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Getting the Scoop on Investment Advisers

NEW YORK -- If you work with a financial planner, some valuable new disclosures will be coming your way. Thanks to a law just passed by Congress, plus a new initiative by state regulators, you'll be able to learn a lot more about the person who guides your investment decisions.

That is, if you're lucky enough to have the right adviser or live in the right state. In 19 states -- Alaska, California, Colorado, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Missouri, New Hampshire, New Jersey, New York, Ohio, Tennessee, West Virginia, Wisconsin, and Wyoming -- investors will have to press their state legislators to get the disclosures they deserve.

The new rules cover investment advisers. That doesn't mean stockbrokers. You already have access to a stockbroker's background and disciplinary history, just by calling your state's securities commission.

Investment advisers manage your assets or advise you on how to manage them. Generally speaking, they're financial planners. They evaluate your total financial situation and advise you on what investments to make.

You can already dig up the background on some financial planners if you know what to ask for or where to look.

Investment advisers are required to register with the Securities and Exchange Commission. They disclose their training, employment history, investment approach and official disciplinary history on Form ADV, Parts 1 and 2 (ADV means "adviser"). You should ask the planner for his or her ADV, before signing on as a client. Some planners give it to you automatically.

There's just one hitch. An ADV covers an investment-advisory firm, not an individual.

If your planner basically works alone, his or her record is the firm's record, too. But you don't get individual information on planners who work for larger firms. The firm's record is pertinent, but doesn't tell you enough. Your state securities commission might have the adviser's personal background, but not necessarily.

What's more, no one generally checks on whether the advisers are telling the truth. The SEC reviews smaller firms an average of once every 44 years. Larger firms may be checked every seven or eight years.

Two improvements are coming down the pike:

1. Advisory firms that manage $25 million or more will continue to report to the SEC and fill in ADV forms. However, these forms will be expanded to include customer complaints and arbitrations. That's valuable information for a potential new client to have.

At the behest of Rep. Edward Markey, D-Mass., the SEC will also maintain a toll-free hotline for ADV information. It should be up and running in about a year, Markey says, although the SEC has no timetable yet. An Internet connection will follow.

Firms managing less than $25 million will no longer file ADV forms. Instead, they will report to the states. So will individual advisers who work for financial-planning firms of any size.

2. The states have hitched up with the National Association of Securities Dealers (NASD) in Washington, D.C., which oversees the conduct of stockbrokers. The NASD also maintains the Central Registration Depository (CRD), which contains a file on every stockbroker and brokerage firm.

These files are currently being overhauled to improve your access to information. The new CRDs will cover not only a broker's background, in detail, but also pending customer complaints alleging losses of $5,000 or more and arbitrations settled for $10,000 or more.

Sometime next year, the 31 states (plus Washington, D.C.) that license investment advisers will require them to have a CRD file, just as the stockbrokers do, says Neal Sullivan, executive director of the North American Securities Administrators Association in Washington, D.C. You'll be able to access that file by calling your state securities commission.

Nineteen states, however, don't license financial planners who give investment advice, set no competency standards and don't require them to file any public information, Sullivan says.

In these states investors can still get the ADV forms filed with the SEC. But they won't be able to check up on small firms or on the complaint record of individual advisers.

Even in the 31 states that license planners and advisers, the securities commission may not have much of a budget for oversight. By and large, however, the SEC hasn't been examining small firms, either.

The new rules allow some customer oversight. You'll be able to check the records yourself. The SEC might consider merging its ADV records into the CRD, says Robert Plaze, associate director of the SEC's division of investment management.

The weak reed remains the states with lax or zero regulation, or no money to enforce the authority they have.

Jane Bryant Quinn welcomes letters on money issues and problems but cannot offer individual financial advice.