What's Important for Consumers to Review on a Form ADV

What is Form ADV?

Form ADV is an important document filed by Registered Investment Advisors (RIAs) with the Securities and Exchange Commission (SEC) providing essential information for consumers. Form ADV is comprised of two parts. Part 1 of Form ADV is a standardized disclosure form that provides basic information about the advisory firm and is available to consumers online at www.adviserinfo.sec.gov. It includes a broad overview of the advisor's business structure, ownership, assets under management (AUM), number of clients, types of clients, regulatory history, and other key details.

Part 2 of Form ADV, also known as the "brochure," contains important disclosures that offer more detailed information about the advisor's services, fees, investment strategies, disciplinary history, conflicts of interest, and other important aspects of the advisory business. While ADV Part 1 is a standardized form, Part 2 allows advisors to customize the content to better explain their practices and policies to clients. In addition, Form ADV 2B provides detailed information on individual advisors within a RIA firm.

Here are a few important areas of ADV Part 2 consumers should review when considering working with an advisor or advisory firm.

Services Offered 

We encourage consumers to review this section carefully to ensure the advisor's services align with their needs, goals, and objectives.

Fees and Compensation

How will your advisor be compensated and how much will it cost you? Unfortunately, not all financial advisors adhere to complete fee transparency. It is important to understand that some RIAs are compensated only by fees, while others can receive fees and commissions. When taking commissions the advisor has a conflict of interest and is NOT serving as a fiduciary. We recommend consumers pay close attention to fee disclosures to understand the total cost of working with the advisor.

Disciplinary History

Most advisors have clean disciplinary records, and we would advise against working with any firm or advisor that has material disciplinary disclosures. Here are a few types of disciplinary items we’ve seen with other advisory firms / advisors that would be a red flag:

Non-disclosed federal tax liens

Customer disputes that resulted in settlements

Allegations of violating policies and procedures

Filing personal bankruptcy

Judgments or Liens

Educational Background, Credentials and Qualifications

We believe it is important to work with an advisor who is professionally trained and has attained respected professional qualifications. Think of it like this – would you seek medical treatment from a “doctor” who hadn’t graduated from medical school?  Consumers should review the following:

Does the advisor have a college degree?

Do they have any professional designations such as the CFP, CFA or CPA?

It is important to review the educational background and qualifications of the investment advisor you are considering working with to ensure you are working with knowledgeable professionals.

Conflicts of Interest

Conflicts arise most commonly around advisor compensation. Here are a few red flags to watch for when reviewing an ADV:

1. Commission Compensation: Advisors who earn commissions on financial products they recommend (such as the sale of insurance) face a conflict of interest. They may be incentivized to recommend products that pay higher commissions rather than those that are the best fit for you. There is no requirement that the advisor put the clients' needs (better or less expensive policy) ahead of their own. This is one reason Ark Royal serves as a fee-only advisor. We’re never conflicted by commissions because we aren’t compensated that way.  
2. Proprietary or Affiliated Products: Advisors affiliated with a specific financial institution or company may have a conflict of interest when recommending these products. They may be inclined to promote these products over others, even if they are not the best ones for you.
3. Revenue Sharing Arrangements: Some advisors receive compensation from third-party providers for recommending certain investment products or services. This creates a conflict of interest if the advisor is influenced to recommend products based on the compensation they receive rather than what’s best for you.

In summary, Form ADV provides vital information for consumers assessing investment advisors. By reviewing the ADV consumers can evaluate services offered, understand fees and compensation structures, review disciplinary history, assess advisor qualifications, and identify potential conflicts of interest.Key areas to focus on include ensuring services align with financial needs, understanding fee structures, avoiding advisors with disciplinary issues, prioritizing advisors with relevant qualifications, and being wary of conflicts like commission-based compensation or proprietary product promotion.

Informed consumers armed with an understanding of Form ADV can confidently choose advisors who best serve their financial interests.