FOR FINANCIAL planners and investors who use them, this month marks the changing of the watchdogs. It has opened a hole in the investor-protection net.
Until last Tuesday, investment advisory firms, including financial planners who give investment advice, had been regulated by the Securities and Exchange Commission.
The SEC rarely got around to checking planners, especially the little guys. But at least the planners were making key disclosures on the SEC's form ADV (for "adviser").
The ADV, Part 2, lists the planning firm's services and investment methods, the principles' education and business background, and the way customers are charged. By law, new customers get Part 2 or a brochure with the same information.
Firms also file Schedule D's for each adviser, which details his or her background and disciplinary history, if any.
But now the SEC will no longer oversee planning firms that manage less than $25 million. A law passed in Congress last year limits its jurisdiction to larger firms.
The smaller firms, which account for two-thirds of those now registered with the SEC, will be regulated by the states.
Four states don't register investment advisory firms: Colorado, Iowa, Ohio and Wyoming. Until they do, firms there will continue to report to the SEC.
The other 46 states will still use an ADV, sometimes with additional disclosures. Always ask for it. If your planner has registered, as he or she should, you can get meaningful information about most people who want to handle your money.
But there are holes. The states can regulate only the planners who have an office and at least six clients there. If you're solicited by someone in another state -- in person or by phone -- your own state won't have his or her background on file.
In the past, investors could learn about out-of-state advisers by asking for the ADVs they filed with the SEC. If the advisers weren't registered, something was wrong. But that source of information is on the way out, and the states themselves have no shared database.
With Balkanization -- and with some states less diligent than others about enforcing their own securities laws -- bad stuff can fall through the cracks.
If you're doing business with a larger firm that still reports to the SEC, get its ADV each year. Also ask for your planner's Schedule D. By law, you have to be told only about any disciplinary actions against the planner, but I wouldn't do business with a firm that didn't release the Schedule D's.
If you're using a smaller firm, ask for its state disclosure form, which should include employment history, fees and disciplinary history. If you can't get a form, don't deal with that adviser.
Pub Date: 7/14/97
