BrightScope Aims to Beat SEC, Finra Showing Adviser Disciplinary Actions
Brightscope CEO Mike Alfred
Brightscope via Bloomberg
Mike Alfred, co-founder and chief executive officer of Brightscope Inc., said his company is starting a website that will show disciplinary histories for financial advisers.
Mike Alfred, co-founder and chief executive officer of Brightscope Inc., said his company is starting a website that will show disciplinary histories for financial advisers. Photographer: Brightscope via Bloomberg
BrightScope Inc., the firm that rates thousands of corporate 401(k) retirement plans, is starting a website that will show disciplinary histories for financial advisers.
The firm will begin publishing today a database of registered investment advisers and brokers that displays customer disputes and terminations as well as assets under management, and eventually aims to publish performance histories and fee schedules that investors may search, Mike Alfred, co- founder and chief executive officer of San Diego-based BrightScope, said in an interview last week at Bloomberg headquarters in New York.
“We see this as part and parcel of a larger movement to provide transparency for consumers” in financial services, said Alfred.
The site, which is free to investors, has about 450,000 listings on its database, and includes most registered investment advisers and a majority of brokers, Alfred said. The firm will add listings for insurance brokers, who generally are licensed with their individual states, during the next 90 days, Alfred said.
It can be difficult for investors to tell whether the adviser they work with is actually any good at managing money, said Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America.
No Good Source
“It’s not illegal to be not particularly competent,” said Roper, who’s based in Pueblo, Colorado. In financial services, “to be drummed out of the business you do have to be guilty of fraud.”
Currently, “there’s no good source for someone to go to and see ‘This is reasonable, this is what I should expect to pay if my account is this size,’” said Mark Cortazzo, senior partner with Parsippany, New Jersey-based Macro Consulting Group, a registered investment adviser.
About 25 percent of investors are considering leaving their investment advisers in the next year, according to an April survey by New York-based Sullivan, an image-consulting firm, and New York-based market-research firm Northstar Research Partners. Respondents said that better investment performance would be their top reason to consider changing advisers.
“I don’t think most people put a lot of thought into” choosing a financial adviser, said Mark Matson, chief executive officer of Mason, Ohio-based Matson Money Inc., which manages about $3.1 billion. “A lot of it is by referral.”
‘Red Flags’
BrightScope’s listings eventually will show “red flags” for investors, including whether an adviser has any disclosed conflicts of interest and whether he or she maintains custody of client assets, Alfred said. Bernard L. Madoff, the broker and registered investment adviser who pleaded guilty in March 2009 to running a Ponzi scheme, kept control of his clients’ assets rather than using a third-party custodian such as Charles Schwab Corp. (SCHW) or Fidelity Investments.
It’s unclear how BrightScope will be able to publish returns for advisers and brokers while complying with existing regulations about how performance histories may be disclosed, Alfred said. “We’re going to sit with the Securities and Exchange Commission and we’re going to sit with the Financial Industry Regulatory Authority and talk about the regulatory implications,” he said. Finra is the Washington-based independent regulator for the securities industry.
Finra spokeswoman Michelle Ong and SEC spokesman Kevin Callahan declined to comment on the website or its plans.
BrokerCheck
Advisers listed on the site may pay a monthly subscription fee of $100 for each individual adviser or $250 for the firm to add a description of their business, post links to other websites and to insert a headshot or company logo to their page, Alfred said. Advisers won’t be able to edit their disciplinary histories or to remove red flags from their pages, he said.
Investors also can access registered investment advisers’ ADV forms, which disclose regulatory histories and fee schedules, on the SEC’s website. Finra’s BrokerCheck website lets investors download reports showing past disputes with clients and any terminations.
In January the SEC released a study recommending unifying search results for the Finra and SEC databases.
Independent registered investment advisers managed about $1.5 trillion in total assets, representing about 12 percent of all wealth-management assets in the U.S., at the end of 2009, the most recent year for which data is available, according to Boston-based research firm Aite Group. Assets held with independent advisers rose about 1.5 percent during 2009, as assets held with traditional brokers fell about 0.9 percent, to $4.7 trillion, according to Aite data.
Fee Basis
Registered investment advisers may provide investment advice or management and other financial-planning services, typically on a fee basis, and are regulated by either the SEC or state regulators. Brokers may perform similar services on a fee or commission basis and are typically regulated by Finra.
BrightScope manages and maintains a database of about 50,000 defined-contribution retirement plans, which represent about 90 percent of all defined-contribution assets in the U.S.
To contact the reporter on this story: Elizabeth Ody in New York eody@bloomberg.net
To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.
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