How to Spot Conflicts of Interest in a Firm's Form CRS

Before trusting any financial firm with your money, take a few minutes to read their Client Relationship Summary (Form CRS). This simple document can make clear any conflicts of interest or incentives that exist at a firm.

If you haven't read your financial firm's Form CRS, now is a great time to do so. You can find it by searching the firm's name and "Form CRS."

The Form CRS, or Client Relationship Summary, is a brief document that most investment firms must publish as part of their Form ADV. It outlines essential details about the firm including:

• How the firm is registered - as an investment advisor, a broker-dealer, or both.
• Whether they act as a fiduciary on all, some, or none of the accounts they manage.
• How the firm earns money - and whether they receive commissions, kickbacks, or third-party payments.

While the Form CRS is only a few pages long, it's one of the most important documents for understanding how your financial professional operates. Firms can say a lot of things in a sales pitch. The Form CRS will show you what is really happening behind the scenes. Here are three sections to pay particular attention to:

How is the firm registered?

If a firm is registered only as a broker-dealer, or is dually registered as both a broker-dealer and an investment advisor, keep an eye out for language like this:

For brokerage services, we charge a transaction-based fee (commission) every time a trade is made in your accounts. The more trades you make, the more commission we earn. This creates an incentive for us to encourage you to trade often.

This means the firm earns commissions on each trade, creating a potential incentive to generate more trades, but not necessarily a better outcome. If you see frequent trading activity in your accounts, and your firm has a broker-dealer registration, it's worth getting a second opinion to see if unnecessary churning is occurring.

Are there "Third Party Payments?"

This section discloses whether the firm earns money from sources other than its clients. Watch for language like:

We receive compensation from third parties related to certain investment products you purchase, such as mutual funds, ETFs, annuities, and more. This creates an incentive for us to recommend certain products and investments.

This signals a conflict of interest: the person you are working with may make more money recommending certain products, even if those products aren't the best options available to you.

Do they have "Sponsorship Agreements?"

Some firms are paid by fund companies to feature specific products on their platform. Wording to watch out for includes:

Certain sponsors pay us to make their investment products available on our platform. Because we receive payments from these third parties, there is an inherent incentive for us to recommend and invest you in their products.

If you are paying for professional investment management, you probably want recommendations based on your goals - not the firm's revenue opportunities. The Form CRS helps reveal when that line may be blurred.

When choosing a financial professional, make sure they are a fiduciary on all accounts and that their firm is registered only as an investment advisor. This structure reduces certain kinds of conflicts of interest and ensures they are legally required to act in your best interest.

At One Day In July, our advisors are fiduciaries on all accounts. We are paid only by our clients, and our loyalty is always to them first. If you'd like help reviewing your current firm's Form CRS or account statements, contact us. We offer free consultations to help you understand how your money manager is paid and whether their incentives best align with your success.