What Is the SEC Form ADV and Why Must Investors Know About It?

When investment advisors register with the Securities Exchange Commission (SEC) and/or with their state securities authority, they need to fill in what is called a Form ADV.

A Form ADV has three major parts:

• Part 1: General business info plus any info on past disciplinary actions
• Part 2: Service offerings, assets under management (AUM), investment strategy and fee arrangements
• Part 3: Relationship summary

Parts 1 and 2 are used by both SEC and all states whereas Part 3 is used by the SEC, but it is only used in some states.

The form needs to be updated annually.

Here is a detailed breakdown of the information each part requires:

Part 1

Part 1 is all about the advisor’s business and clients. This part of the form utilizes checkboxes and fill-in-the-blank sections. It specifically requests info about the advisor’s:

• Clients
• Employees
• Ownership
• Business
• Affiliations
• Disciplinary events (both for the advisor and his or her employees)

This section is used by the SEC to manage its regulatory and examination programs. It is always publicly available and can be searched for on the SEC’s Investment advisor Public Disclosure (IAPD) website[1]. Investors must do their due diligence on this website, as well as FINRA’s BrokerCheck[2] website before entering into any agreements with advisors.

Part 2: Brochure Section

Part 2 of the SEC’s Form ADV requires longer narratives than Part 1. It must be written in plain English.

It is publicly available once filed. Investors should always ask to be shown this information as it contains crucial data in plain English that is imperative to helping an investor decide about the firm.

The information contained in Part 2 includes:

• A detailed explanation of the type of advisory services the firm or advisor is offering.
• All relevant information regarding fees.
• All relevant disciplinary info.
• Potential conflicts of interest which might impact decisions.

Part 2 must also provide bios of key advisory personnel and management. These bios must include at least:

• Education and qualifications
• Business experience

If there are key employees who directly provide investment advice to clients, Part 2 must include a supplement with detailed information about these employees.

Part 3: Relationship Summary

For SEC-registered advisors who offer services to retail investors (nonprofessional investors who buy and sell securities through a brokerage or savings account), Part 3 must be filled in.

Part 3 is also a narrative section, like Part 2, and must be filled out in plain English. It must provide a summary of services, fees, costs, any conflicts of interest, and disciplinary history.

Because this brochure is aimed at nonprofessional investors, it must also offer info on:

• Pertinent questions to ask the advisor
• Notes/links to references where the client can find out more about the advisor and their services

Advisors must give these relationship summaries to all existing clients, as well as new and prospective clients. Like Part 1 of the Form, this relationship summary is publicly available on the IAPD website.

Brokers and advisors offer different services, and they have a different relationship with the investor. Retail investors must understand that relationship completely. 

Part 3 also informs the investor whether the firm offers advisory services, brokerage services, or both.

You should only deal with an advisor actively licensed with FINRA, the SEC or your state.

The first question to ask is whether the financial professional is registered with the SEC and/or FINRA. To check if they are registered with the SEC, visit investor.gov[3]. To check if they are registered with FINRA, visit BrokerCheck[4].

Because FINRA—the Financial Industry Regulatory Authority—is a self-regulating body dedicated specifically to maintaining ethics within the financial advisory sector, it is much easier to resolve grievances through them if an advisor has failed in his or her duties.

After checking if the advisor or brokerage is registered, see if there are any “disclosures” regarding them at BrokerCheck. A disclosure is any disciplinary, legal, or other significant event in the advisor or broker’s history. Using BrokerCheck, an investor can also discover the result of the disclosures, and whether the advisor was found guilty, settled, and what fine they had to pay, if any. It is crucial to know this information before entering into any agreements with any advisors.

Once you have established that the advisor is okay, ask questions about:

• What their process is for choosing investments for you.
• What licenses they have.
• Their experience.
• Their education.
• Any other qualifications.
• Even if you have done your own due diligence, ask them personally if they have any disciplinary history. If they lie or omit telling you, you have your red flag. Move on.
• Get them to explain their fees to you simply.
• Any conflicts of interest.
• Your main contact person. As well as who to speak with if you are concerned about how that contact person is treating you.

Your Rights as an Investor

There is a lot to know about FINRA regulations and SEC rules. But the one main thing to know is: Transparency.

In financial services, lack of transparency is always grounds for complaint. Advisors and brokers must not only have all the necessary information available to investors, but they must also proactively take steps to inform investors of anything and everything that might affect their investments.

An investor is never wrong for asking questions. And any questions asked of an advisor must be answered completely and honestly by that advisor.

If you are concerned that your advisor might not be as forthcoming about your investments as you expect, feel free to call us[5] for a no-obligation consultation.