Form ADV Basics for New Investors

RIAs Have to Fill Out the Form ADV So You Might As Well Take Advantage Of It!

Filing Out Form ADV
The SEC requires Registered Investment Advisors to fill out the form ADV each year so you might as well take advantage of the treasure trove of fantastic information it contains!. Ronnie Kaufman / Larry Hirschowitz

The Form ADV is one of the most important regulatory disclosures a new investor should know.  It is absolutely vital that you study it in-depth before hiring a Registered Investment Advisor to manage your wealth.  Sadly, many investors have never heard of this document nor do they even know where to look if they wanted to find it.  I aim to change that in the next few minutes because this seemingly technical-sounding stack of papers can uncover a treasure trove of information about the firm to which you are considering entrusting your life savings, inheritance, or trust fund.

 It can help you avoid wealth managers you know don't share your values and give you a roadmap of what to expect before sitting down to your first meeting.

What Is the Form ADV and Why Do Registered Investment Advisors Have to File It?

The Form ADV is a uniform regulatory filing a Registered Investment Advisors must submit to state securities authorities and/or the Securities and Exchange Commission, or SEC, depending upon the specifics of the situation.  It is meant to protect clients of RIAs so they know what they are getting, and with whom they will be working.  (If you need help on that front, check out 4 Things to Look For In Your Search for a Registered Investment Advisor.)  Following changes put in place back in 2011, Form ADV is now made up of two different parts with expanded disclosures, which is good for consumers.

Part 1 of the Form ADV contains information about the business operations of the Registered Investment Advisor.

 It has to disclose its business structure, ownership, managing members, executives, or control persons, and other valuable information including whether or not the RIA itself, or any of the RIA representatives, have been subject to disciplinary actions such as being barred from the securities industry in the past for egregious or illegal behavior.

Part 2 of the Form ADV contains a so-called "plain English" overview of the Registered Investment Advisor's business.  It details product and service offerings, minimum account sizes, business experience of key decision makers, educational attainment of key decision makers, potential conflicts of interest (e.g., if an advisor has flat-fee accounts under management as well as share-of-profit accounts for qualified individuals or institutions, there could be a temptation to allocate the best investment ideas to the pay-for-performance client as it would result in a bigger fee), how potential conflicts of interest are handled (e.g., shares of stock are allocated across the firm by client according to some formula), and fee schedules.  It's important to know how the advisor is getting paid.  Some take a percentage of the market value of the portfolio managed for you.  Others charge hourly fees based on advice rendered.  Some charge a fixed fee (e.g., $10,000 per year). Some markup commissions, securities, and products (e.g., you buy 1,000 shares of The Coca-Cola Company for your account and they take the $5 wholesale commission, charge you $50, and pocket the $45 difference).  Many utilize a combination of these in their business model.

How Frequently is the Form ADV Updated by a Registered Investment Advisor?

Each RIA is required to file an updated Form ADV within 90 days of the end of its fiscal year.  As per current regulatory requirements, RIAs must also provide clients with an annual summary of the updates made to the Form ADV and either actually deliver, or offer to deliver, the changed document along with a supplement that explains whom is making the investment decisions for the client as well as how to get in touch with that person's supervisor or boss in case the client has a concern about the way the funds are being managed.

How Can an Investor Find a Form ADV for a Specific Registered Investment Advisor?

There are several ways you can get a Form ADV for a specific RIA but the two easiest are:

  1. Just ask for it.  Seriously.  They have to give it to you.
  1. Visit the Securities and Exchange Commission Investment Adviser Public Disclosure website.  Use the search tool by the name of the individual wealth manager or the name of the Register Investment Advisor firm itself.

Don't Forget the Form ADV Can't Tell You Everything

Trust your gut.  The Form ADV, as valuable as it is, can't tell you whether you are going to feel uneasy working with a specific Registered Investment Advisor.  Sometimes, you just don't trust, or like, someone and that's okay.  Other times, you might feel as if, despite demonstrated expertise, the RIA representative isn't listening to your needs, concerns, and worries; you're just a piggy bank to be shaken for more fees a few times a year.  Maybe you aren't comfortable holding foreign bonds but they keep trying to get you to buy some German debentures.  Perhaps you don't want to own an annuity but they are pushing them on you at every regular meeting regardless of the line you've drawn in the sand.  Cultural and inter-personal fits matter so if you aren't happy, keep looking.  It's your money.  In most cases, you or someone you loved worked hard for it.  You have to stay within your comfort zone and avoid being pressured into something that doesn't feel right.