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 1B. On the exam, both are generally referred to as “Part 1.” The purpose of Part 1 is to identify the business, describe its characteristics, and disclose key personnel.
These are the important disclosures in Part 1 (many mirror 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
All of the products and services listed above are considered advisory businesses. They may only be offered 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 hold client cash or securities, or have the ability to obtain them. Regulators define custody as:
Clients need a firm to hold cash and securities, but custody creates additional regulatory responsibilities. We’ll cover custody rules and requirements for investment advisers in a future chapter. For now, remember this exam point: if an adviser has custody, it must disclose that fact in Part 1 of Form ADV.
The following video summarizes the key points relating to Form ADV Part 1:
Form ADV Part 2A (the brochure)
Form ADV Part 2A contains the information a client typically cares most about. It explains how the adviser operates, how it gets paid, what strategies it uses, and what conflicts of interest may exist.
In other words, the adviser shouldn’t bury key information in jargon or overly technical language. That’s why Part 2A is commonly called “the brochure” - it’s designed to be readable.
Part 2A must also disclose the adviser’s fiduciary obligation and provide truthful information about the business. NASAA describes the fiduciary duty as:
[The requirement for] the adviser to hold the client’s interest above its own in all matters
Put simply: the client’s interests come first.
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 ability to put the client first. Examples include:
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 acting on the advice, 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 go through the specific disclosures required in the brochure:
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 the 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.
It covers investment adviser representatives (IARs) who provide advice to clients and those who act in a discretionary capacity (for example, an IAR who trades client assets but doesn’t meet with the client). Clients can use Part 2B to learn:
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, an investment adviser must sign and submit a consent to service of process with every initial registration application. It does not need to be renewed.
