More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
Independent registered rep David Sterling was infuriated last month when a BrightScope Advisor Pages salesman called to see if he wanted to pay a fee to manage the information on the Web page that describes Sterling’s business.
Until then, Sterling wasn’t aware that there was such a page. But when he checked it out, he discovered that anybody who looked him up on BrightScope would find a red mark against his name and a link to the Financial Industry Regulatory Authority’s BrokerCheck, where FINRA lists what Sterling believes is an out-of-date and irrelevant report on his long-resolved dispute with a contractor over payment on a kitchen remodeling job.
“For just under $1,000 per year I can subscribe to BrightScope so that I can have access to and edit information gathered about me. Of course, the gentleman went on to explain how valuable this option is to my business and branding. What a farce,” Sterling wrote in an complaint emailed to ThinkAdvisor.
But while advisors such as Sterling are upset about BrightScope's sales methods and online business model, others in the advisor industry say that's exactly how the website is supposed to work.
One such fan of BrightScope is Chip Roame, managing partner of industry consultant Tiburon Strategic Advisors, who calls BrightScope an innovative disruptor. “BrightScope will disrupt the advisor industry, and become a portal for advisor data,” said Roame when commenting on Michael Kitces’ decision in April to join BrightScope’s advisory board. Kitces, a partner with Pinnacle Advisory Group, publishes The Kitces Report financial planning blog and is a regular speaker at industry events. He also is a contriubtor to ThinkAdvisor.
Morningstar Is BrightScope’s Role Model
BrightScope officials, too, have argued the merits of online transparency since their launch of Advisor Pages two years ago, and they point to Morningstar as their role model.
BrightScope CEO and co-founder Mike Alfred said last week that he and his team of executives have engaged in regular discussions with officials at Morningstar for several years. Alfred described BrightScope as the Morningstar of financial distribution channels, because it intends to democratize information about advisors and 401(k) plans and make those markets more efficient.
“I think our business model is pretty much misunderstood,” Alfred said. “But we’ve seen how Morningstar has evolved since 1984. Although Morningstar had people screaming when it was new, the service that Morningstar offers today is huge. Morningstar drives real consumer decision-making, and now the asset managers have to be users of Morningstar because between 70% and 80% of the mutual funds that sell the most have Morningstar ratings of four or five stars. If you’re rated two stars, you’re probably not moving flows. That’s powerful.”
Alfred said his privately held company has almost 70 employees. Though he wouldn’t reveal BrightScope’s market cap or revenues, he said the firm has been cash flow positive for three straight years, with more than 60% revenue growth every year. He said the public website represents only 3% of what’s going on at BrightScope, at the very front end of the business, and the revenue is generated at the back end through software and data subscriptions sold to large asset managers, recordkeepers, large plan sponsors and financial advisory firms in the RIA, wirehouse and IBD channels.
When told of Sterling’s complaints, Alfred said his firm is building out additional functionality to benefit non-subscribers. “We’re trying to make it more inclusive so that advisors who don’t use the subscription service can still get something out of it,” he said in a phone interview.
‘When I Got the Solicitation, I Felt Painted Into a Corner’
But Sterling, who in addition to being a registered rep is a practicing attorney and vice-chairman of the American Bar Association’s Insurance and Financial Planning Committee, expressed concern in a separate phone interview that any consumer who checks him out online will see the red mark against his name in the BrightScope regulatory disclosures section and not even bother to do further due diligence on FINRA’s BrokerCheck site.
Further, Sterling said, he resented feeling forced to pay a fee to clear his name.
“It felt like a solicitation that’s so poorly viewed in the finance industry, where you get a sales pitch in a cold call,” he said. “The foundation of my concern centers on the question of the fiduciary issue. Compliance is a way of life for me, and a lot gets lost in translation. That’s the concern I have with all these online digital deals. I laughed when I told a client about the kitchen repair, but I don’t have the opportunity to do that on BrightScope. When I got the solicitation, I felt painted into a corner. Whether you like it or not, you’re a part of the database.”
Alfred disagreed with David Sterling’s argument that online consumer searches of advisors should be viewed as a problem.
Kitces: BrightScope Does a Better Job Than Regulators
Financial advisor Kitces, meanwhile, believes that Sterling’s complaint of a red mark against his name for a kitchen repair payment is a perfect example of why BrightScope should help clean up the financial services industry.
“This red mark has been on his record since FINRA put it there. The only difference is that Brightscope has made it easier to find,” said Kitces, who admitted to disliking BrightScope’s business model until he studied it closely. “If his complaint is that FINRA’s BrokerCheck shows an infraction that he doesn’t like, he should take it up with the regulator.”
The “awkward reality,” Kitces asserted, is that many advisors aren’t doing a very good job of filing their Form ADV when they submit it personally to their regulator. “Frankly, hardly any consumers actually go to regulators. That’s why I’m a fan of BrightScope, because they’re doing a better job than the regulators at getting regulatory information to consumers.”
Kitces added that he expects to see a backlash against FINRA as more advisors go online and find what they feel are unfair infractions against their record. He pointed to a June 13 Reuters story that says FINRA soon expects to send the Securities and Exchange Commission a proposal to make it easier for brokers to erase certain black marks from their records.
“BrightScope is helping to unearth these regulatory infractions that technically are public but nobody can find in the real world,” Kitces said. “Nobody had ever noticed that David Sterling had a regulatory infraction, not even David Sterling, until he saw it on BrightScope.”