Staying on Top of Compliance
With Form ADV
Form ADV, a document required by the SEC that publicizes important information about an RIA’s business practices, conflicts of interests and fees, is intended to help investors make informed decisions about whether to engage an advisor’s services.
When filling out Form ADV, RIAs must disclose:
- Business practices
- Services offered
- Fees charged
- Total assets under management
- Number of accounts
- Number of employees serving in an advisory function
- Percentages of each client type (individuals vs HNW individuals)
- Advisory activities (portfolio management, financial planning, etc)
- Other business activities (Insurance broker, broker-dealer, etc)
- Educational backgrounds
- Professional backgrounds
- Potential conflicts of interest
While the Form ADV requirement is well intentioned, filling it out accurately and thoroughly can be challenging for advisors. For one thing, it can be difficult to understand exactly what needs to be disclosed. Advisors may be working with incomplete or outdated information, resulting in inaccuracies on the form, and of course, simple human error and unintentional oversight can also cause problems with the form.
Unfortunately, these errors can be costly. Failure to fill out Form ADV completely and accurately can result in penalties, fines, and even legal action from the SEC, as well as cause reputational damage and tarnish credibility.
Here, we’ve outlined some of the most common pitfalls we see RIAs run into while completing Form ADV, and offer guidance for ensuring compliance when submitting the form.
Common missteps to avoid
1. Having inconsistencies between Part 1, Part 2 and Part 3
Form ADV is broken down into three parts that detail an RIA’s personal information.
Part 1 requests high-level information about an RIA (e.g., business practices, the persons who own and control them and the persons who provide investment advice on the RIA’s behalf). It also contains several schedules and questions required by state securities authorities an RIA may have to complete depending on their credentials.
Part 2 requires RIAs to create narrative brochures containing information about their advisory firm as well as brochure supplements containing information about certain supervised persons.
Part 3 requires RIAs to create a relationship summary containing information for retail investors.
While some of the requested information may not be applicable to your firm, what’s most important is that you review Form ADV in its entirety and be consistent in the information you provide across all three parts of the form. Doing this will help you stay within regulations and help your clients gain a holistic view of your services.
2. Describing your services inaccurately
Succinctness is key when describing your services. The SEC pays close attention to make sure you actually provide the services you say you do. Avoid using passive voice and be as thorough as possible when detailing the services you offer.
3. Charging inconsistent fees
For the sake of transparency, it is also important that the fees on Form ADV match the fees that you charge clients. While it may be an honest mistake if you charge outside of the fee schedule you slotted on Form ADV, the SEC is notoriously unforgiving of these types of mistakes and will fine you for small and large violations alike.
4. Describing your business inaccurately
Don’t overcomplicate things — use your natural writing voice to clearly describe your business and avoid using jargon and hypothetical language in the descriptions. Remember, whoever processes your Form ADV will likely be interacting with your business for the first time, so provide enough detail so they understand your business without getting lost in irrelevant details.
5. Failing to report conflicts of interest
This one may sound obvious, but disclose any type of conflict of interest you could potentially have with your client. It doesn’t matter how harmless or innocuous the situation may be, if you think there is any potential for conflicting interests, report it on your Form ADV.
6. Miscalculating your AUM
Accurately calculate your assets under management (AUM) by including the securities portfolios for which you provide continuous supervisory or management services as of the date of filing Form ADV. Overreporting or underreporting your AUM for any reason advantageous to your firm can lead to a hefty fine and damage your firm’s reputation.
The most important thing to remember when filling out Form ADV is to approach the process with confidence and candidness — combatting confusion with clarity. Be purposeful with the language you use and make sure what you write is an accurate representation of your business and credentials.
Avoiding these pitfalls and using this direction will help you stay in line with the SEC. For more information on Form ADV and how to file it, please visit the SEC’s instructions document.