The Form ADV is publicly available paperwork that must be filed with the U.S. Securities and Exchange Commission (SEC) by all financial advisor firms with more than $25 million in AUM. Form ADV includes dozens of pages of information about a firm, including its fee structure, total assets under management, other business activities, any disciplinary issues on record and more. It is a great form of reference when you are deciding upon a financial advisor to work with.
What is Form ADV?
Form ADV is officially called the Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Adviser. Form ADV includes two parts, both of which provide detailed information about the firm. Part I is a fill-in-the-blank form, and Part II is a brochure written in prose. The first part contains basic facts about the firm, like its fees, client types, assets under management and any disclosures. The second part is more of a narrative about the firm that explains its services, investing approach and any conflicts of interest.
Registered advisors must update their Form ADV annually. The North American Securities Administrators Association (NASAA), backed by the Financial Industry Regulatory Authority (FINRA), reviews the document and approves any changes.
While a firm’s website may be a good resource, Form ADV takes a deeper dive. The SEC paperwork provides information that most firms don’t provide on their websites, such as whether they have any disclosures, charge performance-based fees or earn commissions from selling products to clients. It may not always be clear when a firm last updated its website, but firms must update Form ADV annually.
Understanding Form ADV Part 1
Part 1 requires information about the investment adviser’s business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the adviser or its employees. Part 1 is organized in a check-the-box, fill-in-the-blank format. The SEC reviews the information from this part of the form to manage its regulatory and examination programs.
Form ADV Part I is divided into at least 12 items. The first section establishes basic information about a firm, including its legal name, the name it’s doing business under, its address, website and phone number.
Items 3 through 7 provide additional information for prospective clients. This is where the firm lists:
- Total assets under management
- Total number of accounts
- Number of employees serving in an advisory function
- Percentages of each client type it serves
- Compensation Agreements (the fees it charges for its services)
- Advisory activities (whether it provides financial planning, investment management, etc.)
- Other business activities (whether it’s also broker-dealer or an insurance broker)
An additional important section is Item 11. In this section, the firm reveals whether it has any disclosures on its record. If it does, the firm must state what its offenses were and whether any supervised persons were involved.
Understanding Form ADV Part II
Part 2 requires investment advisers to prepare narrative brochures that include plain English disclosures of the adviser’s business practices, fees, conflicts of interest, and disciplinary information. The brochure is the primary disclosure document for investment advisers and must be delivered to advisory clients.
Part II: Items 1-8
This section is often referred to as “Part 2 Brochures.” The first eight items of Form ADV Part II typically contain the most relevant information for prospective clients. The first few items include the cover page, any changes that have occurred since the firm’s last filing and the table of contents. The true beginning of Part II is Item 4, which offers an overview of the firm. This is where you can find the firm’s founding year, its owners and the services it provides.
Items 5 and 6 cover the firm’s fees. Item 5 outlines the exact fees a firm charges for its various services. Item 6 makes clear whether the firm charges performance-based fees or offers side-by-side management.
Item 7, where the firm describes its typical clients and often lists its account minimum. Item 8 provides a deep dive into the firm’s methods of analysis and investment strategies, as well as a warning of the risks involved with investing.
Part II: Items 9-18
These items provide information about the firm’s inner workings and policies. Item 9 provides more details on any disciplinary information, while Item 10 discloses any other financial industry activities and affiliations. Typically, Item 10 will disclose whether the firm earns commissions from selling insurance products or securities.
Item 11 is the firm’s code of ethics and Item 12 details a firm’s brokerage practices. The remaining sections outline a firm’s policies on account reviews, client referrals, custody of clients’ assets, voting client securities and any other relevant financial information.
Understanding Form ADV Part III
Part 3, the “relationship summary,” requires SEC-registered investment advisers that offer services to retail investors to prepare a brief plain English summary about the types of services the adviser offers, the fees and costs clients will have to pay for those services, the conflicts of interest the adviser may have, the required standard of conduct, any legal and disciplinary history, key questions to ask the adviser, and references to where clients can find more detailed information about the adviser and the services they offer.
How To Get a Firm’s Form ADV
Form ADV is publicly available through the SEC’s website (https://www.sec.gov/). You can search for individual advisors and advisory firms by either the firm or advisor’s name or their CRD number. This number is assigned to every registered representative licensed to sell securities in the U.S. CRD stands for Central Registration Depository, a database that contains information about firms and brokers.
Many firms also provide a link to their Form ADV on their websites. Any registered representative should be able to produce a copy of this paperwork if you request it.