Form ADV

Understanding Form ADV

Any investment management or advisory firm that wishes to do business as a registered investment adviser (RIA) must register with the U.S. Securities and Exchange Commission (SEC) or its state regulatory authorities, depending on the value of assets under management.

Filing a Form ADV is an integral part of the registration process. Registered investment advisers, unlike broker dealers, have a fiduciary duty to their clients and are consequently subject to greater oversight.

What is Form ADV?

All investment advisers with more than $25 million in assets under management (AUM) are required to register by filing Form ADV, also known as the Uniform Application for Investment Advisor Registration and Report by Exempt Reporting Adviser. Firms with $25-$110 million in AUM file this form with their state regulatory authorities, while firms with $110 million or more in AUM file the form directly with the SEC.

Form ADV includes several parts and is intended to offer disclosures regarding a firm’s background, ownership, assets under management, services offered, fees, practices, potential conflicts of interest and risks, as well as other operating information. The ADV also discloses any disciplinary actions that may have been taken against the firm by regulatory authorities.

Once the form is submitted, it’s reviewed by the North American Securities Administrators Association (NASAA) with support from the Financial Industry Regulatory Authority (FINRA). Every registered investment adviser is required to update their Form ADV filing annually, within 90 days of the end of the fiscal year.

What’s the Purpose of Form ADV?

The SEC requires investment advisors to register and complete Form ADV as part of the SEC’s mission to safeguard investor interests. The filing provides crucial disclosures that allow the SEC to monitor the operations of RIAs and ensure that they comply with all securities regulations.

Form ADV also requires registered investment advisers to disclose potential conflicts of interest and any prior disciplinary actions, as well as operating information. With all this information publicly available, investors enjoy a level of transparency that allows them to make informed decisions and avoid unethical investment advisers.

Parts of Form ADV

Completing the ADV filing can be a time-consuming process, as the ADV includes Part 1A, Part 1B, Part 2A, Part 2B, and Part 3. The RIA’s compliance department is typically responsible for the ADV filing. It’s vital that all the information included is accurate and timely, and all the sections include consistent information.

Form ADV Part 1A

Part 1A is the primary disclosure that all advisers must complete. It’s a fill-in-the-blank document that an RIA must file whether registering with their state or the SEC. It includes vital information about the firm including:

• Name (both legal name and doing business as), address, telephone, and web address
• Total assets under management
• Total number of accounts
• Number of employees providing advisory services
• Breakdown by client type (percentage high-net-worth, retail, etc.)
• Compensation and fees charged for services
• Types of services and investments recommended or offered
• Potential conflicts of interest
• Other business activities (insurance or brokerage, for example)

Item 11 requires the registering adviser to disclose any past or pending disciplinary actions. In the event of disciplinary actions, the registrant must attach additional documentation regarding the specific details of the incident, the individuals involved, and mitigating actions taken.

Form ADV Part 1B

This portion of the form is only relevant for advisers registering with state regulatory authorities. It includes additional questions about the business and allows the registrant to designate the specific states in which the business should be registered.

Form ADV Part 2A

Part 2A requires the adviser to submit a detailed brochure, in narrative prose format, offering a full description of the firm’s business operations, services, fees and compensation, investment philosophy, analytical methods, investment strategies, risk management, code of ethics, brokerage practices, soft dollar arrangements, and any other information pertinent to the firm’s business practices and investment expertise.

The regulators require this information in brochure format to make it more accessible to investors, as extracting the information from the Part 1A questionnaire can be challenging.

Form ADV Part 2B

Also known as the “brochure supplement,” Form ADV Part 2B, includes information about employees providing financial advisory services. Such individuals are required to file a U4 (Uniform Application for Securities Registration or Transfer) with FINRA providing employment history, qualifications, and disciplinary history, and it’s important to ensure that Part 2B is consistent with U4 filings.

Specifically, Part 2B requires information about:

• Education history, professional experience, and professional qualifications
• Disciplinary actions
• Outside business activities
• Additional compensation
• Supervisors

Form ADV Part 3

Part 3 of the ADV, also known as Form CRS, was introduced in 2020 for firms that serve retail clients. It is intended to be non-technical and easily understood by retail clients. Part 3 provides some of the same information that’s provided in the earlier parts of Form ADV, but in a more reader-friendly format. It includes five sections:

• Introduction: Firm name, type of registration, and link to https://www.investor.gov/CRS for additional information
• Relationships and Services (all services offered to retail investors plus account minimums, investment monitoring, and investment authority)
• Fees, Costs, Conflicts and Standards of Conduct (detailed descriptions of fee arrangements, additional costs, compensation practices, conflicts of interest, and adviser obligations)
• Disciplinary History
• Additional Information

How to Access Form ADV

If you’re interested in looking at a registered investment adviser’s Form ADV, it’s easy to find online. Every registered investment adviser’s Form ADV is publicly available through the SEC’s Investment Adviser Public Disclosure website. Just click on the link and search by name, location, or Central Registration Depository (CRD). Note that some firms may have multiple listings.

If you’d like to start the registration process, you can find the full Form ADV with instructions at https://www.sec.gov/files/formadv.pdf.

The Takeaway

Form ADV is a very important document since it discloses all the pertinent details about a registered investment adviser to the regulatory authorities.

One of the most important ways the SEC and state regulators can protect investors is by ensuring transparency. Investors need to have full and complete information before doing business with an RIA, and in a format that allows for easy comparison between RIAs.

The level of disclosure Form ADV demands, as well as the requirements for regular annual updates, ensure that investors are protected against inexperienced or unethical advisers and can make informed investment decisions.

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