The most important document to pull if you’re going to hire a money pro (or have one on the payroll already) is Form ADV. Technically known as the Uniform Application for Investment Adviser Registration form, this part-resume, part-financial tell-all provides a rundown of an advisor or firm’s history, client makeup, management style, billing practices and rap sheet of misconduct, if any.
Registered investment advisors file Form ADV with the U.S. Securities and Exchange Commission, the state securities authorities, or both. Consumers can get a copy for free via the Investment Adviser Public Disclosure website or by going to their state’s regulator website. The North American Securities Administrators Association maintains a database of state regulator websites.
Anyone you’re considering hiring to help handle your money should readily offer a copy of the form very early in the get-to-know-each-other process. Consider it a red flag if they don’t. Existing clients should receive an updated version annually and whenever material changes are made.
(For many reasons, hiring a digital advisor — aka a robo-advisor — may be more your speed. Here’s how to choose. Robo-advisors also are required to file Form ADV.)
What’s in Form ADV
There are two parts to Form ADV. Part I is a fill-in-the-blank form where you can see how long the company has been in business, what education or certifications the principal players have, how many clients the advisor or firm serves, how much in assets they manage and a summary of any disciplinary actions that have been taken.
Part II, which the SEC calls a “narrative brochure,” is the plain English explainer about the advisor or firm and how business is conducted. Information includes:
- Types of clients served
- A detailed description of services offered
- Fees charged and how compensation is structured
- Methods used for analysis
- The advisor’s investment philosophy and strategy (how portfolios are allocated)
- Potential risks for clients (e.g., exposure to volatile securities)
- Potential conflicts of interest
- Disciplinary information (any regulatory or judicial actions)
- What code of ethics is followed
- Whether or not the individual or firm has filed for bankruptcy
Pay particular attention to the sections on fees and compensation. The financial world is known for passing along fees in a less-than-crystal-clear manner. Form ADV makes it harder to hide behind cryptic language. If an advisor gets a kickback from a particular company whose product they sell, it needs to be disclosed in Form ADV. If they are paid based on a percentage of assets managed or via fee-only services, it’ll be spelled out.
What you find might surprise you
The level of detail provided on ADV Part II can vary. But Part I is tough to fudge since most of the answers require checking a box. The sections about disciplinary actions taken against the firm, advisor or key personnel are most likely to raise red flags.
Credentials Sound Good, But Are They Real?
In a forthcoming study in the Journal of Political Economy titled “The Market for Financial Adviser Misconduct,” researchers found that 7% of financial advisors have been cited for misconduct. Among the largest advisory firms, more than 15% of employees involved in the money advice business have red marks on their records. The top offenders by firm, according to the data, include Oppenheimer Co. (19.6%), First Allied Securities (17.7%) and Wells Fargo Advisors Financial Network (15.3%).
To more comprehensively weed out potential bad apples:
1. Pull ADV forms from advisorinfo.sec.gov for both the individual advisor you’re considering as well as her firm. If the advisor offers other financial services, check out her reputation via the appropriate regulatory entities. Here’s how to do a background check on other types of advisors, including accountants, financial planners and insurance salespeople.
2. As a gut-check during your in-person interview, ask the advisor to describe her philosophy, fee schedule and services offered. Besides giving you a sense of how well your personalities mesh, you want to ensure that the terms haven’t changed. (To find the best match for your situation, here’s a 10-question script to follow.)
3. Even after you’ve hired a money pro, don’t stop asking questions, such as why she recommends a particular product (e.g., an insurance policy or mutual fund from XYZ company). Advisors who are fiduciaries are required to work in the best interest of the client and not pitch some products over others because they make more money for the advisor.
» MORE: Unsure of what kind of help you need? See our guide to finding the right financial advice.