Form ADV has three distinct sections: Part 1, Part 2A, and Part 2B.
Form ADV Part 1
Form ADV Part 1 is divided into two sections: Part 1A and Part 1B. On the exam, both are generally referred to as “Part 1.” The purpose of Part 1 is to identify the firm, describe its business characteristics, and disclose key personnel.
These are the key disclosures on Part 1 (many overlap with broker-dealer disclosures):
Basics of the business
Name
EIN (tax reporting number)
Business address
Contact person
Other jurisdictions
Disclosure of registration with other states
Business structure
Corporation, partnership, sole proprietorship, or LLC
Whether the adviser maintains custody (discussed below)
Business history
Qualifications (financial and legal)
Any legal actions ruled against the firm or its advisory affiliates
Any regulatory events related to the firm or its advisory affiliates (e.g., another state administrator revoked registration)
Any criminal events related to the firm or its advisory affiliates
A key difference between broker-dealers and investment advisers is what they provide to investors. Broker-dealers generally execute securities transactions and often provide custodial services. Investment advisers primarily provide advice about what securities transactions should be performed.
Investment advisers can offer a wide range of advisory services, including:
General securities advice and/or market commentary
All of the products and services listed above are considered advisory business. They may be offered only by registered investment advisers (or those that may claim an exemption or exclusion). In practice, most investment advisers focus on advisory products and services, but an adviser may also operate in ways that resemble a broker-dealer.
One example is custody. An investment adviser may offer custodial services for clients. Regulators define custody as:
Clients need a firm to hold cash and securities, but custody creates additional regulatory responsibilities. Custody rules and requirements are covered in a future chapter. For now, remember this exam takeaway: if an adviser takes custody, it must disclose that fact on Part 1 of Form ADV.
The following video summarizes the key points relating to Form ADV Part 1:
Form ADV Part 2A (the brochure)
The disclosures that matter most to clients are found in Form ADV Part 2A. This section includes the adviser’s compensation structure, investment approach, and conflicts of interest.
In other words, Part 2A shouldn’t be packed with jargon or overly technical language. That’s why Form ADV Part 2A is commonly called “the brochure” - it’s meant to be readable.
Part 2A must also disclose the adviser’s fiduciary obligation. NASAA describes the fiduciary duty as:
[The requirement for] the adviser to hold the client’s interest above its own in all matters
A major part of fiduciary duty is disclosing conflicts of interest. A conflict of interest is any circumstance, relationship, or event that could compromise the adviser’s obligation to put the client first. For example:
An adviser is paid by a third party to recommend a specific security to its clients
An adviser recommends the securities of an affiliated or parent company
An adviser recommends a purchase of a security that will be sold from their own inventory
A practical way to think about it: if a reasonable client would want to know about it before accepting the recommendation, it likely needs to be disclosed as a conflict. Advisers must disclose conflicts and also mitigate (reduce) them as much as possible.
Now let’s look at the specific disclosures required in Part 2A:
General business characteristics
Description of the business
How long the adviser has been in business
Types of advisory services offered, including any specialties
How the advisor tailors their business to clients
Description of wrap fee programs
How much of the business is dedicated to discretionary services
Fees and compensation
How the adviser is compensated
Payment logistics (how clients may pay)
Fees collected outside of advisory services
If fees may be prepaid, and if they are refundable
If the adviser is paid by parties other than clients
Types of clients
Type of client the adviser typically handles
Any prerequisites for doing business with an adviser (e.g. having a minimum amount to invest)
Investment philosophy
Types of securities recommended
Methods of securities analysis
Description of risks clients are exposed to
Disciplinary information
Convictions of any felony or a securities-related misdemeanor
Any regulatory action taken against the adviser or its controlling affiliates
Conflicts of interest
Relationships with relevant third parties
Payments received by third parties
Any other item that may compromise the fiduciary obligation
The following video summarizes the key points relating to Form ADV Part 2A:
This video shows a real-world example of Form ADV Part 2A:
Form ADV Part 2B
Form ADV Part 2B is typically called the “brochure supplement.” It’s a personnel disclosure document.
Investment adviser representatives (IARs) who provide advice to clients, and those who act in a discretionary capacity (for example, an IAR who manages client assets but doesn’t meet with the client), are covered by this form.
Part 2B allows clients to review the following information about these employees:
Educational background*
Business experience
Disciplinary information
Other business activities (outside of the adviser)
Additional compensation (outside of normal compensation)
Supervision details
*Although educational background is disclosed on the brochure supplement, there are no minimum educational requirements for IARs
The following video summarizes the key points relating to Form ADV Part 2B:
This video shows a real-world example of Form ADV Part 2B:
Consent to service of process
Like other registrants, investment advisers must sign and submit a consent to service of process with every initial registration application. It does not need to be renewed.
