Form ADV: Your Critical Step in Choosing the Right Financial Advisor | Axos Bank

Form ADV: Your Critical Step in Choosing the Right Financial Advisor


 

Selecting a financial advisor is one of the most important decisions you will face during your investing career.

If you are a newer investor, sorting through the myriad of financial topics can be daunting, especially with respect to investments and taxes. In these situations, it helps to have a knowledgeable and competent counselor on your side.

On the other hand, choosing the wrong advisor could wreak havoc on your hard-earned wealth. Aside from the infamous list of terrible actors, many investors commonly lose money through hidden fees.

With this in mind, it is vital that you perform your due diligence when vetting your pool of potential advisors. In this post, we’ll walk through the most commonly overlooked document for evaluating advisors – the Form ADV.

What is a Form ADV?

The Form ADV is a document that investment advisors use to register with the Security and Exchange Commission (SEC) and state securities authorities. Once registration is granted, advisors must submit updates annually or whenever material changes are made.

The Form ADV allows you to perform a background check on any registered advisor.

As you sort through potential advisors, the Form ADV will help you understand everything you need to know about their business. In plain English – meaning, without the fluff and sales pitches – advisors are required to submit extensive information regarding their firm, including:

  • Education
  • Services offered
  • Fee schedule
  • Compensation arrangement
  • Assets under management
  • Disciplinary action
  • Conflicts of interest
  • Customer and regulatory disputes

Essentially, the Form ADV allows you to perform a background check on any registered advisor. Because all Form ADVs are available to the public, you can discretely research any advisor before scheduling precious time to meet with them in person.

How to Find an Advisor’s Form ADV

The easiest way to find an advisor’s Form ADV is through the Investment Advisor Public Disclosure (IAPD) website. There, you may research individual advisors as well as the brokerage firms they belong to.

The presence of other activities and affiliations identifies the potential for a conflict of interest.

The SEC also requires advisors to provide you with the narrative portion (Part 2) of their Form ADV before offering any investment advice. When vetting advisors, take note of their Form ADV’s availability – transparent advisors will supply this information publicly on their website or immediately upon meeting you in person.

What to Look For in a Form ADV

It’s impractical to read every potential advisor’s Form ADV in its entirety – a single Form ADV would most likely cost you an entire afternoon. Instead, we’ve listed the most important items for your research:

  • Part 1:
    This section is pretty straightforward and its check-the-box format allows for easy skimming. A few items to look for are:
    • Item 5: This provides a quick overview on the number of clients, employees, total assets under management, compensation arrangements, and the firm’s advisory activities.
    • Item 11: This outlines the disciplinary history – misdemeanors, charges, felonies, suspensions – of all advisory affiliates during the past ten years. (Tip: if the firm in question has a history of disciplinary action, find a different firm.)
    • DRP Pages: If the firm has any disciplinary action to report in Item 11, they will disclose this in further detail here. Disclosure reports will include criminal action, regulatory action, civil judicial action, arbitration claims, bonds, and judgments/liens.
    • Part 1B – Disclosure Questions: A check-the-box section which asks the firm to disclose any bonds, judgments/liens, arbitration claims or civil judicial action.
  • Part 2:
    This is the narrative brochure which provides further details on the services, fees, disciplinary action, conflict of interest, educational background, and business experience. The items to pay extra attention to are:
    • Item 4 – Advisory Business: This section will provide a complete breakdown of all advisory services offered by the firm. Essentially, you want to confirm what’s offered in person matches the content listed in the Form ADV.
    • Item 5 – Fees and Compensation: Skip to the table for a no-nonsense explanation of the firm’s standard fee schedule. Then, sift through the narrative to identify any additional, miscellaneous fees that may also be incurred.
    • Item 8 – Methods of Analysis, Investment Strategies and Risk of Loss: As its title suggests, this section details how a firm decides which investments to pursue and how its advisors manage their clients’ portfolios. If you have a particular investment philosophy, review this section thoroughly to ensure it aligns with yours.
    • Item 9 – Disciplinary Information: Similar to Part 1, Item 11 – if your potential advisory firm has a history of disciplinary action, look for a different firm.
    • Item 10 – Other Financial Industry Activities and Affiliations: This section details all potential conflicts of interest. If an advisor receives additional compensation for recommending certain products or services, you want to be aware of this ahead of time.

      Keep in mind: the presence of other activities and affiliations does not mean your advisor will not work toward your best interest – it simply identifies the potential for a conflict of interest.

Always Do Your Research First

As you schedule meetings with potential advisors, be sure to review their Form ADV ahead of time to ensure you have a productive initial meeting. While it may take considerable time and effort to choose the right financial advisor, it’s better to do the heavy lifting now than suffer the losses of a poorly-chosen advisor.

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Form ADV: Your Critical Step in Choosing the Right Financial Advisor