Form ADV: A Detailed Overview

It’s important to do your homework on any financial professional or firm you’re considering going to for guidance. This can help you ensure they have your best interests at heart and align with your goals.

One way you can research a financial advisor is by looking up their Form ADV. This is a document all investment advisors must file with the either the U.S. Securities and Exchange Commission (SEC) or a state securities regulator. It highlights valuable information about a firm or individual’s assets under management (AUM), compensation, and conflicts of interest.

In this article, we’ll help you better understand what Form ADV is and how to use it to verify a professional’s credentials. We’ll offer a detailed breakdown of the main parts that make up the document, as well as where you can go to look it up.

What Is a Form ADV?

Also known as a Uniform Application for Investment Adviser Registration, Form ADV is a document registered investment advisors (RIAs) must fill out and file with either the SEC or their state before registration. A firm must register with the former when they have $110 million AUM. But if they have managed assets of $100 million or less, they must register with any state in which they do business. Additionally, per the de minimis rule, firms with five or fewer clients in states that they do not have an office are not required to register in that state.

Form ADV allows an official, publicly accessible record to exist that shows various details about a firm’s activities and operations. Information you would find on one includes fee structures, disciplinary actions, and overall business practices. Having these aspects about companies allows a heightened level of transparency between advisors and their clients, giving people a better idea of whom they’re trusting to help them with their financial future.

Form ADV Parts

Form ADV comprises three main elements, Parts 1, 2, and 3. Though the information you can find in each one can tend to intersect, they all serve a specific purpose. Part 1, for instance, is for general administrative purposes, while Part 2 holds informational material for consumers.

Below is a rundown of each, including the information they convey:

Part 1: Uniform Application

Part 1 is a fill-in-the-blank and check-the-box questionnaire that either the SEC or state agencies review. It outlines key information about an advisory firm, including:

• Identifying information (name, file number, address, etc.)
• Corporate structure
• Ownership
• Employees
• Client details (i.e., types, number, AUM)
• Compensation
• Whether the firm holds other business roles (e.g., broker-dealer, accountant, lawyer, banker, etc.)
• Conflicts of interest
• Affiliations
• Favored markets and securities
• Disclosures of disciplinary history

Part 1 has two sections, 1A and 1B. 1A is the application every financial advisor firm must complete. On the other hand, 1B is for when an agency applies for registration as an investment adviser with any of the state securities authorities. It highlights various disclosures and the states in which the business serves clients.

Part 2: The Brochure

Part 2 allows you to learn quite a bit about an organization. It’s a client-facing brochure the registered firm must create that contains much of the information provided in Part 1. According to the SEC, this section must be in “plain English.” It must be readily available to prospective clients and be easy to understand. The second part of the form is divided into two subsections, 2A and 2B.

18 items make up Part 2A. Items one through three include a cover page, a list of changes to the material in the form, and a table of contents. The rest of the items provide information the public can use to better understand how an advisor does business. This involves details such as fees and compensation, types of clients they serve, and investment strategies. It also lists any disciplinary actions they’ve received.

Part 2B is a supplementary section to the brochure that spells out background information about every investment advisor employed at the firm. This includes their education, years of experience, or any designations they hold. It may also consist of the same kind of material the rest of the brochure lays out about the business, such as compensation, affiliations, and discipline they’ve received.

Part 3: Relationship Summary

The third and final section of Form ADV is what the SEC refers to as a “relationship summary,” also known as Form CRS. This is for SEC-registered firms that serve and offer advice to retail investors, or average people who buy and sell securities through brokerage or retirement investment accounts. Like the brochure, the summary must be in an accessible, easy-to-read “plain English” format. It must delineate the following, according to the SEC:

• All the services the company offers
• All fees customers must pay
• Possible conflicts of interest
• Standards of conduct employees follow
• Past disciplinary actions
• A list of questions clients should ask
• Additional information, including locations where prospective clients can learn more about the firm.

Importance of Form ADV

Trusting a financial professional to provide unbiased, informed advice can be a massive leap. Therefore, as a client, it’s critical to know who you’re working with and whether they align with your needs and situation. Form ADV helps solve this problem and hold registered advisors accountable, acting as a public window into the credentials, practices, or interests an individual advisor or their firm has.

Because it’s the core document investment advisors file with the SEC, it also works to maintain a level of government oversight over the operations of firms and their representatives. When an organization has filed Form ADV, it means they must agree to comply with the law and follow certain standards of disclosure and conduct.

After checking an agency’s Form ADV, you’ll become better informed on what to expect upon meeting with an advisor. It will deliver insight into how they make money, whether you fit their criteria as a typical client, and how they could help you invest. You’ll also be able to see whether they follow a fiduciary duty, which is often the case if they don’t earn commissions.

How to Find a Firm’s Form ADV

The most mainstream way to check out an RIA’s Form ADV is with the SEC’s Investment Adviser Public Disclosure (IAPD) tool. Once on the site, you can search for an individual or a firm by typing in their name or Central Registration Depository (CRD) number. To filter your search by location, the IAPD also allows you to type in a ZIP code or state. This is especially helpful if a company or representative has a common name.

It’s also not uncommon for advisory companies to include a link or download to their Form ADV on their websites. Often, this will be the easy-to-read brochure section (Part 2A) they’ve assembled for clients.

Frequently Asked Questions

Do robo-advisor firms have to submit Form ADV?

Yes. Because robo-advisors must register as investment advisors, they must file Form ADV with either the SEC or the state in which they operate. Also, like in-person advisors, you can look up a robo-advisor’s document on the IAPD website.

How often do registered advisors have to update their Form ADV?

Firms registered with either the state or the SEC must update their Form ADV yearly. Specifically, they must update both Parts 1 and 2. If there have been any changes from the previous year, they must note them in item two of the brochure, labeled “Material Changes.”

What are some red flags to look for in an advisor’s Form ADV?

Form ADV can be very effective for weeding out professionals who may not prioritize your interests. Be wary if you see any of the following in an advisor’s document:

• Direct conflicts of interest. They’re likely not a fiduciary if they have affiliations with other companies that give them commissions.
• Numerous disclosures. If a firm tends to get in trouble or has lots of grievances, it could be a hint that they’re not running very well.
• Unreasonable fees. Watch out for costs that far surpass industry norms.
• Vagueness. Unclear explanations or descriptions in the brochure could signal a disorganized firm.
• Inconsistent information. The website says one thing, such as contact information or an investment strategy, but the form tells another story.

What are some green flags to look for in a Form ADV?

As we’ve mentioned, Form ADV can help you ensure you find high-quality advisors who practice with care:

• Experienced employees. Form ADV allows you to see the qualifications and experience advisors at a given firm have. In this case, the more on an expert’s resume, the better.
• Transparency. Firms that are consistent and leave everything out in the open are generally more trustworthy than those that try to hide even the most trivial information from clients.
• Reasonable fees. Firms that offer services for logical costs are often more desirable. However, keep in mind that cheap isn’t always the best.
• Clear code of ethics. Be on the lookout for companies that follow a strict code of ethics and hold their employees to a high standard of integrity.
• Ethical and concrete investment philosophy. A firm’s investment philosophy must align with your goals. Form ADV allows you to see details such as this so you can make an informed decision on whether a company is right for you.