When working with a financial advisor, it’s important to understand what services they provide and how they’re compensated. Reviewing your advisor’s Form CRS, also known as a client or customer relationship summary, is a good place to start. This form offers an overview of what to expect when working with an advisor. Advisors and other financial professionals are required to provide clients with a copy of their Form CRS and update it regularly. Besides checking an advisor’s Form CRS, it’s also worthwhile to speak to a financial advisor you are considering engaging.
Form CRS, Definition
In simple terms, this form is a summary disclosure that outlines certain details of how a broker-dealer or financial advisor operates. Regulation Best Interest rules require that broker-dealers and financial advisors maintain an up-to-date Form CRS and make it available to their retail investor clients.
This form is different from Form ADV, which is another piece of documentation that’s required for registered investment advisors. Form ADV is what’s used to register an investment advisor with the Securities and Exchange Commission as well as state securities agencies.
Form CRS has a specific purpose: to help investors understand the nature of the relationship they have with their financial advisor. It’s intended to provide information about a financial advisor or broker-dealer in a way that’s easy to understand, which investors can use to decide which firm or individual advisor they want to work with. Every broker-dealer and investment advisor who’s registered with the SEC has to have a Form CRS.
What’s Included in Form CRS?
For a Form CRS to be considered complete, it has to include disclosures pieces of information. Following the SEC’s guidelines, this form has to explain:
- The types of financial services an investment advisor or broker-dealer offers
- What fees or other costs you’ll pay for those services
- Any conflicts of interest a broker or advisor may have
- What standard of conduct is required by the advisor or broker-dealer
- Any instances of legal or disciplinary action the advisor or broker-dealer has been associated with
- A list of key questions to ask your financial professional when deciding whether to use their services
All of this information is designed to help you make informed decisions when choosing an advisor or broker-dealer to work with. It’s not meant to be lengthy either. The SEC limits broker-dealers and investment advisors to two pages when creating a Form CRS. In the case of dual registrants that outline both brokerage services and investment advisory services in one relationship summary, it can be up to four pages. Form ADV, on the other hand, can go into much more detail in explaining how an advisor operates.
In terms of when you’ll see a copy of this form, your advisor or financial professional is required to give you one when opening a new account or entering into a new contract for investment advisory services. They should also give you access to Form CRS when recommending specific investment products.
You have the right to request a copy of an updated Form CRS at any time. And if the advisor or broker-dealer makes changes to their form they should provide you with an updated copy as well. Many broker-dealers and financial advisors make this form easily accessible by including a link to it on their website.
The SEC requires that any and all information included in a Form CRS be factual and that advisors not omit any key information. Advisors can’t make exaggerated claims or include vague wording that could be misleading. Again, this form is all about explaining the client-advisor relationship in a way that’s clear and easy to understand for the everyday investor.
How to Read Form CRS
If you’re looking for an advisor to work with or you just want more clarity about what your current advisor does, then it’s helpful to know how to read a Form CRS. While individual advisors and firms can format them differently in terms of subheadings or how the information flows, there are certain things the form has to cover for investors.
For instance, when reading this form the first section may be an introduction that identifies the advisor or firm by name. This section should mention the advisor or firm’s SEC registration status and explain what the form you’re about to read covers. Somewhere in the introduction, you should also see a sentence directing you to the SEC’s website at Investor.gov/CRS to learn more about investing and what financial professionals do.
The next section is where you’ll find a breakdown of the advisor’s services. For example, if you’re working with an online brokerage you’ll see a list of the different account types available and mention of what type of securities you can invest in. If the advisor recommends products or services from third-party firms that would be mentioned here. This section may also mention the minimum amount required to open and maintain an account, if applicable.
After the services section, you should find a section explaining the fees the advisor charges. For example, some advisors charge by the hour while others charge a flat rate or a percentage of assets under management. Any transaction fees the advisor charges would also be mentioned here.
Form CRS should also include a breakdown of any legal obligations the advisor has when making investment recommendations or offering advice. This section is where you’ll see mention of any potential conflicts of interest if they exist.
Following this section, there should be an overview of how the firm’s financial professionals make money. This is important to review because you should know if you’re working with a fee-based or fee-only advisor. Fee-based advisors make money by charging their clients fees but they can also earn commissions based on products they recommend. Fee-only advisors, on the other hand, make money solely through the fees their clients pay.
To wrap up the Form CRS, you should see a section that mentions any legal or disciplinary action taken against the advisor or firm, if any. Finally, the concluding section should cover who to contact if you have questions and a list of key questions to ask when working with a financial advisor.
The Bottom Line
A Form CRS can be a useful tool to have if you’re shopping around for an advisor or you’re trying to decide whether to keep using the advisor you have. This form condenses key information about an advisor or broker-dealer and focuses on the most important things to consider. You can use this, along with other tools like FINRA’s Broker Check Tool, to help decide which financial professional is the best fit for your needs and situation.
Tips for Investing
- If you don’t have a financial advisor yet or you’re interested in changing advisors, doing so doesn’t have to be a complicated process. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One important question to ask when choosing an advisor is whether they’re a fiduciary. Advisors who follow a fiduciary standard are legally required to act in your best interests, which influences the nature of the advice you receive. The ethical standards required as a fiduciary would prevent an advisor from recommending investment products or services that benefit them, rather than yourself.
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