Updated on Monday, July 13, 2020

When researching investment advisors, one of the best tools at your disposal is Form ADV, paperwork that registered investment advisors must file with the Securities and Exchange Commission (SEC). The filing, which contains two parts, includes a vast amount of information about an advisory firm, including its services, client base, fee schedule and any disciplinary actions on its record.

Let’s take a look at Form ADV and how it can help you decide if an investment advisor is right for you.

What is Form ADV?

The Form ADV is officially called the Uniform Application for Investment Advisor Registration. The SEC requires this registration document from investment advisory firms (including robo-advisors) that manage at least $25 million in assets. Not only is filing Form ADV required to register with the SEC, but advisors must update their filing each year.

Advisors with less than $25 million under management are exempt from filing Form ADV. Instead, these firms can register with other regulatory authorities; however, if they want to be registered with the SEC, filing Form ADV is required.

In general, Form ADV filings can help investors gain information about who owns the company, the services the firm provides, what fees clients may pay and if there are any disciplinary actions against the firm, its affiliates or its employees. In other words, viewing a firm’s Form ADV is a way for you to evaluate a financial advisor to see if they are a good fit.

What information you can find in Form ADV

Information in Form ADV is presented in two sections. Part 1 is a standardized fill-in-the blank form that contains information about the investment advisory business and how it operates, while Part 2 is basically a brochure that provides in plain language descriptions of the types of services offered, how much those services cost, the investing strategies used and the details of any disciplinary actions you need to be aware of.

Form ADV Part 1

Form ADV Part 1 offers information about the advisor in more of a list or check-box style format. You can easily see basic identifying items for the investment advisor, including:

• Firm name
• Office locations
• Other contact information
• Assets under management (AUM)
• Total number of employees
• Types of clients served by the firm
• Fee types charged
• Advisory services offered
• Any other business activities, including real estate or accounting
• Disciplinary and regulatory disclosures

All of this information can help you figure out the basics of an investment advisor. One of the most important sections of ADV Part 1 is the disclosures, which is always Item 11 in the document. This section provides information on whether an investment advisor, its affiliates or any of its employees has faced civil, regulatory or criminal charges over the last 10 years.

Form ADV Part 2

While the information in Part 1 is useful for an overview, what you find in the Form ADV brochure can be even more helpful as you seek to answer questions about a financial advisor. Rather than just providing information, the brochure provides context. The two major parts of Form ADV Part 2 are divided into “a” and “b” designations.

Form ADV Part 2a

This is the main Form ADV brochure. When you read this portion of the ADV, you’ll find information that includes:

• How the business is run: You’ll get details on how the business operates, including who owns the firm and the types of services it provides.
• Who the firm serves: The brochure will provide more information on the client types the firm is capable of serving, as well if it has a minimum investment requirement.
• Fees and compensation: You’ll get greater detail on the fee structure for the advisory business in the brochure, including how it charges for specific services. You might even see published fee schedules detailing the exact rates the firm charges, though firms may also provide estimates.
• How investments are chosen: The Form ADV brochure also includes information on the types of investments used and the strategies involved in putting together portfolios. The different analysis methods the advisor relies on are also detailed in Form ADV Part 2a so that you understand the way the advisor evaluates investment opportunities.
• Risks involved: The brochure also requires investment advisors to spell out the risks of different investments and strategies it uses. If something is out of the ordinary and could increase your risk, that’s also shared in this section.
• Ethics: Investment advisors are also required to describe a code of ethics and point out where a more detailed version can be found. In addition to providing this code, an advisor also uses the Form ADV brochure to describe any potential conflicts of interest it may have and how they deal with those conflicts.
• Disciplinary disclosures: There is also a section for disciplinary disclosures in Form ADV Part 2, in addition to Part 1. The brochure may include more color on the events disclosed in Part 1. Information is considered “material” to clients if they happened within the past 10 years.
• Brokerage practices: Finally, ADV Part 2 requires firms to provide information about the different practices a brokerage might engage in, such as using a third party for research or bundling trades together to reduce costs.

Form ADV Part 2b

In addition to Part 2a, there is also a Form ADV Part 2b, which is known as the “brochure supplement.” Clients can get an idea of who is managing their investments and providing advice for their portfolios.

Some of the information you find in Form ADV Part 2b includes:

• Advisors’ backgrounds: You can get information about an individual advisor’s background and experience, including their post-secondary education and any business experience they’ve had in the last five years.
• Employee supervision: If you’re dealing with an individual team member, the investment advisory firm must detail the supervision methods used and how the advisor is monitored.
• Business activities: If there are business activities the advisor is involved with, along with associated conflicts of interest, those must be disclosed. Different compensation structures, such as special commissions or performance bonuses, are also disclosed in this portion of the Form ADV.
• Additional compensation: There might be other types of compensation received by individuals, such as a sales award, that can provide benefit to the advisor for the services they offer. This is included in Form ADV Part 2b.
• Disciplinary disclosures: Once again, disciplinary action and legal actions specific to an individual must be disclosed.

How to access Form ADV filings

Most firms include a link to their Form ADV on their websites. However, if you don’t see it there, you can find it using the SEC ADV search. Follow these steps to access a firm’s filing:

• • Visit the Investment Adviser Public Disclosure (IAPD) website: The IAPD website serves as a database of investment advisors in the United States. It functions as the SEC investment advisor search.
  • Form ADV search: Once you’re on the IAPD website, go to the search bar at the top and enter the name of a firm. You can also search by city or zip code. If you know the advisor’s Central Registration Depository (CRD) number, you can use that as well. The CRD is maintained by the Financial Industry Regulatory Authority (FINRA) and assigned to those in the database as an easy way to search for advisors and firms.
  • Select “More Details”: Once you get your search results, you can click for more details on an individual firm. On the firm’s summary page, you can view information about the firm’s registration status or click the tabs at the top to view its Form ADV Part 1 or 2.

In addition to the SEC search tool, it’s also possible to get more information on a firm or advisor by visiting the FINRA BrokerCheck website, which also provides details about disciplinary disclosures.

Using Form ADV in your search for a financial advisor

If you have questions about how a financial advisor or investment firm operates, Form ADV can be a big help. The paperwork collects important information about the firm or advisor in one place, assisting with your research and comparison-shopping process as you look for an advisor who is right for you.

For example, you can see which kinds of clients the advisory firm focuses on serving, and whether you might meet minimum investment requirements. Additionally, the ADV fees section can help you get a feel for how an advisor charges for their services, such as if they are fee-only or fee-based. This way, you’ll know before you start working with an advisor if they have any potential conflicts of interest or may be financially incentivized to recommend certain products. Having this information on hand can help you to act as a more discerning investor.

It’s also important to know whether the firm or advisor has any disciplinary disclosures and what the nature of those disclosures is. If you notice flagrant issues or repeat problems, that might be a sign that you don’t want to work with a firm. Many firm websites won’t go into details about that information in a highly visible place, so it’s important to look at the ADV form.

Of course, Form ADV should only be one way in which you evaluate an advisor. Also make sure to ask plenty of questions and gauge if you think the advisor is someone you could see yourself working with.

Form ADV FAQ

Source: https://www.magnifymoney.com/blog/investing/form-adv-financial-advisor/