Client relationship summary

What Is a Client Relationship Summary?

A client relationship summary, often referred to as Form CRS, is a standardized, concise document that investment advisers and broker-dealers are required to provide to retail investors. This document, falling under the umbrella of financial disclosure and regulatory compliance, aims to help investors understand the nature and scope of services offered by financial firms, enabling them to make informed decisions about their investment relationships³⁰, ³¹. The client relationship summary highlights key information such as the types of services available, associated fees and costs, potential conflicts of interest, the firm's standard of conduct, and any relevant disciplinary history²⁸, ²⁹.

History and Origin

The client relationship summary (Form CRS) emerged as a direct outcome of the U.S. Securities and Exchange Commission (SEC)'s efforts to enhance investor protection and transparency within the financial services industry. On June 5, 2019, the SEC adopted Regulation Best Interest (Reg BI) alongside new rules and forms, including Form CRS²⁷. This regulatory package was designed to clarify the standards of conduct for broker-dealers and investment advisers when serving retail investors²⁶. The requirement for firms to deliver the client relationship summary became effective on June 30, 2020, with existing clients receiving the summary by July 30, 2020²⁵. The SEC mandated that the form be no more than two pages (four pages for dually registered firms) and written in plain English to facilitate easy comprehension and comparison among different firms²³, ²⁴.

Key Takeaways

• The client relationship summary (Form CRS) is a mandatory, concise disclosure document for retail investors.
• It provides crucial information about a financial firm's services, fees, conflicts of interest, and disciplinary history.
• The SEC adopted Form CRS in 2019 as part of a broader regulatory package, including Regulation Best Interest, to enhance investor understanding.
• Firms must deliver Form CRS to new and prospective clients and provide updates for material changes.
• The client relationship summary helps investors compare different firms and make informed decisions about their financial relationships.

Formula and Calculation

A client relationship summary is a qualitative disclosure document and does not involve specific formulas or calculations. Its purpose is to present information clearly and concisely, rather than to provide a quantitative analysis.

Interpreting the Client Relationship Summary

Interpreting the client relationship summary involves carefully reviewing its sections to understand the key aspects of the relationship with a financial professional or firm. Investors should pay close attention to the "Types of Services" section, which outlines whether the firm offers advisory services, brokerage services, or both, along with a description of common account types²¹, ²². The "Fees and Costs" section details how the firm and its professionals are compensated, including commissions, advisory fees, and other charges¹⁹, ²⁰. Understanding the fee structure is crucial as it directly impacts investment returns.

Furthermore, the "Conflicts of Interest" section explains situations where the firm's interests might not align with the client's, and how those conflicts are managed¹⁸. The "Standard of Conduct" section clarifies the legal obligation owed to the client (e.g., fiduciary duty for investment advisers)¹⁷. Lastly, reviewing the "Disciplinary History" allows investors to check for past regulatory actions against the firm or its professionals¹⁶. The SEC also provides resources like Investor.gov/CRS to help investors understand and compare these summaries¹⁵.

Hypothetical Example

Imagine Sarah is considering two financial firms, "Capital Growth Advisers" (CGA) and "WealthWise Brokerage" (WWB), for her retirement savings. She obtains a client relationship summary from each.

CGA's Form CRS states they are a registered investment adviser and act under a fiduciary duty, meaning they must act in Sarah's best interest. Their services include comprehensive financial planning and continuous asset management, with fees charged as a percentage of assets under management. It discloses a potential conflict if they recommend proprietary funds, but explains how they mitigate this.

WWB's Form CRS identifies them as a broker-dealer operating under Regulation Best Interest, requiring them to act in Sarah's best interest when making recommendations. Their services are primarily transactional, involving buying and selling securities, with compensation through commissions on trades. Their Form CRS notes that while they suggest suitable investment strategies, they do not offer ongoing monitoring unless a separate agreement is made.

By comparing these two client relationship summaries, Sarah can clearly see the differences in services, compensation structures, and standards of conduct, helping her choose the firm that best aligns with her needs: ongoing advice (CGA) or transactional services (WWB).

Practical Applications

The client relationship summary serves several critical practical applications in the financial services landscape. For retail investors, it acts as a primary tool for initial disclosure, offering a standardized format to compare offerings from various firms, whether they are investment advisers or broker-dealers¹⁴. This comparability helps investors understand the different business models, service types, and fee structures prevalent in the industry¹³.

For financial firms, preparing and maintaining an accurate client relationship summary is a core regulatory obligation. It requires them to clearly articulate their services, compensation, and potential conflicts, fostering greater transparency. The SEC actively monitors compliance, and failures to timely file or deliver Form CRS have resulted in enforcement actions against firms¹². This underscores the importance of the client relationship summary as a cornerstone of investor protection and regulatory adherence. Further guidance on the requirements for firms can be found through resources like the Financial Industry Regulatory Authority (FINRA)¹¹.

Limitations and Criticisms

While the client relationship summary is designed to enhance investor understanding, it does face certain limitations and has drawn some criticisms. One challenge lies in ensuring that retail investors genuinely read and comprehend the information presented, despite the SEC's efforts to mandate plain English and a concise format¹⁰. The effectiveness of any disclosure ultimately depends on investor engagement.

Another critique revolves around the inherent complexity of financial products and services, which can make it difficult to condense all relevant information into a two-to-four-page document without omitting details that some investors might deem critical. Although the Form CRS includes references to more detailed information (such as a firm's Form ADV Part 2A brochure), investors may not always seek out these additional resources⁸, ⁹. Furthermore, some observers have noted that while the Form CRS aims to highlight the differences between brokerage and advisory services, the nuances of varying standards of conduct—such as the "best interest" standard for broker-dealers versus the fiduciary duty for investment advisers—can still be challenging for a non-expert to fully grasp from a brief summary.

#⁷# Client Relationship Summary vs. Form ADV Part 2A

The client relationship summary (Form CRS) and Form ADV Part 2A are both crucial disclosure documents provided by investment advisers, but they serve distinct purposes and have different levels of detail.

While the client relationship summary provides a high-level overview to aid in initial decision-making, Form ADV Part 2A offers the extensive details necessary for a thorough understanding of an adviser's operations and serves as a foundational disclosure document.

FAQs

Who is required to provide a client relationship summary?

Registered broker-dealers and registered investment advisers that offer services to retail investors are required to provide a client relationship summary.

#⁶## When will I receive a client relationship summary?

You should receive a client relationship summary when you open a new account, or before or at the time you enter into an investment advisory contract. Firms are also required to send an updated summary if there are material changes to the information.

#⁴, ⁵## What kind of information can I find in a client relationship summary?

A client relationship summary includes information about the types of services offered, the fees and costs you will pay, potential conflicts of interest, the firm's legal standard of conduct, and any disciplinary history of the firm or its financial professionals.

#³## Where can I find a firm's client relationship summary?

Firms are required to post their current client relationship summary prominently on their public websites, if they have one. Yo²u can also find relationship summaries and other information about firms and financial professionals using the free search tool on Investor.gov/CRS, maintained by the SEC.¹