[Editor's Note: This is a guest post from website advertiser Johanna Turner, CPA, CFP, RLP with Fox and Company Wealth Management (see ADV2 here.) It is an important subject I've been meaning to write about for a long-time, but have never gotten around to it, about an important step to take when evaluating a financial planner or investment manager. Reviewing the ADV is an important step I take when determining which financial advisors I allow to advertise on this site. This is not a sponsored (i.e. paid for) post and thus no compensation was given or received for it.]
One of the most important decisions an investor will ever make is their choice of financial advisor. Whether you have decided to hire a financial planner or just want the guidance of an investment advisor, your choice will have a tremendous effect – positive or negative – on your standard of living. From the day you sign the on the dotted line until you either die or decide you’ve made a mistake, your wealth will be impacted by the skills and the costs of your advisor.
When people search for a financial advisor, they typically visit their website, ask around at work, and schedule an interview. Unfortunately, few people understand the significance of the information contained in an advisor’s ADV. Unlike a website, where you are seeing advisors at our glamorized best, an ADV doesn’t slant information. You get just the facts.
What Is Form ADV?
Johanna Turner, CPA, CFP, RLP
Form ADV is the informational document the SEC (Securities and Exchange Commission) requires all investment advisors to file and update annually. It is free, publicly available, and must be offered in electronic format. Best of all, you do not have to submit any identifying information to get a copy so your investigation is totally anonymous. Investment advisers are required to submit their ADVs to either the SEC ($100M+ in assets under management) or state securities authorities (firms with less than $100M under management).
The ADV is divided into two parts:
- Part 1 – the “data”, which includes the number of clients, owners of the firm and advisors, office location(s), states where registered, disciplinary information and so on.
- Part 2 – a narrative “brochure” that advisors are required to provide to all of their clients annually. Advisors are also required to upload Part 2 to the IARD but states do not always enforce this requirement. In other words, you will occasionally find a non-compliant advisor with a Part 1 online but no Part 2. Either call or email the advisor’s office to ask for a copy.
While the ADV is far easier to disseminate than in the past, the amount of information can be overwhelming, even intimidating, if you don’t know where to look for a particular piece of data. I’m writing this article to help you use the ADV as an effective tool during your search for the “perfect” advisor.
How To Find Form ADV
It’s not always easy to find a firm’s ADV. Some advisors include it on their website, [I'm far more impressed with an advisor who puts their ADV and their fee schedule on their website-ed] but it’s simpler to go to the Investment Advisor Public Disclosure (IAPD) website, where you’ll find a search function allowing you to look up information by Individual or Firm name.
- By entering the individual’s name, you’ll see the “Public Disclosure Report”, which summarizes jurisdictions where licensed, any past disciplinary actions, exams passed, employment history, and other business activities. Interesting, but not where you’ll find the real meat.
- You’ll need to click on “Firm” and enter all or part of the firm’s name to pull up Form ADV.
- You can also search by zip code to see all registered advisors within a certain radius of your selected city. An interesting exercise is to compare ADVs of firms near you by entering the zip code – the variety of billing methods can be quite a shock.
How to Fill Out The ADV Form
So you’ve found the ADV! But what does it all mean and what do you do with it?
Part 1 is a check-the-box, fill-in-the-blank format. You’ll find very little narrative here and it can seem a bit boring. The best way to review Part 1 is by clicking on “View Form ADV by Section” on the left-hand navigation bar. This will bring up advisor responses highlighted in red to help you differentiate the information entered from the form itself. You can also click on View Latest Form ADV Filed in the dark blue box to get the complete ADV Part 1. You’ll see the date the ADV was filed (upper left) but not have the helpful red indicators.
ADV by Section pulls up an index in a separate window organized by “Item”. Probably the most significant Items are:
- #5: Information About Your Advisory Business, where you’ll find the number of employees, number and types of clients, compensation arrangements, assets under management, and types of advisory activities.
- #11: Disclosure Information – past charges, convictions, suspensions and most everything else beyond traffic violations.
- #1B: Disclosure Questions – specifically asks about charges, complaints, and convictions with regard to the investment advisory business, along with potential conflicts of interest.
Part 2, Brochure will yield the most fruitful results for your search. To make Part 2 more user-friendly, the SEC mandated in 2011 that advisors must file a “plain English” version annually. Many firms groused about the change, as you might expect, but it has really helped consumers standardize their quest to compare firms side-by-side.
Part 2 is made up of:
- ADV Part 2A (the Brochure) and
- ADV Part 2B (the Brochure Supplement)
ADV Part 2A, which is available online, must follow the same format and numbering scheme for every advisory firm. You can find the SEC’s instructions for advisors to complete Part 2A here. State-registered advisors must cope with differing disclosure requirements by each state in which they are registered so the information provided in some Parts 2A may be more robust than in others depending upon the requirements of the particular states in which a firm is registered. Part 2A (“The Brochure”) contains the following:
- Item 1: Cover Page
- Item 2: Material Changes since the last brochure was filed.
- Item 3: Table of Contents
- Item 4: Advisory Business is a description of the firm, including kinds of services offered and how they are offered.
- Item 5: Fees and Compensation includes detailed explanations not only of the various types of fees, but also how they are calculated. If fees are or may be negotiable, it must say so.
You will find a lot of creative writing in Item 5 but there is no getting around the disclosure of AUM fees. These fees are very easy to compare from firm to firm; be sure to find out what other services are included. You’ll also find a disclosure of any indirect compensation (such as commissions and money/goods paid to the firm by sources other than then client).
- Item 6: Performance-Based Fees/Side-by-Side Management is rarely applicable.
- Item 7: Types of Clients is a brief description of the types of entities served.
- Item 8: Methods of Analysis/Strategies/Risk of Loss is divided into four sections. The first two are the most important; the last two are pretty much boilerplate.
- Methods of Analysis: Find out if your advisor believes in passive or active analysis and why.
- Investment Strategies: This is an especially important section and should be your guide as to whether your advisor’s ideas about investing correlate with yours. If not, and you aren’t willing to compromise, this could be a deal killer. Keep an open mind, though – you might learn something new!
- Material Risks Involved: Boilerplate
- Risks Associated With Securities: Boilerplate
- Item 9: Disciplinary Information Have they or haven’t they?
- Item 10: Other Activities and Affiliations details other companies they own or are affiliated with.
- Item 11: Code of Ethics, etc. will be explained here, along with any advisory firm members’ personal involvement in client transactions. (Unfortunately, compiling a Code of Ethics is no guarantee that it will be followed.)
- Item 12: Brokerage Practices describes fees and practices of any custodians used by the firm.
- Item 13: Review of Accounts describes how and how frequently the firm reviews investment accounts.
- Item 14: Client Referrals and Other Compensation is a disclosure of any fees received from resources other than clients.
- Item 15: Custody tells you whether the firm takes custody of client assets (for example, Bernie Madoff had custody of his clients’ assets.)
- Item 16: Investment Discretion explains the amount of power the firm has over a client’s account. In other words, we do not take custody of client funds, but our clients give us the authority to select and implement portfolios at a third-party custodian (TDA) on their behalf.
- Item 17: Voting Client Securities discloses whether the firm has any involvement in proxy votes for client-owned securities. Boilerplate.
- Item 18: Financial Information is intended to demonstrate that the advisor is capable of meeting any financial obligations to clients and does not accept prepayments of more than $500 six months or more in advance. Boilerplate.
- Item 19 (optional): Requirements for State-Registered Advisors is included only by advisors who have less than $100M under management and are supervised by the various states in which they do business rather than by the SEC.
In my opinion, the sections you should spend the most amount of time on are:
- Item 4
- Item 5
- Item 8, A & B
- Item 9
- Item 14
ADV Part 2B is a business resume’ of each “supervised person” (advisor at the firm who may be involved with investing at the firm) and includes:
- Educational background and business experience,
- Disciplinary information,
- Other business activities that the supervised person is involved in,
- Compensation received as a result of business activities (excluding wages) from sources other than the client, and
- The manner in which the “supervised person” is supervised.
I hope this detailed look at what an ADV can tell you will help you begin the search for your next advisor. The ADV is full of hidden gems in plain sight, just begging to be mined for valuable information. The right “chemistry” with your advisor is important, but don’t base your decision on a sales pitch. Take the time to kick the tires and look under the hood first. Better to invest time in making an informed decision now than to find out, thousands of dollars later, that you selected the wrong advisor.
[Editor's Note: There is no sense in meeting with an advisor before reading the ADV2A part 4, 5, 8, 9, and 14. You can do 90% of your work selecting an advisor from the comfort of your own computer. Figure out how they get paid and how much they get paid. If the fees are too high, move on. If they have disclosure information, probably move on. If their investing methods don't gel with what you read on this site, move along. If they pass all those tests, then it is probably worth having a sit down (or virtual sit down if they aren't local to you) with them. When you sit down you may also wish to ask them the questions I ask in my application for financial advisors to advertise on this site. ]
What do you think? Have you ever looked up a Form ADV? Did you learn anything interesting? If you use an advisor, what did you look for? How did you decide on one? Comment below!
I would add Item 10 to the list (for part 2A). This is the section where you’ll find out if the firm is double dipping by selling product (and advising for fee). If you see something about an insurance afflilation, they’re selling insurance. Expect this advisor to offer free placement of insurance as a convenience to its clients. Or a broker-dealer affiliation means they’re earning commissions on investment products. Advisors sell variable annuities and commission based investments through this arm. If they have a mortgage or real estate firm on the side, it goes here. Now we’re talking about a one-stop-shop. If this section is very short and has no listed affiliations, it’s very likely the firm is Fee-only. If it’s complex and lists lots of other affiliations, it’s typically a sign the firm is dealing with some major conflicts of interest.
Hey, Daniel, Thanks for reading – good point! Are you saying you would add that information TO Item 10 above?
I meant to say I would add Item 10 to the list of the most important areas to spend time on. Great post by the way!
Thank you for this.
In the past year I’ve been learning about personal finance from this and other blogs and podcasts.
My wife and I worked recently with someone to set up trusts and wills, and possibly assist with further financial planning.
The information in this blog post allowed me to finally determine that he is indeed kosher, which is a concern I had before working further with him.
Wonderful – glad it helped!
That’s great to know. A bit odd though as usually it’s an attorney doing trusts and wills, and they don’t do ADV2s.
We use the term boilerplate most frequently when referring to doc’s we review from attorneys. You want boilerplate? They got boilerplate!
Awesome resource, thanks, Johanna. I looked up one of the local guys who retired from medicine to become a CFP. I knew he charged with AUM but seeing that 1.75% written down just seemed like a kick in the stomach. I had also heard that he turned away one of the young guys…I guess his compensation wouldn’t have been enough. Funny, leaving an altruistic profession for one where you ignore a young person that needs the most help.
Disappointing isn’t it. 1.75% is a rip-off. Now if it is only on the first $100K or something, I can understand, as long as it scales back to 0.5% or so by $1 Million. But it never seems like it works that way. When someone starts at 1.75%, they never seem to get down into the reasonable range in my experience.
This is fantastic, Johanna. I knew these things existed, but wasn’t entirely sure where to find them or what to look for. I’m going to look up the fiduciary advisory firm that had this couple (http://www.physicianonfire.com/28to3/) invested in 28 different funds.
I already know I’ll find disciplinary actions — we found those on a couple individuals with a FINRA Brokercheck.
Best,
-PoF
interested to know what you find
At the risk of sounding uneducated, what exactly do you mean when you refer to a section of the ADV as “boilerplate?”
I’m sure a lot of people are glad you asked. Boilerplate is standard language that you will typically find in these spaces in all forms ADV. You’ll find boilerplate language in lots of common legal documents, such as Last Will & Testament, Living Trust, Power of Attorney and so forth.
…pause while I go and click on a few street signs.
“Boilerplate” means every advisor has the same stuff written there and it isn’t helpful to tell them apart.
Excellent article Johanna.
There is one aspect of the FWM ADV that is unclear to me — what is the relationship of Investment Management Services to Comprehensive Financial Planning or Fixed Fee FP for Doctors? It appears that both CFP and FF include investment analysis as described in Item 8, so what additional benefits would there be to investment management?
A financial plan can analyze your investments, but if you want someone to manage your investments going forward, I would call that investment management. The crazy thing is that most docs had no idea that financial planning and investment management were two different things. And it gets even more confusing when advisors start using terms like wealth management.
I am glad you asked because this is very confusing to the public. I’ve been toying around with the idea of an article on this topic. In short, investment management is just that, but there is a back story to what has happened at FWM:
When we first started our business (pre-WCI, pre-physicians, just a CPA who was trying to figure out how to be a fee-only financial planner and really didn’t know what the heck she was doing in the beginning), clients had 3 choices: 1) AUM (at that time, the most popular service) for asset management with a set number of hours of planning included per year based on the value of the investment portfolio: 2) financial planning – a flat fee engagement which did not include investment management, or 3) hourly services.
Fast forward and along came WCI and we realized that our structure did not fit what was being requested. So we retooled and developed the current Fixed Fee Financial Planning for Doctors, which includes asset management (no additional AUM fees). That structure has been in place only since last May and it has been extremely popular, but we are still trying to figure out how to marry the 2 for our previous clients, many of whom are not interested in financial planning. We’ll get there.
In the middle of it all, we also changed the name of our firm from Milestones Financial Planning to Fox & Co Wealth Management to incorporate the fact that we don’t just do financial planning but also manage investments. (Our CPA firm is also named Fox & Co CPAs, so it made a lot of sense to synchronize.)
It has been a very interesting year.
WCI defines investment management as “managing your investments going forward”; Johanna says “investment management is just that”. I am just as confused as “most docs”. Johanna, you say the FFFP for Doctors includes asset management. It would seem, but it is unclear, that your CFP also includes investment management because the services incorporate Item 8. I can certainly understand the difficulty in marrying the 2 for previous clients. All of this suggests a very important matter that needs to be addressed.
What exactly is investment management? Here is a summary I picked up off the internet:
• Selecting investments for purchase in areas such as the equity and/or fixed income markets
• Monitoring and rebalancing assets, ideally in accordance with a written investment policy statement
• Tax loss harvesting where appropriate
If selection of investments is simply picking low cost index and other mutual funds to fit a planned asset allocation, this should be covered by financial planning. Monitoring and rebalancing is not some magic formula, but should be done infrequently on an ad hoc basis as agreed with a financial advisor. Tax loss harvesting is also infrequent, and should be undertaken as suggested by a financial advisor in situations such as that of 2008. All of this would seem to make investment management rather insignificant and unnecessary in the context of a comprehensive financial planning engagement.
WCI has observed that, even though nearly all of his blog participants are capable of DIY, perhaps 80% choose to use a financial advisor. I can understand that. Why would those individual choose investment management instead of comprehensive financial planning? That I can’t understand. Is there any advantage to have someone take custody of the assets rather than holding the assets and setting and adjusting the holdings per the recommendation of the FA. As I see it that is a meaningless benefit.
I commend Johanna for realistically dealing with these issues. For those seeking a financial advisor, I would strongly suggest foregoing investment management for comprehensive fixed fee financial planning.
You’re misquoting me a bit. I think the vast majority of docs are capable of functioning as their own financial planner and investment manager if they have the interest required to develop the knowledge and discipline to do it well. However, something like 80% of docs want and truthfully should use a professional financial advisor because they do NOT have the knowledge or discipline NOR the interest required to get it. Those who arrive here at this blog are a rather self-selected subset of doctors, however, and the percentage of them who have the interest required is far higher than 20%. How high I don’t know, but higher than that.
Thanks for the correction. I should have said 80% of docs and not 80% of blog participants choose to use a FA. I fully agree with the reasons you state, and, as I said, I fully understand the choice of most docs to use a FA,
Wish I’d had this years ago! I’m with a 0.9% AUM firm. Is it odd that they accept “soft dollars” (brokerage practices)?
In item 14, client referrals, I see they pay some client referral fees ( to Schwab Advisor Network and one other, if applicable). This comes out of the 0.9%
My advisor is a CFA/CFP, and I’ve generally been pleased with the asset allocation model and advice. I’m now wondering if I could do the same with the schwab roboadvisor + an hourly planner.
You should just ask your advisor these questions re: soft dollars and client referral fees. If the referral fees come out of the .9%, that sounds fair, I suppose, but see what s/he has to say. If you’ve really been pleased with the advice and you’re pleased with the way the conversation goes (i.e. they don’t appear to be hiding anything and are forthright) and you’ve been through a bear market without significant scarring, I’d probably recommend you stay where you are.
I’d have a frank discussion with the advisor about what the soft dollars are for. Definitely odd.
At any rate, I think a highly competent hourly planner doing the financial planning + a roboadvisor doing the investment management is certainly a reasonable option that keeps costs pretty low.
This is one of the most helpful articles I’ve seen on this site. Thank you very much!
I’ve dreaded talking to advisors in the past as much as talking to the finance guy at the car dealerships. Now I have a wonderful excuse to go back and do some homework if I ever get the hard sell.
“Would you happen to have a copy of your Form ADV on you?”
Thanks, that means a lot.
Excellent post, thank you. Clearly articulated, and teaches folks to gain access to data they can use to become better consumers. Great way to explain how to clearly find and use technical information, so we can apply it to our own situations.
Also, really nice to read your ABV, great to have a well written example to view as I read the article. Thanks. I am surprised at the difference with your ABV, and that of a firm I currently use (yikes!).
Thanks and you’re welcome. I will pass your compliment along to my partner, Michelle, who is in charge of our compliance. It is not an easy job!
Wonderful post. This quality of writing is impossible to come by outside of Bogleheads/WCI/etc. Posts like this are what sets this site apart from all the others.
Johanna, I noticed on your company’s website that you’re located in Mayfield, KY—near Land Between the Lakes, correct? Have you ever eaten at Patti’s?–they have a wonderful, famous 2 inch pork chop! 🙂
Lol, I have eaten at Patti’s many times. Small world. Glad you enjoyed the post.
So… after reading up on an advisor I had recommended to me through residency I have a question. Is it normal for him to be employed by an investment group that is a owned by a large insurance company? That seems like a striking conflict of interest. Maybe I’m just naive.
That does sound concerning to me. I’m kind of a fan of the “small shop” when it comes to financial advisors. I like the advisor being in business for himself and answerable to no one but himself. It can be pretty tough to scale up and maintain the same knowledge base and ethical standards that the original principals had. But there are certain economies of scale that could be useful at least in theory.
As usual, I totally agree with this comment. This is the reason I would never hire an employee. This is an awesome article. Unfortunately, it has been my experience that most investors don’t read the fine print, let alone the ADV. I think the smaller firms where the client deals with the owner of the firm provides an advantage. Additionally, does the firm owner invest his or her own money in the product that he or she puts the client in? For example, if a core recommended holding is the Vanguard Total U.S. stock market index fund (E.R.=.05), does the owner of the firm have the same for his or her portfolio? Does the firm eat its own cooking?
This is a red flag imo.
Wow. I wish I had known this before I invested with a previous financial advisement company. Fees were way high and they had other negative information on the ADV. Great post, great info, wish I had not learned by the class of hard knocks first.
My husband is about to be done with fellowship and we are looking for a financial advisor. I looked up the one he was interested in (local small firm) and it seems that they are a financial planning firm that refers investment management to a third party. They have fixed fees for a financial plan ($500-$2000) but you also have to pay the fees for the third party managing investments. To me, it would be cheaper to find someone who does it all? This is all very new to both of us. The other thing that was a red flag is that they are both commissioned insurance salesmen.
That sounds a bit worrisome. A typical insurance agent does not get any significant training or education in financial planning, certainly not from the parent insurance company. Is it impossible to be a commissioned insurance agent and do a good job doing fee-only, fixed rate financial planning? Absolutely not. But it’s an odd arrangement for sure.
One thing I would really be concerned about is the insurance agent/financial planner getting paid for the referral to a commissioned mutual fund salesman.
Focus your analysis on # 1 Is the advice good and # 2 Are you getting it at a fair price (i.e. as good a price as you can get similar services elsewhere.)
I’ve been debating opening up my own fee-only RIA for a while now and have been reading tons of ADVs. If I listen to a podcast with a financial advisor, I go straight to their ADV to see if what they are saying is true. It’s a great document that tells you a lot about the firm and its partners.