How to Read Form ADV Without Getting Lost

Form ADV is one of the public documents used to understand a registered investment adviser. It contains important information, but it is not a substitute for asking direct questions or reviewing the full relationship agreement. I am Connor Houlihan. In fund distribution I read a great many Form ADVs, trying to understand an adviser before a first meeting. This is how I learned to get through one without getting lost.

What Form ADV is

Form ADV is the uniform registration form that investment advisers file with the SEC or with state securities regulators. The SEC’s general instructions describe its three parts. Part 1 is mostly check boxes and data. Part 2 is a narrative brochure written in plain English. Part 3, the Form CRS relationship summary, is a short document for retail investors. Advisers must update it at least annually, within 90 days of their fiscal year end, and promptly when certain information becomes materially inaccurate.

Everything is free on the SEC’s Investment Adviser Public Disclosure site at adviserinfo.sec.gov. The firm page shows Part 1 as a web form, the brochures as PDFs, the Form CRS, and a disclosures section. Records remain available for ten years after a firm deregisters.

Part 1A: the data that matters

Part 1A is written for regulators and most of it can be skimmed. These items cannot:

• Item 5, Information About Your Advisory Business. The number of employees and how many of them give advice; the types of clients and roughly how many of each; how the firm is compensated (percentage of assets, hourly, fixed fees, commissions, performance fees); and regulatory assets under management, split between discretionary and non-discretionary. It tells you whether you would be a typical client or an outlier.
• Item 7, Financial Industry Affiliations. Whether the adviser or a related person is also a broker-dealer, insurance agency, bank, or sponsor of private funds. Affiliations are where conflicts originate.
• Item 8, Participation or Interest in Client Transactions. Whether the firm or its people trade in the same securities they recommend, receive commissions, or use soft dollars.
• Item 9, Custody. Whether the adviser or a related person has custody of client cash or securities, for how many clients and how much, and what safeguards apply. For most individuals the right answer is an independent custodian that sends statements directly to you.
• Item 11, Disclosure Information. A series of yes-or-no questions about the regulatory, civil judicial, and other disclosure history of the firm and its advisory affiliates. Every yes requires a Disclosure Reporting Page with details. Read the pages, not just the count.

Schedules A and B list the firm’s owners and control persons. Schedule D holds the detail behind many Part 1A answers, including affiliated firms and private funds. Part 1B applies only to state-registered advisers and adds the questions the states require.

Part 2A: the brochure

Part 2 is written as a brochure and can provide useful context about how an adviser operates. The SEC’s Part 2 instructions require plain English, delivery to you before or at the time you sign an advisory agreement, and an updated brochure or a summary of material changes each year within 120 days of the adviser’s fiscal year end. The items I read first:

• Item 4, Advisory Business. Who owns the firm, how long it has operated, what services it offers, and whether it tailors advice or runs model portfolios. Also the assets under management figure, which should reconcile with Part 1.
• Item 5, Fees and Compensation. The fee schedule, whether fees are negotiable, how and when they are billed, what other costs you bear (fund expenses, custodian fees, transaction charges), and whether the firm or its people also earn commissions. If Item 5 does not let you estimate your annual cost in dollars, ask for a written estimate.
• Item 10, Other Financial Industry Activities and Affiliations. The narrative version of Part 1 Item 7. Here the adviser must describe the conflicts those affiliations create and how it addresses them.
• Item 12, Brokerage Practices. Which custodians and brokers the firm uses, whether it receives research or services from them in exchange for client trades (soft dollars), and how it aggregates trades across clients.
• Item 14, Client Referrals and Other Compensation. Whether the firm pays for referrals or receives economic benefits from anyone other than clients, including custodians and product sponsors. This is where arrangements with fund companies and platforms appear.

Items 6 (performance-based fees), 8 (methods of analysis and risk of loss), 9 (disciplinary information), 15 (custody), and 18 (financial information) deserve a second pass. Item 2 lists material changes since the last annual update and is the fastest way to see what is new.

Part 2B and Part 3: the supplement and Form CRS

Part 2B covers the individuals who will actually advise you. For each, it gives educational background and business experience, disciplinary information, other business activities, additional compensation, and who supervises them. SEC-registered advisers must deliver it to clients but are not required to file it on IAPD, so you may need to ask for it. Compare each person’s history here with their BrokerCheck or IAPD record. They should match.

Part 3, the relationship summary, is the shortest document in the set: two pages for an adviser or broker-dealer, four for a firm that is both. It states the services offered, the fees and costs, the standard of conduct the firm owes you, conflicts of interest, and whether the firm or its professionals have reportable disciplinary history. It also includes suggested conversation starters, written so that an ordinary investor could ask them without embarrassment. Use them.

How I used Form ADV in distribution work

In fund distribution, Form ADV was how I prepared to meet an adviser I had never spoken to. A few minutes on IAPD answered most of the questions that would otherwise have used up the meeting:

• Item 5 told me how large the firm was and what kinds of clients it served, which told me whether an institutional share class or a retail one was the relevant conversation.
• Items 7 and 10 told me whether the firm had a broker-dealer affiliation, which affected which share classes it could use and whether 12b-1 fees were in play.
• Item 12 told me which custodians the firm traded through, which told me whether our funds were available to them at all, and in which classes.
• Item 8 told me whether they built portfolios from individual securities, index funds, active funds, or outside managers, which told me whether to show up.
• Item 11 and the Part 2A disciplinary item told me whether there was something I should know before associating a fund I represented with the firm.

Advisers were sometimes surprised that a wholesaler had read their ADV. The real surprise is how few investors do, given that the document is public and free. The kind of work that involved is described on my experience page.

Reading it alongside everything else

Where to focus: services offered and the types of clients served; fees and compensation arrangements; conflicts of interest; disciplinary and other disclosure information; ownership and business activities. Read it alongside the adviser’s current website, agreements, and the regulator’s public database. Where they disagree, ask why. The website is marketing; the ADV is a filed document; the agreement is the contract. Only the last one binds anyone.

The goal is not to memorize the form. It is to ask better, more specific questions. “Item 12 says you receive research from your custodian. What do you receive, and how does it benefit me?” is a better question than “Do you have any conflicts?” It gets a better answer. The broader checklist is in my essay on due diligence questions, and the fund-specific version is in fund due diligence.

Connor Houlihan
Connecticut