What is the ADV Brochure and how can you use it to your advantage?
If you have researched registered investment advisors, you have probably read the term “ADV Brochure”. You have come to the right place if you have wondered what exactly this refers to! This is a document registered investment advisors (RIA) have to submit to the Securities and Exchange Commission (SEC). The ADV brochure provides an overview of the company. RIAs have to update and file it annually. Lastly, the RIA needs to make it publicly available if it manages more than USD 25m.
If you are looking for a new investment advisor or would like to do some due diligence on your current one, the ADV is the best starting point. It consists of five different documents:
- Part 1a: Provides information about the investment advisor. Including their business practices, the persons who own and control the firm, and the persons who provide investment advice on the firm's behalf.
- Part 1b: Provides extra information required by state securities authorities. If the investment advisor is only registered with the SEC (and not with specific states), then this part does not exist.
- Part 2a: Provides a narrative brochure containing information about the advisory firm.
- Part 2b: Consists of supplements containing information about certain supervised persons.
- Part 3 (only introduced this year): Provides a relationship summary (Form CRS) containing information for retail investors.
The ADV brochure part 2a is quite comprehensive and the most relevant document for prospective clients. Here the most important sections of the document:
This section is a description of the advisory firm. It includes how long it has been in business and the identification of its principal owner(s). It also includes a description of the types of advisory services the company offers. An explanation of whether (and, if so, how) the company tailors its advisory services to the individual needs of clients. It also explains whether clients may impose restrictions on investments. It discloses if the company participates in wrap fee programs and lastly, it also discloses the assets managed by the company.
Fees and Compensatio
This section is extremely important. You don't just see what the fees are, but also what they consist of. Are they only paid by you as the client or does the firm also take money from any third party? This section includes a fee schedule and a statement on whether the fees are negotiable. It also lists any other types of fees or expenses clients may pay, such as custodian fees or mutual fund expenses.
Make sure to work together with someone who only takes money directly from you as the client. This is the only way to ensure that the company is absolutely objective and only works in your best interest.
Types of Clients
This section is interesting in order to see what kind of clients the firm specializes in (individuals, structures, companies, retirement money, etc.) and if they already have experience with clients who are similar to you. Also, if there are any requirements for opening or maintaining an account, such as minimum account size, those requirements are disclosed here as well.
If there are legal or disciplinary events that are relevant to a prospective client’s evaluation of the advisory business or the integrity of the management, all material facts regarding those events are disclosed here.
Client Referrals and Other Compensation
If someone who is not a client provides an economic benefit to the adviser for providing investment advice or other services, those arrangements are listed and conflicts of interests are explained. If there are any, the firm has to show how they address them. If the firm or a related person directly or indirectly compensates any person for client referrals, there is a description of the arrangement and the compensation.
How can you benefit from the ADV Brochure?
This brochure gives you an honest and comprehensive overview of the company and its dealings. It can help you streamline your questions before an initial consultation and if there are any major red flags, you should find them within the document. Even if it is a dry read, I highly encourage taking a couple of minutes to read through the brochures of the investment advisors you are considering for a partnership.