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  • Rita Rhodes

Conversation Starter: What do you know about Form CRS?

Here’s a multiple-choice question for you:


What is Form CRS?


A. It is a new form mandated by Regulation Best Interest.


B. It may also be known as a “Relationship Summary” for broker-dealers or Form ADV Part 3 for investment advisers.


C. It is strictly limited to only two pages (or four pages for dual registrants), although the instructions for completion cover 18 pages.


D. It has strict requirements for headings, conversation starters, and informational language that must be included, and that take up the majority of the two-page limit.


E. It is designed to provide important information, but is limited to only specific disclosures and prohibits language beyond the stated scope.


F. It only needs to be provided to retail investors, which are defined as natural persons or legal representatives of natural persons, who receive services primarily for personal, family, or household purposes.


G. It needs to be written in plain English that is easily understandable to average investors.


H. It needs to be delivered to a retail investor before or at the time the retail investor enters into an investment advisory contract.


I. It also needs to be delivered to an existing retail investor client whenever the adviser (i) opens a new account for the client, (ii) recommends the rollover of assets from a retirement account, or (iii) recommends or provides new products or services to the client.


J. The initial form needs to be filed through the Web CRD/IARD between May 1, 2020 and June 30, 2020.


K. It needs to be updated within 30 days whenever any information becomes materially inaccurate, and communicated to existing retail investor clients within 60 days.


L. It can be provided in paper form or electronically, but if in electronic format, charts, graphs, tables, and other interactive features are encouraged (but still limited to the equivalent of two paper pages).


M. It is only required for investment advisers or broker-dealers registered with the SEC, although state regulators may have implemented or may be considering implementing similar disclosure requirements for state-registered advisers.


N. Creating it may require several doses of Advil.


O. All of the above.


Was that the most complicated multiple-choice question you’ve ever seen? Well, this is indicative of how complicated this form is. By the way, the correct answer is O, all of the above.


Just between you and me, I have to admit that I find Form CRS rather perplexing. We already go to great lengths to make sure all of the appropriate disclosures are included in our Form ADV Part 2A, and that it is written in clear, concise, plain English. We make sure this is provided to all clients, and we have them acknowledge that they have received it. We review it and update it every year, and communicate material changes to clients. Why is an additional form necessary?


As I understand it, the SEC felt this form was needed to provide greater clarity to retail investors on the nuances between services provided by broker-dealers and investment advisers. Essentially, it is intended to make it easier for investors to make more of an apples-to-apples comparison of services among financial professionals. Regulators acknowledged that most investors don’t bother to read the Form ADV Part 2A that everyone is supposed to read, and somehow thought this shorter two-page form would be more accessible. Perhaps this is true, but then there are so many requirements and restrictions on the content that most advisers will end up referring readers to their Form ADV Part 2A anyway. In fact, the Form CRS requires that you refer readers to your Form ADV Part 2A. Rather circular.


Now that I’ve filled over a page discussing a measly two-page document, let me sum up by saying that I’ve developed a template for SEC-registered investment advisers who want to create a paper format of Form CRS. Let me know if you’d like a copy of this template to help you start formulating your document. I haven’t developed a template for broker-dealers or dual registrants, as I imagine most brokerage houses will have their own forms.


But what I really wanted to talk about in this article are “Conversation Starters.” No, this isn't the hot new family game that everyone wants for this holiday season. Conversation Starters are a series of questions that must be included in Form CRS. The questions don't need to be answered in the Form CRS (nor can you, with the space limitations), but are intended to help retail investors form questions for their financial advisers to better understand the services they will receive, the fees they will pay, and the qualifications of the financial adviser. If an investor is shopping around for services, the Conversation Starters provide a script that can be used to perform due diligence with various providers.


The SEC really wants to accentuate these Conversation Starters. The instructions for Form CRS state that text features should be used to make the Conversation Starters prominent and more noticeable than other text, by using different fonts or graphics to make them stand out. They need to be eye-grabbing, in other words. If retail investors read the Form CRS, they will definitely notice these Conversation Starters. So you should be prepared to address them.


Although Form CRS is only required for investment advisers and broker-dealers that are registered with the SEC, as investors are performing their due diligence, they may present these questions to state-registered investment advisers as well. Therefore, if you are a state-registered investment adviser, even though you don’t need to worry about Form CRS (yet), you may still want to start thinking about how you would answer the Conversation Starters.


Depending on the size of your firm, you may want to have a script prepared with the Conversation Starters and appropriate responses, so that you have consistency among employees on how the questions are answered. Or perhaps have a prepared brochure that you can give to potential clients that includes the questions and the answers.


These are the Conversation Starters that you should consider:

  • Given my financial situation, should I choose an investment advisory service? Why or why not? [Note: This question is worded slightly differently for broker-dealers and dual registrants, but I'm focusing on investment advisers here.]

  • How will you choose investments to recommend to me?

  • What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?

  • Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me? [Note: This needs to be answered using the sum of $10,000, even if your minimum account size or minimum investment is higher.]

  • How might your conflicts of interest affect me, and how will you address them?

  • As a financial professional, do you have any disciplinary history? For what type of conduct?

  • Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me?

So, get out your thinking cap and start sketching out your thoughts about how to respond to these Conversation Starters.


But, before you expend too much time and energy, you should be aware that several jurisdictions and associations have filed court actions to challenge Regulation Best Interest. There is a chance that, like the DOL’s Fiduciary Rule, this regulation may be modified or overturned, although it’s impossible to predict the likelihood at this point.


As stated before, this is a complicated issue. If you have questions or need some guidance, please don’t hesitate to contact us.

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