Journal of Financial Planning: March 2013
Rick Adkins, CFP®, ChFC, CLU, is president and CEO of The Arkansas Financial Group Inc. in Little Rock, Arkansas. He served as the 2003 chair of the Board of Governors of Certified Financial Planner Board of Standards. Email HERE.
In the early years of our firm when revenues, both gross and particularly net, were scant, I taught finance as an adjunct professor to be able to cover my mortgage payment. I was extremely idealistic and had great visions of changing my students’ futures by helping them learn to compute the net present value of after-tax cash flows in complex financial transactions.
Silly me! Imagine my surprise when on the first night of class most of the students told me that the only reason they were in my class was to “check a box.” I had no clue what they meant. They explained that when they came up for their next promotion, one of the critical elements would be whether they had an MBA or not. If they were able to “check the box,” they were still in the game; if they didn’t “check the box,” there would be no promotion.
What they were really telling me was that they didn’t care if they ever learned anything in my finance class, they just needed to pass the class and the others required to get the degree and “check the box,” whether they learned anything or not. I was crushed. I had to quickly accept they would never experience the joy of learning to compute a portfolio standard deviation!
Form ADV: Not a Marketing Tool
Box-checking is such an interesting activity. Let’s face it, it’s very easy to do; it doesn’t take much time or effort, yet it can have significant ramifications. There’s one document that most of us complete each year that extensively uses check boxes: Form ADV. The SEC essentially uses the boxes we check as the basis for our firms’ audits.
In the early days of our firm, we probably saw Form ADV as much as a marketing tool as we did a regulatory tool. If you looked at most firms’ ADVs from the 1980s, lots of boxes were checked. Checking a box simply meant, “Yes, we could do that if you wanted to hire us to try.” After all, we had many initials after our names and had covered the subject at some point in our academic training. There was almost a fear that if we didn’t check certain boxes we weren’t as cool as other firms, thus limiting our firm’s ability to survive.
Over time, we’ve become much more intentional in what we say we do. We view Form ADV as a regulatory document that should clearly indicate what we do and don’t do so that a prospective client doesn’t hire us thinking we do something that we really don’t. The form also helps audits to be more focused. The auditor can more easily see a strong consistency between our actual day-to-day work for clients and what we’ve said by the boxes we’ve checked.
I’m not sure all firms share this approach. Each year, our statewide business journal publishes information on investment advisers in our state. The information it shares is publicly available, obtained from the SEC’s website (which got it from … drumroll please … each firm’s Form ADV).
This information includes a column labeled “financial services” for each firm on the list. Out of the 20 largest firms, 14 indicate on their Form ADV that they offer “financial planning services.” Because I know a fair amount about several of those firms, let’s just say I’m skeptical.
The presence of this check box on the form begs the questions: How does the SEC view the checking of that box? How do they define the term “financial planning services” when they conduct an audit? Do they? More importantly, how do they determine if a firm actually performs “financial planning services? Do they really care?
Be Careful What You Check
Misrepresentation on Form ADV is a huge deal. If you were to check a box related to custody or discretion or your method of compensation, and then in an audit the SEC finds that your practices differ from what you represented on Form ADV, problems will ensue.
What is the standard to which we are held when checking a box on this important form? Is it aspirational? (I hope I get to try that one of these days.) Is it positional? (I hope you’ll be impressed that I’ve said I could do this for you, even though it’s not what I really do.) Or is it real? (This is what I routinely do on an ongoing basis for my clients.)
Personally, I don’t have a clue what the SEC’s position is on any of these questions. I am sure that on questions of fact our answers had better not be aspirational (I don’t actually hold a CPA license or J.D. degree, but I hope to someday) or positional (Our firm doesn’t really manage $100 million in assets, but I’m sure if you added everything up that our clients own, that would be about right and besides, we need that much to be supervised by the SEC). I simply don’t know if this box on “financial planning services” is held to the same rigorous standards as other boxes.
But, let’s play “what if.” What if the SEC determined that accurately checking the box indicating your firm actually performs “financial planning service,” was as important as accurately listing your credentials, your assets under management, or your method of compensation? How might they go about finding you guilty of such a misrepresentation? Here’s a list of possible questions the SEC might pose when conducting an audit of firms that check this box:
Question 1: What financial planning software does your firm use to provide financial planning services?
I can’t imagine trying to provide financial planning services in today’s world without software that considers the achievement of financial goals using tax, cash flow, return, and inflation tables and assumptions under conditions of uncertainty. To do otherwise isn’t planning, it’s posturing. The quality and accuracy of doing it by hand or by spreadsheet could verge on malpractice. So if the answer is “none,” you might not be offering financial planning services.
Question 2: How many of the clients you listed on Part I of Form ADV have ever had something that might loosely be called a financial plan prepared by your firm? Please provide me with a copy of each of those plans.
In our experience, auditors will read the financial plans your firm has prepared. Although they are generally looking for what advice was actually offered and how that advice might have been carried out, they could just as easily use that to confirm you indeed are performing financial planning services. TIP: If you’ve check the box, don’t tell them you don’t have copies of any plans; that might raise a red flag.
Question 3: How do you monitor your clients’ progress toward the goals they shared with you initially and over the subsequent years as they have been served by your firm? Please provide me with copies of correspondence or meeting notes where these plans and advice were updated over the years.
If financial planning services are actually being performed, there should be a clear paper trail. Here’s where CRM and document management programs are invaluable for documenting what was advised, performed, or put off and why. Financial planning isn’t an event or a transaction; it is a dynamic process that covers a lifetime. So, just as an adviser who checks the box for “portfolio management for individuals, businesses and/or institutional clients” would be expected to monitor his or her investment portfolios, you might imagine that someone checking the “financial planning services” box might be expected to monitor the financial planning services he or she has provided.
These are just three examples of questions that might be developed by an SEC auditor to determine whether you and I are accurately checking this box on Form ADV. I’m sure there are others they might use; these are simply the low-hanging fruit.
For too long financial planning has been the “we just throw that in for free” service that some firms say they provide but seldom do. If financial planning is ever going to be taken seriously as a profession, these services must be intentional, routine, updated, and systematic—not anecdotal or ad hoc. If they aren’t, maybe the box needs to be taken off the form.