Minimum Disclosure by Brokers and Advisers

Regulations intended to provide investors with more information about their financial advisers’ business practices have fallen short, according to Morningstar.

The firm reviewed over 100 of the Relationship Summaries required by the 2020 implementation of Regulation Best Interest (BI). What Morningstar found was that few firms exceeded the minimum requirements to provide investors with all necessary information. This makes it difficult for investors to compare firms with the Relationship Summary as a basis.

Among the observations made by Morningstar were:

The same language was used by different firms in Relationship Summaries. This usage makes it more difficult to differentiate firms.
Information about conflicts of interest repeatedly exhibited confusing language with little elaboration on how opposing priorities are balanced. Details were rarely included. Clarification on what the firm’s incentives were and what steps were being taken to mitigate conflicts were often left out. Overall, the quality of information regarding conflicts of interest information varied.
The description of fees was often neither robust nor presented in a clear manner. Use of identical language among firms was again common, with 71% using boilerplate statements. Even though most firms explained whether they charged fees based on the amount of assets managed or on a commission basis, only 29% of firms quantified these fees.
Compensation programs for financial professionals infrequently indicated commitments to clients. Many firms “simply recited their fiduciary duties to clients or the Regulation Best Interest standard.” Furthermore, 24% of firms failed to clearly state the compensation that financial professionals would receive based on the products or services selected by investors.
Independent broker/dealers and registered investment advisers (RIAs) were more likely to have content that is understandable compared to dual registrants (who provide both brokerage and advisory services).

Regulation Best Interest requires brokers to act in the “best interest” of investors as well as disclose conflicts and fees via Form CRS. Form CRS was designed to provide investors with “simple, easy-to-understand information about the nature of their relationship with their financial professional.” A key portion of the regulation is the accompaniment of a Relationship Summary. This summary should outline the services offered by a firm, the cost of these services, how these services affect compensation of financial professionals and any conflicts of interest.

“Evaluating Form CRS Relationship Summary;” Lia Mitchell, Susan Zhou, Jasmin Sethi and Aron Szapiro; Morningstar, October 2021.