors with over 30 disclosures. Out of all parties, there are a total of 169,760 advisors who have between one to three disclosures, and 121,933 who have one disclosure. So there are some financial professionals who are raising the bar (or lowering it in this case), for everyone else.

Let’s dig into the numbers a bit more before explaining what this means to you.

Now compare that to the pool of financial advisors, and the numbers get interesting. A total of 629,262 people made commitments to become a Registered Representative (RR), along with 387,730 who decided to become an Investment Advisor Representative (IAR).

The disheartening news is that 14.65% of all advisors have at least one disclosure on their record, totaling 187,416 advisors in the financial services industry.

Many of these financial professionals decided to work in other areas, however, and no longer work in the financial services industry as an advisor, and could have taken on other roles instead, such as writers or other ancillary positions within the finance industry. Making it as a financial advisor is quite difficult, so the challenges led people down to other careers.

With that in mind, that brings the total amount of active Registered Representatives (RR) down from 629,262 people to 320,353. Active Investment Advisor Representatives (IAR) drop from 387,730 to 78,821. Plus, there are 308,909 advisors who are Dually Registered Representatives, meaning they hold both licenses.

When we look at the advisors who are active, there are still 12.74% of the total active financial advisor population of 708,083 advisors who have at least one disclosure on their record, which comes out to 90,224 financial advisors.

There’s a 12.74% chance that the advisor that you are currently working with, or plan to work with in the future has a disclosure on their record, but what does that mean?

"While it may seem like this advisor has had many different types of complaints by their clients due to the huge volume of disclosures associated to his name, the truth is that a lot of advisors who got caught up at the municipal debacle when Puerto Rico formally filed bankruptcy in 2017 on $70 billion in public debt that was restructured to exit in March of 2022 were hit hard. One negative event could lead to multiple discrepancies" KJ Kim, at AdvisorCheck stated.

Before we get into that, let’s break down the data even further.

Registered Representatives tend to be those who work at broker dealers and other entities like that. Out of the 320,353 active Registered Representatives servicing the financial services industry, 26,042 of them have disclosures, which comes out to 8.13%.

Investment Advisor Representatives have a much lower rate of active financial services professionals who have disclosures, with 8,530 having a discretionary mark on their record, which is 10.82% of the group.

Dually Registered Representatives have 55,652 disclosures on their record, which accounts to 18.01% of this population of financial services professionals.

With so many financial professionals having disclosures on their record, it can make you wonder if your money is in a safe place.

Yet not all disclosures are created equally. Chances are, if someone were to rob a bank, they would be barred from the industry in its entirety; the same if they were to commit massive fraud throughout their firm.  Perusing through AdvisorCheck’s database, you could see a few people who are no longer actively in their finance roles.

Due to disclosures rising up on some finance professional’s records, they moved to other industries like crypto, which is much less regulated. Many feel they could go undetected and not have their disclosures follow them around. Yet, it’s important to consider how many total disclosures are out there.

While earlier, we may have discussed 26,042 active Registered Representatives having a disclosure, when we look at the entirety of the Registered Representative landscape with both active and inactive advisors, there are 81,694 people who have disclosures, out of the 629,262 total people who were once active as a Registered Representative in their lifetime. That means that even if you aren’t working directly with one of the 26,042 people who have a disclosure at the fund you are working with, if you decided to make ancillary investments into a crypto company or another type of entity, there is a high probability that one of those 81,694 people with disclosures are working in that field. Not to mention the 64,182 people who have a disclosure out of the 387,730 people who became licensed as an Investment Advisor Representative.

Now, while alarm bells might be ringing and your guard may be up completely, do consider that most of these bad actors are unable to find work in the financial services industry. So the probability that the disclosure your potential advisor has being a heinous act are quite slim.

In fact, many disclosures could be issued when one was a minor, or when they sold someone a product that didn’t suit their needs, or they had to file bankruptcy because of a divorce or another matter that could’ve curtailed one’s life.

Yet, having these disclosures front and center are key for deciding which financial advisor you plan to either stick it around with or choose to manage your money.

And if you’re not using a financial advisor and plan to invest in non-traditional methods, you need to put the people who are operating that company’s name into AdvisorCheck’s search tool as well, to ensure you’re not working with someone who did something extremely unordinary in their profession, to make sure your money is safer than with a prior bad actor.

“In some cases, a multitude of disclosures could occur from one specific negative event,” Dan Hattori from AdvisorCheck stated. “For example, when Puerto Rico defaulted on their central government bonds in the 2016, it was the catalyst for numerous clients' complaints.” Dan continued. 

Why the Relationship Between a Financial Advisor and Yourself Matters So Deeply

The relationship between a Financial Advisor (FA) and a client or clients must be built on trust. Trusting someone with your retirement funds, nest egg, or investments, in general, requires a lot of trust and a level of respect for someone who you hope has the financial acumen to protect, grow, and have your money waiting for you (or your legacy) when it is needed.

As with any professionals that we deal with in our day-to-day lives, our financial advisors usually aren’t our friends, although we certainly want to have a friendly relationship with our financial advisors. You may exchange pleasantries with your advisor, and perhaps you receive holiday or birthday cards from them (if they are good at customer relations), but it’s rare that you know any more about their lives than the bare minimum.

Although we see their certifications, degrees, and licenses displayed in their office, like everyone they have a life outside of that office and a history that they’ve lived before you ever met each other. Sometimes, like with most people in the world, that history had a few bumps in the road that they’d rather not remember or talk about.

Because the financial services industry has to be one built on a large degree of trust and transparency, many types of advisory firms and financial advisors have to disclose certain things that may have happened in their past that their clients may want to be aware of.

In the world of Financial Advisors, these disclosures are made through the Form ADV required by the Securities and Exchange Commission (SEC). Many people outside of the financial services world would not understand exactly what a Form ADV is, nor would they be able to go through the countless pages that one could see for an advisor or a form, so we’ll explain what these disclosures are, along with what the Form ADV is, along with what it means if your advisor has one, how many advisors in the country have disclosures filed, and how to conduct a search to find out if an advisor you are considering has one.

What Exactly is a Form ADV Disclosure?

A Financial Advisor disclosure can refer to two different things, depending on the context. In the first example, an advising firm (the office or company for which Financial Advisors work) must file a public disclosure report regarding details about the services it offers, its background, the fees that it charges clients, and any conduct by its advisors that would require disclosure.

In the second, Financial Advisors who are registered with FINRA or the SEC (Registered Representatives (RR) and Investment Advisor Representatives (IAR), to be specific) are required to provide disclosures to their prospective or current clients regarding any potential conflicts of interest or disciplinary actions that they may have or have had.

The advisor-level forms must be filed with their compliance officer, the SEC, and the states in which they are licensed, and are done via a form ADV. The Securities Act of 1933 and Securities Exchange Act of 1934 require that these disclosures be updated annually so that they can provide access to transparency about the backgrounds and history of advisors, or advisory firms that a client may consider working with.

The Form ADV has two different sections, divided into Section A and Section B. Section A contains information about the firm specifically and is a fill-in-the-blank document that includes identifying information. Section B is a narrative or prose-style section, in which the advisor or advisory explains the situation, and what happened.

Explained directly by the SEC regarding Section B: “The requirements of Part 2 are designed to provide new, prospective and existing clients with clearly written, meaningful current disclosure of the business practices, conflicts of interest, and background of the investment adviser firm and the firm’s employees who provide advice.”

As an additional benefit, sites like AdvisorCheck will include information that tells you the result of the filing, in an easily digestible format. While some of the claims against advisors are dismissed outright after an investigation by the compliance office showing that they did no harm, other types of disclosures required for legal, criminal, or other types of actions may have information letting you know if the case was dismissed, or if any criminal or civil penalties, fines, or judgments were issued.

How Do I Find if an Advisor that I’m Considering Has a Disclosure?

Both the firm and the advisor are required to make public or provide any disclosures to current or prospective clients. As they need to be updated annually, they are also required to provide updates for those disclosures to current clients, when appropriate.

In reality, however, most people don’t take the time to read the fine print and don’t understand a large portion of the financial forms or paperwork that they are given during client meetings. Whether you are considering hiring a new Financial Advisor or want to know if your current one has a disclosure, AdvisorCheck provides easy access to that information by displaying all disclosures under a disclosure tab.

After starting an account with AdvisorCheck, you can simply select the “Advisor Search” option once you log in. You can then either search all advisors within a city, state or zip code or perform a search for a specific firm or advisor.

Either option will show you if those firms or advisors have any filed disclosures. If they do, AdvisorCheck will also tell you the status, and provide the narrative regarding the disclosure to give you a better understanding of the situation that led it to being filed.

Should I Be Worried if an Advisor Has a Disclosure?

There are many different types of actions and incidents that require disclosure. They run the range of severity and can be anything from an unhappy client to a criminal sentence for the advisor, and everything in between. The mere existence of a disclosure shouldn’t cause worry about an advisor but may make you want to get to know a little bit more about why they have one.

When the stock market or a particular investment class has a period of poor performance, it is a frequent occurrence for a large number of customer complaints to be filed against Financial Advisors by clients who are unhappy that their FA couldn’t predict the future and see the market turmoil coming.

The 2008 financial crisis is a great example of this, during which a large number of customer complaints were filed by unhappy clients who lost money. Many of these complaints required disclosure by the Financial Advisors, and those disclosures remain on their record even if an investigation proved them to be entirely unwarranted due to unforeseen market events.

If any Financial Advisor could accurately predict every major market event that led to a downturn or significant increase, they would have so much money that they wouldn’t need to take on clients. Still, a greater degree of understanding of the financial markets is expected of every financial advisor, and no client is happy when they lose money.

Financial Advisors who have been in the business for a long time are more likely than new ones to have disclosures because they have dealt with so many clients and such a long work history. The 2008 crisis is a great example of why merely having a disclosure on file isn’t necessarily a sign that your Financial Advisor can’t be trusted, but it is worth your time to see exactly what the disclosure is regarding. 

Does an Advisor Have to Warn Me That They Have a Disclosure?

Yes, the SEC requires that advisors provide all disclosures to both current and prospective clients. Additionally, the disclosures are supposed to be updated annually and advisors are required to provide updates to clients if anything regarding those disclosures changes.

This doesn’t mean that they need to bring it up verbally to you, unless directly asked. They could just show you their Form ADV and have you go through it yourself, so that’s why it’s essential to have a tool like AdvisorCheck pull up the pertinent data, as opposed to going through a countless amount of pages on your own. Some advisors may have a Form ADV that is over 100 pages long.

How Many Types of Disclosures Are There?

It can be difficult to find information online regarding what types of disclosures there are that an advisor has to make, and why they would have to make them. To lay it out for you, here are the different types of disclosures that the SEC requires on Form ADV Part 2A:

Advisory Business

An investment advisor is required to disclose the types of advisory services that are offered, any specialties that the advisor claims to have for a particular type of advisory service, and how much that advisor manages in Assets Under Management (AUM).

Fees and Compensation

An advisor must disclose in their brochure how they are compensated for their services, provide a fee schedule, and disclose whether these fees are fixed or negotiable. These are easier to find and decipher for fee-based advisors than commission-based, and the commission-based advisors will typically have fees that are more easily negotiated than those who charge fixed.

The advisor must also disclose whether they bill their clients directly or deduct fees directly from the client’s account, if the client has a choice between the two options of billing, and how their fees are assessed. If the advisor manages any accounts that are not charged a performance fee, they must note this as a potential conflict of interest by managing these different types of accounts simultaneously and how they manage that potential conflict.

Methods of Analysis, Investment Strategies, and Risk of Loss

Advisors must explain their methods of analysis and investment strategies. They must also explain that investing in securities carries the risk of loss, and explain whether any of their investment strategies carry a higher level of risk than is typical. The advisor must also explain the material risk for any strategy or method of analysis that they use for any type of investment that they recommend primarily. If the advisor’s strategy involves frequent trading of securities, they must explain how frequent trading can affect investment performance (and fees).

Disciplinary Information

An advisory firm is required to include any information that includes material facts about any legal or disciplinary action that could be considered material to a client’s evaluation of the advisory business or the integrity of its personnel. An advisor must do the same on their Form ADV.

Certain disciplinary events are considered material if they have occurred within the past 10 years, but searching through the advisors on AdvisorCheck.com we found one disclosure that was from the 1980s. To his credit, that advisor included his misdemeanor for a shoplifting charge when he was a teenager, although it would be a stretch to call that a material event now! Yet, that is up to the client to decide upon the level of comfort they have in proceeding with moving forward or continuing to work with that financial advisor.

This is where the disciplinary events – which could be seen as extremely important to some clients – are difficult to place into a box. The term material could be interpreted in different ways by different people and compliance officers, and there is no single, black-and-white list from the SEC regarding exactly which criminal, civil, or disciplinary actions must be disclosed.

By using AdvisorCheck, however, you can look into and read the narrative for any disclosure for any registered advisor in the country to gain a clear understanding of why any disclosure is there, if they have one.

Code of Ethics, Participation or Interest in Client Transactions, and Personal Trading

An investment advisor must disclose its or their code of ethics, and inform the client that a copy is available upon request. The advisor must also disclose any potential conflicts that may arise around the trading of securities, and whether they, anyone they know, or any company for which they have a financial interest is making the same trades at the same time as their client accounts.

The advisor must also disclose if they or anyone they are close to has a material financial interest in any of the companies or their underlying securities that the advisor recommends or directs client investments towards.

If any of the above situations is present, the advisor must explain how they mitigate these potential conflicts of interest for their clients.

Brokerage Practices

Advisors must disclose the methods by which they determine which broker-dealers they use for client transactions, and determining whether the compensation they require for the trade is reasonable. The advisor must also disclose “soft money” transactions, which can include the paid research they use (which may be provided by a third party or investment advisor), directed brokerage (asking clients to send deals to a specific dealer for execution), client referrals, or trade aggregation. As always, the advisor is required to list any conflict of interest this may cause, and how those conflicts are mitigated if present.

Civil, Criminal, or Complaint-Based Disclosures in Reality

Now you know what the SEC says needs to be disclosed, and the different buckets of disclosures that they require from advisors and firms. But what do the actual disclosures look like in real life? What are they for?

We want to protect the names of both advisors and clients, so we will take you through a few summary examples that are based on randomly-selected narratives present on AdvisorCheck.

We already discussed the advisor with a disclosure from a shoplifting charge from the 1980s. While there is a 10 year materiality for most cases, felony charges, even the ones acted upon as a juvenile, do follow a person for the rest of their life. The notes from their compliance officer stated that the advisor had seen it as a deep learning experience, so this advisor could have turned his life around after that incident.

Several of the disclosures that we looked into were complaints levied by clients who were angry that they had lost money in their investments. Many of these were shown to be resolved through notes by the investigating compliance officer, and easily explained since all good advisors will keep copious records of every client engagement.

Typically, while an Investment Advisor Representative IAR makes recommendations for you, a  Registered Representative can make trades based on your decisions regarding your portfolio. That means, in most instances, the RR is executing what their client wants them to do. In several disclosures, the clients had directed trades that ended up losing money, and lodged a complaint to demand the firm or advisor pay them back for lost funds. Because those RRs had kept notes on exactly what the client stated that they wanted done in their account, the compliance officers were able to resolve the issue, but the disclosures of the disputes remained.

For the advisor who has 246 disclosures, he has been in the investment business as an advisor for 41 years and is dual registered to provide his services in 16 different states. As we said, the longer the work history, the more likely an advisor is to have disclosures.

Each of these disclosures is from a customer dispute, of which he only had five between 1991 and 2002. He disclosed dozens of complaints each in the years 2014 through 2019, but things seem to be slowing down as he only had four customer complaints in 2020.

Another disclosure revealed more of a sad story than anything else. An advisor had to file bankruptcy due to a divorce a decade ago. What happened behind the scenes could only make one wonder, but it seems that the marriage destroyed this person’s finances.

“In some cases, a multitude of disclosures could occur from one specific event,” Dan Hattori from AdvisorCheck stated. “ For example, when Puerto Rico defaulted on their bond in the 2010s, those who sold the bond may have faced a significant number of client complaints that led to disclosures. Advisors could also take the time to expunge disclosures off their record as well,” Dan continued.

A Final Note on Disclosures

While it may seem unnerving to discover that your advisor or potential advisor has a disclosure on record, the truth of the matter is that they aren’t always a bad thing. Sometimes they are just an explanation of how they keep investments or clients firewalled in a highly-regulated environment. Other times clients make poor decisions and are looking for someone to blame and a way to get their lost money back.

And on some occasions, an advisor has made a mistake that either resulted in a criminal or civil dispute, for which they must disclose that mistake and the resolution.

While some advisors have a large number of disclosures, the majority don’t have any. That’s also not entirely a bad thing, as there are many advisors out there whose licenses only allow them to deal in mutual funds or annuities rather than stocks, and the client’s investment history goes much like they imagined it would.

According to industry experts, those who trust their investments to an advisor are likely to make up to twice as much in returns as those who do not. The annual growth rate with an advisor leading the way averages out to around 3% more annually.

Whether you are curious about your current advisor, in the market for a new one, or looking for the first person that you will trust to manage your investments, AdvisorCheck.com provides insights into every registered advisor and their disclosures, if they have any.

Due diligence is the key to success, and the financial advisory business is built on trust. It was Ronald Regan who popularized the phrase, “trust but verify,” and that phrase couldn’t be more pertinent to your financial advisor. Start a free account at AdvisorCheck.com today to do your own due diligence to ensure that there isn’t anything in your advisor’s past or current dealings that you should be concerned about.

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Written by Robert Lewis

Fact checked by Billy Quirk

Reviewed by Dan Hattori

Disclosure

The information provided in this article was written by the research and analysis team at AdvisorCheck.com to help all consumers in their financial journeys, by providing the resources and the insights to help improve one’s financial health, make it through recessionary and inflationary periods of time, and save their earnings to use them towards building a secure financial future. 

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