Academic journal article Journal of Accountancy

Choose Wisely: New Brochures Can Help CPAs Vet Investment Advisers

Academic journal article Journal of Accountancy

Choose Wisely: New Brochures Can Help CPAs Vet Investment Advisers

Article excerpt


* CPAs can perform due diligence on registered investment advisory firms and their representatives with the help of brochures the SEC recently began requiring advisory firms to produce. CPAs who refer clients to investment advisers or retain them while acting as trustees should carefully review these brochures.

* The first thing CPAs should evaluate while studying the brochures is whether the services the investment adviser provides fit the needs of their clients. CPAs also should focus on risk, conflicts of interest, and other red flags, such as disciplinary matters.

* When acting as trustees, CPAs who already have chosen investment advisers should review the brochures to make sure they don't contain surprise disclosures that would cause them to discontinue the relationship.

* It's important to thoroughly evaluate any conflicts of interest revealed in the brochure. Studies show that the average person does not understand that some financial advisers are not conflict-free fiduciaries. CPAs possess the requisite professional skepticism to determine when an investment adviser's conflicts would cause problems for their clients.


Disclosures mandated in 2011 by the SEC help investors become more informed about the financial advisers they work with or wish to retain. CPAs can use them as part of their due-diligence process.

CPAs will be viewed as fiduciaries, according to Walter M. Primoff, CPA/PFS, former deputy executive director of the N.Y. State Society of CPAs and co-author of CPA Guide to Opportunity. "Like attorneys, [CPAs] have always had more malpractice exposure than most others in the wealth management arena," he said. For this reason, it is important that CPAs perform the necessary due diligence before making a referral to a financial adviser or retaining an adviser when acting as a trustee. To this end, reviewing an adviser's newly mandated SEC disclosure documents can provide a wealth of key information. The documents serve as a road map for the CPA to follow to unearth comparable information from advisers who are not subject to these rules.

The new rules recently were adopted by the SEC under the Investment Advisers Act of 1940 (the Advisers Act) to provide advisory clients with clearly written, current disclosure of the business practices, conflicts of interest, and background of investment advisers. The rules require registered investment advisers, including CPAs who act as such, to provide clients with two narrative disclosures. Form ADV, Part 2A, also called a "Brochure," requires firms to answer 18 items in a prescribed order. Form ADV, Part 2B, known as the "Brochure Supplement," ("Supplement") with six prescribed items, focuses on the financial adviser who interacts with the client. Most advisory firms must have filed their Brochures with the SEC and delivered them to clients by May 31, 2011. Brochure Supplements are not filed with the SEC, but must have been delivered to clients by Sept. 30, 2011.


Importantly, these disclosure rules also apply to "almost all" major broker-dealers, according to the SEC. Firms such as Merrill Lynch, Morgan Stanley, and UBS are now "dually registered." While conducting their primary business activity as broker-dealers, they are regulated under the Securities and Exchange Act of 1934 (the 1934 Act). When their "registered representatives" sell investment advisory services such as managed accounts, they are regulated under the Advisers Act and their representatives are referred to as "adviser representatives."

One dually registered firm cautions its customers in writing that investment advisory (asset-based) and brokerage (transaction-based) services are two distinct service models governed by different laws and contracts with the customer. The firm explains that when it acts as a customer's broker-dealer, it does not enter into a fiduciary relationship with the client and is not held to the same legal standards as when it provides investment advisory services in a fiduciary relationship. …

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