Form ADV Part 2: Why It’s Important and What It Includes

Form ADV is a comprehensive document that includes essential information about your advisory firm. There are three parts, each of which serves a different function and purpose. Form ADV Part 2 covers disclosure requirements for preparing your firm brochure. This brochure, which must be given to each client, includes information about your firm’s business practices, the fees you charge, conflicts of interest, and past disciplinary actions.

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What Does Form ADV Part 2 Cover?

Form ADV Part 2 has two distinct sections.

• Part 2A outlines the various disclosures you must include in your brochure.
• Part 2B is the brochure supplement and contains information about the individuals within a registered investment advisor (RIA) firm (“supervised persons”) who interact with and advise clients.

Both sections apply to all investment advisors who are registered or plan to register with the SEC but don’t apply to exempt reporting advisors.

Completing Form ADV Part 2A

Part 2A lists 19 separate items you’ll need to address. It’s helpful to read through each one individually to understand what’s required and what information you’ll need for the brochure.

Item 1 – Cover Page

Your brochure must have a cover page that includes your:

• Name
• Business address
• Contact information
• Website address, if applicable
• Date the brochure was created

If you included a doing business as name in Form ADV Part 1 that is different from your full legal name, you can use the business name throughout your brochure.

The cover page of your brochure must include this statement or one that’s similarly worded:

This brochure provides information about the qualifications and business practices of [your name]. If you have any questions about the contents of this brochure, please contact us at [telephone number and/or email address]. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Additional information about [your name] also is available on the SEC’s website at www.adviserinfo.sec.gov.

If you refer to yourself as a registered investment advisor you’ll also need a statement in the coverage page explaining registration does not imply a certain skill level or type of training.

Item 2 – Material Changes

If you’ve amended an existing brochure you’ll need to disclose that in the new one. You must explain the material changes that were made and the date the brochure was last updated.

Item 3 – Table of Contents

Your brochure must have a table of contents. It should be easy for the reader of your brochure to navigate and use the same headings as the ones listed in Form ADV Part 2A.

Item 4 – Advisory Business

In Item 4, you’ll describe your business, including:

• Who the principal owners are
• The types of advisory services you provide
• How you tailor your services to the needs of individual clients, if applicable
• Whether you participate in wrap fee programs
• The amount of client assets you manage on a discretionary and non-discretionary basis, if applicable

Item 5 – Fees and Compensation

In Item 5 you’ll disclose your fee schedule and how you’re compensated. You’ll also need to disclose the following:

• Whether your fees are negotiable
• Whether fees are deducted from client assets or billed to them directly
• Additional fees your clients may pay for your services, such as custodial fees or mutual fund expenses
• Whether fees must be paid in advance
• Compensation from the sale of securities or other investment products, including commissions or sales charges

Any conflicts of interest arising from your firm’s fee structure must be disclosed.

Item 6 – Performance-Based Fees and Side-by-Side Management

You must disclose any performance-based fees you or your supervised persons accept. Disclosure is also required if you or your supervised persons manage accounts that are charged performance-based fees and accounts that are charged other types of fees. Form ADV Part 2 requires you to explain how this creates a conflict of interest and how the conflict is addressed by your firm.

Item 7 – Types of Clients

Item 7 is where you’ll disclose the types of clients you advise. If your firm has minimum AUM requirements for working with a client you’ll include that here as well.

Item 8 – Methods of Analysis, Investment Strategies and Risk of Loss

In Item 8 you’ll explain the methods of analysis and strategies you use to shape the investment advice you offer to clients. You must also detail the material risks involved with each one.

Item 9 – Disciplinary Information

Any legal or disciplinary events that would be material to a client’s decision-making when evaluating whether to work with your form should be disclosed in Item 9. That includes:

• Criminal or civil actions against you
• Administrative pleadings before the SEC
• Self-regulatory organization (SRO) proceedings involving your firm

These same items are also included in Form ADV Part 1.

Item 10 – Other Financial Industry Activities and Affiliations

You must disclose other financial industry activities and affiliations in Item 10. For instance, if you’re also a registered broker-dealer or have a registration application pending that would go here. If you have professional relationships with lawyers, accountants, or other individuals and those relationships are material to your advisory business, that must be disclosed in Item 10 as well.

Item 11 – Code of Ethics, Participation or Interest in Client Transactions and Personal Trading

If you’re SEC-registered you’ll need to disclose your firm’s code of ethics, as required under SEC Rule 204A-1. You’ll also need to include potential conflicts of interest for yourself or related persons.

Item 12 – Brokerage Practices

In this section of the brochure, you’ll disclose the factors you consider in selecting or recommending broker-dealers for client transactions. If you recommend a particular broker-dealer based on an incentive to receive client referrals you must disclose that as well.

Item 13 – Review of Accounts

Here, you’ll need to indicate whether you periodically review client accounts or financial plans and if so, how often and what you consider. If someone other than you conducts these reviews you’ll disclose that as well.

If you don’t do periodic reviews you’ll need to explain the factors that would trigger a review. You’ll also need to detail what information from these reviews is conveyed to clients and whether the reports are written.

Item 14 – Client Referrals and Other Compensation

In Item 14, you’ll disclose any economic benefits such as sales awards or prizes you receive from third parties for offering advisory services to your clients. You’ll need to explain any conflicts of interest and how you address them.

Item 15 – Custody

Item 15 details how custody of client assets works and whether clients will receive account statements from you, a qualified custodian, or both. If they’ll receive both you’ll need to add a statement encouraging clients to compare them.

Item 16 – Investment Discretion

Here, you’ll disclose any discretionary authority you accept to manage securities accounts on behalf of clients, if applicable. You’ll describe the procedures you follow before assuming authority.

Item 17 – Voting Client Securities

If you have or will accept authority to vote client securities you’ll disclose your voting policies and procedures here. You’ll need to state whether and how clients can direct your vote and how you address conflicts of interest.

Item 18 – Financial Information

You’ll need to include a balance sheet for your most recent fiscal year here if you require or solicit prepayment of more than $1,200 in fees per client six months or more in advance. The balance sheet must follow generally accepted accounting principles and be audited by an independent CPA.

Item 19 – Requirements for State-Registered Advisors

If you’re state-registered you’ll need to identify each of your principal executive officers and management persons, with a description of their education and background. You don’t need to include this in your brochure if you’ve already added it somewhere else in your Form ADV.

You’ll also need to disclose any other business activities you’re engaged in, outside of giving investment advice, explain your fees, and disclose any legal or disciplinary issues.

Completing Form ADV Part 2B

Form ADV Part 2B is shorter—there are just seven items to complete versus 19. Here’s what you’ll need to include.

Item 1 – Cover Page

You’ll need a cover page for your brochure supplement that includes:

• The supervised person’s name, business address, and phone number
• Your firm’s name, business address, and phone number
• The date the supplement is created

The cover page must include a statement using this or similarly worded language:

This brochure supplement provides information about [name of supervised person] that supplements the [name of advisory firm] brochure. You should have received a copy of that brochure. Please contact [service center or name and/or title of your contact person] if you did not receive [name of advisory firm]’s brochure or if you have any questions about the contents of this supplement. Additional information about [name of supervised person] is available on the SEC’s website at www.adviserinfo.sec.gov.

Item 2 – Educational Background and Business Experience

Here you’ll disclose the supervised person’s:

• Age or year of birth
• Post-secondary education
• Business background, including specific positions held in the past five years

Should the supervised person lack a college degree or business background you’ll need to disclose that. If you include mention of the supervised person’s professional designations you’ll also need to explain the minimum qualifications required for each designation.

Item 3 – Disciplinary Information

Any disciplinary events involving the supervised person that would be material to a client’s perspective of them should be disclosed here. These events must be disclosed for ten years from the date they occurred.

Item 4 – Other Business Activities

If a supervised person is engaged in other business activities outside of offering investment advice those must be disclosed here. If those activities create potential conflicts of interest those must be explained as well.

Item 5 – Additional Compensation

Any arrangements in which a supervised person receives an economic benefit from someone who is not a client for providing advisory services must be disclosed. Examples of economic benefits include sales awards, prizes, and bonuses that are based on sales, client referrals, or new accounts.

Item 6 – Supervision

You’ll need to explain how you supervise the supervised person, including how you monitor the advice they give to clients. If someone other than you is responsible for supervising their advisory activities on behalf of your firm you’ll need to include that person’s name, title, and contact number.

Item 7 – Requirements for State-Registered Advisors

Item 7 is mandatory if you’re registered with one or more state regulatory authorities. Here, you’ll disclose whether the supervised person has been involved in a bankruptcy proceeding or any other legal or disciplinary events not already disclosed.

Bottom Line

Form ADV Part 2 asks for quite a bit of information about your firm and knowing what to expect can make your initial filing easier. You’ll need to file an updated Form ADV annually after your initial registration, but the process may become easier with time and practice.

Tips for Growing Your Advisory Business

• If you’re starting with $0 AUM then you’ll need to know how to drum up clients in a hurry. Developing a comprehensive and consistent marketing plan can help you get on the right track with building a book of business. You may also consider partnering with an advisor marketing platform if you’d like some expert help with prospecting. SmartAsset AMP uses a holistic approach to help growth-minded advisors match with leads. Schedule a demo to learn how you can leverage it to grow a thriving business.
• Form ADV consultants assist advisors with preparing the required documents for initial registration and annual updates. It could be beneficial to work with one of these professionals if you find Form ADV Part 2 (or Part 1) daunting or would simply prefer to have a second set of eyes review your paperwork.

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