why is Financial Profile required?

[GrayHare]

What is the purpose of the "Financial Profile" section that appears on all brokerage account applications? It appears government regulation requires questioning about investment objective, income, net worth, etc. I have been denied the choice to opt out of answering. I assume there's more than mere statistical compilation going on.

I can imagine the answers might better enable an advisor to recommend appropriate investments, but as an investment DIYer I don't want recommendations. I can imagine the responses being used in an attempt to excuse advisor wrongdoing. Additionally, the privacy level afforded the question responses is not made clear; can the answers be used to identify HNW people for marketing purposes? I don't care to be marketed the newest products, services, etc. as such items are often not compatible with a LBYM approach.

 

[MichaelB]

What is the purpose of the "Financial Profile" section that appears on all brokerage account applications? It appears government regulation requires questioning about investment objective, income, net worth, etc. I have been denied the choice to opt out of answering. I assume there's more than mere statistical compilation going on.

I can imagine the answers might better enable an advisor to recommend appropriate investments, but as an investment DIYer I don't want recommendations. I can imagine the responses being used in an attempt to excuse advisor wrongdoing. Additionally, the privacy level afforded the question responses is not made clear; can the answers be used to identify HNW people for marketing purposes? I don't care to be marketed the newest products, services, etc. as such items are often not compatible with a LBYM approach.

FINRA requirements. See the link for complete details. FINRA - Opening a Brokerage Account

What to Expect When You Open a Brokerage Account
If you're reading this, you may be planning to open a brokerage account. You may wish to invest for your retirement or a child's education, or simply to try to grow some cash you have set aside. This publication explains what to expect if you do decide to open a brokerage account, including what information you will be asked to provide, what decisions you will be asked to make, what questions you should ask your broker and what your rights are as a customer of a brokerage firm.

 

[Alan]

Thanks for the link Michael. I think the view is that if a brokerage does not garner a view of your finances and current financial situation, they are more likely to give bad advice.

About the Financial Industry Regulatory Authority






The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. FINRA’s mission is to protect America’s investors by making sure the securities industry operates fairly and honestly. All told, FINRA oversees nearly 4,490 brokerage firms, about 163,640 branch offices and approximately 635,405 registered securities representatives.

 

[MichaelB]

Thanks for the link Michael. I think the view is that if a brokerage does not garner a view of your finances and current financial situation, they are more likely to give bad advice.

I've had issues with this when a brokerage (Schwab or Fido) would not let me purchase a specific bond because it did not meet the criteria I had established when my account was opened regarding investments objectives and risk tolerance. It wasn't a big deal and was easily dealt with, but this is something designed to protect investors from outbound sales of products that do not fit their investing profile.

It would not be a surprise if they ask for more information than required by law and used it to create a marketing profile.

 

[Nords]

What is the purpose of the "Financial Profile" section that appears on all brokerage account applications? It appears government regulation requires questioning about investment objective, income, net worth, etc. I have been denied the choice to opt out of answering. I assume there's more than mere statistical compilation going on.

I can imagine the answers might better enable an advisor to recommend appropriate investments, but as an investment DIYer I don't want recommendations. I can imagine the responses being used in an attempt to excuse advisor wrongdoing. Additionally, the privacy level afforded the question responses is not made clear; can the answers be used to identify HNW people for marketing purposes? I don't care to be marketed the newest products, services, etc. as such items are often not compatible with a LBYM approach.

They don't want to allow you to burn your fingers by accessing inappropriate investments.

Fidelity has five different levels of investment access. At the lowest level you can buy stocks & bonds. At higher levels you can sell covered call options. At the highest level you can sell naked put options. By the time you get up to the highest level you can invest in just about anything, and they give you access to the margin to get yourself into incredible amounts of trouble.

They're also identifying you as an "accredited investor" (able to invest at least $1M, or annual income over $200K, or other income limits for shorter periods of time or with spouse). If you're accredited then you're able to invest in assets not registered for sale to the general public-- private placements and startup companies. In other words you're judged to be experienced enough (not necessarily smart enough) to be on your own, and you can't claim that you were misled by an evil broker.

As far as marketing goes, you can opt out of the marketing efforts and restrict the methods by which they attempt to contact you.

 

[GrayHare]

Interesting the FINRA site states no limits on how the Financial Profiling info can be used. I recall a poster here describing that after applying for an account he began being marketed as a HNW individual. Such profiling might be undesired by those who prefer a stealth wealth approach to FIRE. Wish there were a good way to opt out of such profiling.

 

[Bestwifeever]

The FINRA document says "you'll likely be asked to provide:

Employment status, financial information—such as your annual income and net worth—and investment objectives: Collecting this information helps your broker to fulfill regulatory obligations. For example, if your broker is recommending investments to you, SEC and FINRA rules require that your broker collect this information. In addition, the information can help your broker determine suitable investment recommendations for you."

We did not provide any of the above information when we opened an account this spring with a broker and had no trouble opening the account. I can see that the SS number would be required and decisions about what type of account, etc., but I wonder if many of the questions are just for the firm's own marketing purposes.

 

[Finance Dave]

Interesting the FINRA site states no limits on how the Financial Profiling info can be used. I recall a poster here describing that after applying for an account he began being marketed as a HNW individual. Such profiling might be undesired by those who prefer a stealth wealth approach to FIRE. Wish there were a good way to opt out of such profiling.

I would have to discuss with the advisor (I don't have a brokerage account), but would it be possible to put things like N/A in the fields or "0" or something just to fill in the fields without giving any info? I'm not telling you to lie...as I don't know what the wording is on the form...but maybe there's a workaround.

 

[FinanceDude]

Up until 9/11, most brokerage firms used a one page info sheet. After the Patriot Act, the documentation grew substantially. FINRA has set all sorts of rules that require firms to get this data. We usually use ranges to keep things confidential for folks that are leery.

Our IRA new account kit is 85 pages long, only SEVEN pages ask for info and signatures, the rest are "discolsure pages"...........

 

[jIMOh]

What is the purpose of the "Financial Profile" section that appears on all brokerage account applications? It appears government regulation requires questioning about investment objective, income, net worth, etc. I have been denied the choice to opt out of answering. I assume there's more than mere statistical compilation going on.

I can imagine the answers might better enable an advisor to recommend appropriate investments, but as an investment DIYer I don't want recommendations. I can imagine the responses being used in an attempt to excuse advisor wrongdoing. Additionally, the privacy level afforded the question responses is not made clear; can the answers be used to identify HNW people for marketing purposes? I don't care to be marketed the newest products, services, etc. as such items are often not compatible with a LBYM approach.

The FINRA criteria is designed to protect both the investor and the broker. The broker can only recomend SUITABLE investments for you, suitable based on income, tax situation, risk tolerance and time horizon.

In addition, there is a liquidity concern with some investments. For example if a person is allowed to put too much of their net worth into one investment, that is a flag because the investment might not be liquid.

The information is NOT verified. Meaning if you put down you have $30,000 in savings and a net worth of $300,000, you will receive investment advice based on that information. If you really have $300,000 in savings and $1 M in investments, the biggest consequence is you might get bad advice.

 

[ziggy29]

I suspect that when these brokerages go above and beyond the legal requirements, it's partly for marketing purposes and partly for legal CYA.

 

[jIMOh]

I suspect that when these brokerages go above and beyond the legal requirements, it's partly for marketing purposes and partly for legal CYA.

Agreed. tax rate is needed for things like muni bonds and similar.
Income is needed for things like accredited investor and net worth based investments (hedge funds).

If you hold any other brokerage accounts, that is pure marketing.

The application to open an account with an advisor is MUCH longer than the one to open an individual account is my experience.

 

[FinanceDude]

The application to open an account with an advisor is MUCH longer than the one to open an individual account is my experience.

Which is why I have an 85 page document for my practice and I can open an account on Etrade in 5 minutes or less.........