Use Form ADV to Check a Financial Advisor’s Record

Form ADV (“the Uniform Application for Investment Advisor Registration”) is the most important document to check if you’re going to hire a financial advisor (or already have one). You can see an advisor's Form ADV on the Investment Adviser Public Disclosure website at adviserinfo.sec.gov. You can also check state regulator websites where the advisor operates.

The purpose of Form ADV

Form ADV is a mandatory disclosure document that investment advisors file with the U.S. Securities and Exchange Commission (SEC) or state securities authorities. Form ADV is a combination business profile, resume and rap sheet, and it contains the following:

• A description of services, the types and number of clients served and the amount of assets managed.

• Information about the people providing investment advice at the firm.

• An explanation of fees and billing practices.

• The company’s history and principal players’ certifications, education and work history.

• Any disciplinary actions (regulatory or judicial) taken due to misconduct.

It’s not just individual financial advisors and firms employing advisors that are required to file Form ADV. Automated portfolio management companies (robo-advisors) must also file Form ADV.

What to look for in Form ADV

There are two parts to Form ADV.

• Part I lays out the information mentioned above plus more details about the advisor’s background and business.

• Part II is what the SEC calls the “narrative brochure” and contains the meat of what you want to know. This isn’t a fluffy sales brochure diluting any dirt with vague language. It’s a plain-English explainer about the person or firm.

Pay particular attention to the sections that cover:

• Fees charged and how compensation is structured.

• Potential risks for clients (exposure to volatile securities, for example).

• Potential conflicts of interest that could affect the recommendations they make.

• Disciplinary information (against the firm, advisor or key personnel in the company).

• Whether the individual or firm has filed for bankruptcy.

If an advisor gets a commission for selling products, you’ll see the relationship disclosed in Form ADV. If they are paid based on a percentage of assets managed or a flat-rate for one-off services, that will be spelled out.

» Learn more about typical financial advisor fees

Don’t be surprised to see red marks on an advisor’s record; 7% of financial advisors have been cited for misconduct^[0]

» Need an advisor? View our picks for the best financial advisors

Go beyond the background check

Advisors you’re considering hiring should readily offer a copy of Form ADV 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 every year and whenever big changes occur.

Beyond Form ADV, ask these questions:

Are they reputable in other areas of their field?

If a provider offers services beyond investment advice, verify any required licenses with the appropriate regulators. For example, some financial advisors are also accountants, financial planners or insurance salespeople.

Are they good at explaining things?

Most financial advisors offer a free consultation with potential clients. Use that opportunity to ask the advisor to describe her philosophy, fee schedule and services. That can give you a sense of how well your personalities mesh and help ensure that the advisor’s terms haven’t changed since the last ADV filing. (Here are 10 questions to ask a financial advisor.)

Are you comfortable asking questions?

Even after you’ve hired a money pro, don’t stop asking questions. Ask why the advisor recommends a particular product instead of the alternatives. Make sure they’re pitching the insurance policy or mutual fund from XYZ company because it’s the best one for you, not because it pads their bottom line. If they are a fiduciary, they are required to put your best interests before their own. You can check whether an advisor is a fiduciary in Form ADV, which is one more reason it’s essential to review this important document.