Scholarly Financial Planner

Part 5 of a Series on the Regulation of Financial and Investment Advice, and on the Future of the Profession.

ALL POSTS PRIOR TO 2021 HAVE NOT BEEN REVIEWED NOR APPROVED BY ANY FIRM OR INSTITUTION, AND REFLECT ONLY THE PERSONAL VIEWS OF THE AUTHOR.

Part V. Disclosure Requirements the S.E.C. Could Adopt - That Make Sense

Should the U.S. Securities and Exchange Commission desire to adopt a disclosure document, there is a far better form that could be utilized than that contained in Form CRS.

While disclosures are not the most effective means of consumer protection, the disclosure forms below would provide consumers with much more useful information. These forms of disclosure would more clearly provide consumers with information that permits them to understand the role their broker or investment adviser is in, and the duties owed (or not owed) to the consumer.

UNIFORM DISCLOSURE FORM FOR BROKER-DEALERS, REGISTERED REPRESENTATIVES, INVESTMENT ADVISERS, AND INVESTMENT ADVISER REPRESENTATIVES

a)     Whenever investment advice is provided to a client, then a uniform disclosure form (“UDF”) shall be completed and provided by the broker-dealer, agent or adviser to the client at the inception of the client relationship, and annually during each calendar year thereafter during the duration of the client relationship, which UDF shall be substantially in the form set forth below.

b)    The UDF shall be and remain as a separate document and shall remain apart from and distinct from any other contracts, agreements, or other disclosures made to the client. If delivered electronically to the client, notification of electronic delivery of the UDF shall refer to: “Important Annual Relationship Disclosure” in the subject heading of the communication and no other substantial information shall be provided to the client in such communication other than the UDF.

c)     Should any material modifications occur to the disclosures contained in the UDF previously provided to the client, more than 15 days prior to the annual re-delivery of the UDF, the broker-dealer and/or adviser shall modify the disclosures previously provided through a written amendment thereto. Such amendment need not be in the format of the UDF, provided that the material modifications are relatively minor.

d)    The agent and/or adviser shall ensure that the client has received and reasonably understands the disclosures provided in the UDF and any amendments thereto. The agent and/or adviser shall fully and completely answer any questions posed by clients which relate to the subject matter of the UDF.

e)     Completion and delivery of the UDF does not fulfill the entirety of the fiduciary or other duties owed to the client by the provider of investment advice.

f)      The UDF provided shall be in substantially the following format and with substantially the following content:

UNIFORM DISCLOSURE FORM TO INVESTMENT CONSUMERS WHO ARE IN RECEIPT OF INVESTMENT ADVICE FROM INVESTMENT ADVISERS OR BROKERS
Name of Broker-Dealer (Company) Providing Investment Advice:
Name of Investment Adviser (Firm) Providing Investment Advice:
Note to dual registrants: complete both the “broker-dealer” and “investment adviser” listings above.
1. IS YOUR INVESTMENT PORTFOLIO INVESTED “PRUDENTLY”? Is the Prudent Investor Rule applicable to all or the majority of your investment portfolio?
_____ YES (if checked) Assets, if any Excluded:	All or the majority of your investment portfolio upon which we, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), provide investment advice is advised upon and/or managed according to the dictates of the prudent investor rule, which requires that such portion of your investment portfolio be managed as a prudent professional would manage the portfolio, after considering your needs, goals, investment time horizon(s). In satisfying this standard, we are required to exercise due care, skill, and caution. In adherence to the prudent investor rule, we possess a duty to minimize idiosyncratic (diversifiable) risk, we are required to not waste your assets, and we possess other duties.
	While the majority of your portfolio is subject to the prudent investor rule, the following account(s) or investment assets are excluded from the application of the prudent investor rule:
_____ NO (if checked) Exceptions:	All or the majority of your investment portfolio upon which we, your broker-dealer firm (and agents thereof) and/or investment advisers (and representatives thereof), provide investment advice is NOT advised upon and/or managed according to the dictates of the prudent investor rule. As such, you understand that additional risks, fees and costs may exist within your investment portfolio which exceed those in a prudent portfolio.
	While the majority of your portfolio is NOT subject to the prudent investor rule, the prudent investor rule is applied by us to following account(s) or investment assets:

2. WHAT FORM OF INVESTMENT ADVICE IS PROVIDED TO YOU? Is the registered representative of your broker or the representative of your investment adviser an “independent adviser” or “restricted adviser” – or is “no advice” provided to you?
_______ Independent Adviser (if checked)		We, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), possess the ability to provide a sufficient range of relevant investment strategies and financial products available on the market which are sufficiently diverse with regard to their type and with regard to the number of issuers or product providers to ensure that your investment objectives can be appropriate met. As to any investment advice we provide to you, we are required to implement a due diligence process in which we compare a broad range of investment strategies and financial instruments.
_______ Restricted Adviser (if checked)		We, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), can only provide “restricted advice” (also called “non-independent advice”), for the following reasons (set forth the restrictions here):
________ No Advice Provided (if checked)		We, your broker-dealer firm (and registered representatives thereof), do not provide investment advice to you. We may describe the features and characteristics of a financial product or investment to you. We may not, however, advise you as to whether the financial product or investment is in your best interests or whether the financial product is the best product in the marketplace to seek you meet your needs and goals.
3. WHAT FORM OF RELATIONSHIP ARE YOU IN? Are you in a fiduciary-client relationship in which you are entitled to rely upon the investment advice you receive, or are you in an arms-length (seller-purchaser) relationship in which you must protect yourself?
________ A Fiduciary-Client Relationship Exists		We, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), possess broad fiduciary duties to you in all aspects of our business relationship with you, including but not limited to: 1.    The duty to act with due care with regard to any financial or investment advice we provide to you, which means that we must act with the skill, prudent and diligence of an expert in providing financial or investment advice to you. 2.    The duty to act in your best interests, under the duty of loyalty, which includes the requirement to keep your interest paramount to our own interests, and that we act without regard to the financial or other interests of ourselves or our affiliated entities. 3.    The duty to be completely honest with you, with a high degree of candor. 4.    The duty to receive only reasonable compensation. 5.    The duty to not undertake any material misrepresentations of fact to you.
_______ A Seller-Purchaser, Arms-Length Relationship Exists		We, your broker-dealer firm (and agents thereof), are not acting as your fiduciary. In connection therewith: 1.    Our relationship with you is that of the seller of a financial product to you, the purchaser of that product. We are in an arms-length relationship with you. 2.    We may favor our own interests over yours. We are not legally required to act in your best interests. 3.    We do not possess a broad duty of due care with regard to our financial product recommendations to you. Any product we recommend to you need only be “suitable.”
FEES PAID DIRECTLY BY YOU
	Investment advisory fees paid directly by you based upon a percentage of the assets upon which advice is provided
	Investment advisory fees paid directly by you of a fixed or flat fee nature, paid either annually, quarterly, or monthly
	Investment advisory fees paid directly by you based upon hourly fees
	Investment advisory fees paid directly by you for discrete projects
FEES PAID BY PRODUCT MANUFACTURERS OR OTHER INTERMEDIARIES
	Sales commissions (including but not limited to front-end sales loads for mutual fund shares, and including but not limited to front-end commissions for annuities) resulting from sales or purchases of securities, other investments, or annuity/insurance products to you
	Sales commissions in the form of deferred contingent sales charges or back-end loads resulting from selling or purchasing securities, other investments, or annuity/insurance products to or from you
	Mark-ups and mark-downs in connection with principal trading of securities (i.e., where the broker-dealer firm purchases securities directly from you, or sells securities directly to you, from the broker-dealer’s own accounts)
	For any securities sold to you, compensation derived from the issuer or stocks, bonds, or other securities relating to the investment underwriting activities of the broker-dealer
	12b-1 fees paid by mutual funds to your brokerage firm, which fees last indefinitely as long as you own the fund, regardless of whether you continue to receive investment advice from us
	12b-1 fees paid by mutual funds to your brokerage firm, which fees will last for only a fixed period of time before they disappear, but which fees may continue during that period of time, regardless of whether you continue to receive investment advice
	Other than 12b-1 fees, any other form of fees or trailing commissions paid to your brokerage firm resulting from the sale of securities, other investments, or annuity/insurance products to you, which fees or trailing commissions last indefinitely as long as you own the security, other investment, or annuity/insurance product, regardless of whether you continue to receive investment advice from us
	Other than 12b-1 fees, any other form of trailing commissions paid to your brokerage firm resulting from the sale of securities, other investments, or annuity/insurance products to you, which fees or trailing commissions last for only a fixed period of time before they disappear, but which fees may continue during that period of time, regardless of whether you continue to receive investment advice from us
	Payment for shelf space received by your broker-dealer. (A shelf-space agreement occurs when a mutual fund pays this additional compensation in exchange for the broker-dealer preferentially marketing the shares of that mutual fund.)

(-cont.)  FEES AID BY PRODUCT MANUFACTURERS OR OTHER INTERMEDIARIES
	Marketing support payments paid by product manufacturers or intermediaries to your broker-dealer or investment adviser arising from the sales of securities or annuity/insurance products to you
	Other revenue sharing payments paid by product manufacturers to your broker-dealer or investment adviser
	Fees and/or commissions resulting from sales of securities for which your broker-dealer acts as underwriter or as part of an underwriting group
	Any other fees and/or commissions received for referrals by your broker-dealer firm of you to any other product or service provider that are not set forth above
	Receipt by your broker-dealer of payments for order flow from other brokerage firms (including but not limited to market makers) (these compensation payments benefit a brokerage firm for directing orders to different parties for trade execution)
	Receipt by your brokerage firm of soft dollar compensation received from managed accounts (including but not limited to mutual funds). Note that Section 28(e) of the (federal) Securities Exchange Act of 1934 discretion with respect to an account shall not be deemed to have acted unlawfully or to have breached a fiduciary duty under state or federal law solely by reason of his having caused an account to pay more than the lowest available commission if that person determines in good faith that the amount of the commission is reasonable in relation to the value of the brokerage and research services provided.
	Other than as previously described, any receipt by your broker or investment adviser of access to software, research, trading software, practice management and/or investment education (though attendance at conference, via webinars, written materials, or otherwise), or other support services from any other brokerage firm, custodian, or product manufacturer.
	Any other forms of revenue sharing or other payments, paid by product manufacturers or intermediaries, to your broker-dealer or investment adviser arising from the sales of securities, other investments, or annuity/insurance products to you, other than as previously described: (Broker-dealer and/or investment adviser: adequately describe such forms of revenue sharing or other payment arrangements, in the space set forth below):

Ron A. Rhoades, JD, CFP® is the Director of the nationally recognized Personal Financial Planning Program at Western Kentucky University’s Gordon Ford College of Business. A professor of finance, tax and estate planning attorney, investment adviser, and Certified Financial Planner™, he has long written about application of fiduciary law as the delivery of financial planning and investment advice. This article represents his personal views, and are not necessarily the views of any institution, organization, nor firm with whom he may be associated.