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Researching a Financial Advisor: Form ADV Part II
One thing I d suggest doing before enlisting the services of a financial advisor is getting a copy of the advisor s Form ADV.
Form ADV is a document that Registered Investment Advisers (RIAs) are required to file with either their state or with the SEC. It s broken down into two parts.
ADV Part I includes:
- Identifying information about the firm,
- How many clients they have,
- Total amount of assets they manage,
- Whether or not they re a broker-dealer or a registered representative of a broker-dealer (That is, are they paid commission to recommend certain investments?), and
- A whole list of other (less interesting) tidbits.
ADV Part II includes (among other things):
- What type of services they offer,
- How they charge their clients (hourly fees, percentage of assets under management. fixed fees, commissions. etc.),
- What type of analysis they perform when selecting securities for a client, and
- The RIA s education and career background.
Finding an Advisor s Form ADV
There are two ways to get a copy of an RIA s Form ADV:
If you look it up online, you can search by name of the firm or by name of the advisor. Unfortunately, RIAs aren t currently required to submit Part II electronically, so you ll have to ask the RIA for it.
Note: If a financial advisor doesn t have a Form ADV, that means that he or she is not a Registered Investment Adviser. It s likely that this person is either a commission-paid stockbroker or insurance agent, in which case my suggestion would be to look elsewhere for advice.
How About an Example?
It would surely be useful, but I don t have the heart to make an example of an RIA whose Form ADV sets off all kinds of red flags. Instead, let s take a look at an RIA whose ADV shows pretty much everything I d look for.
Dylan Ross is an RIA and CFP who regularly reads and comments on this blog. His ADV Part II is publicly available on his website. From it, we can see that:
- He charges hourly or fixed fees rather than commissions or AUM fees (and if you scroll through to Schedule F, you can see the specific fees for each service),
- He counsels clients on long-term investing rather than short-term trading,
- He provides advice in the areas of cash flow, debt management, risk management, college funding, retirement planning, estate planning, tax planning, asset allocation and investment selection.
And we can see the following about his investment selection process:
Adviser believes that the appropriate allocation of assets across diverse investment categories (e.g. stock vs. bond, foreign vs. domestic) is the primary determinant of portfolio returns and critical in the long-term success of one’s financial objectives; therefore, Adviser advocates the use of passive, low-cost, broad-market index investments.
Why Not Just Ask?
Wouldn t an RIA would be willing to share any of the above pieces of information if you asked? Yes, almost certainly. Still, I d suggest getting the official documentation for two reasons:
- It may call your attention to a potential red flag that you would not have thought to ask about, and
- It doesn t allow for any wiggle room. Rather than getting a carefully-worded answer that conceals an unpleasant piece of information, you get a check in a box: yes or no.
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September 29, 2010
Treasury Circular 230 Notice
Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.