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Checking out an Investment Adviser: Form ADV Part 2

If you’re shopping for fresh parsley, you won’t find it by searching in the freezer aisle.

And yet people do this all the time when it comes to looking for financial professionals — or when recommending them to others.

For instance, on the Bogleheads forum, you’ll often see:

  • People asking about a robo-advisor (e.g., Vanguard Personal Advisor Services) when what they’re looking for is financial planning, or
  • People recommending an advice-only planner (e.g., Mark Zoril or Jon Luskin) to somebody looking for an advisor that will manage their portfolio.

To back up a step, registered investment advisers (RIAs) can be broadly grouped into three categories based on what services they offer:

  • Those that are “advice-only” (i.e., they provide planning but do not actually manage the client’s portfolio),
  • Those that provide investment management only, and
  • Those that provide financial planning as well as investment management.

(To be clear, this is only one way to group such professionals. They can also be grouped based on how they charge: hourly, flat fee, percentage of assets, etc. Or they can be grouped based on expertise; to draw a medical analogy, some financial professionals are specialists with deep expertise in a sub-field of financial planning, whereas other professionals are more akin to general practitioners.)

Before considering a specific advisor (or recommending a specific advisor to somebody else), it’s important to know what services are being sought. Are we looking for just investment management? Are we looking for just financial planning? Or are we looking for both? Any of those three options is perfectly valid, but you must know the answer, otherwise our parsley shopper is going to end up in the freezer aisle looking at a bunch of tasty treats but very few herbs.

Once you do know what you’re looking for, how do you know which category a given advisory practice falls into? You read the firm’s Form ADV Part 2 (a.k.a. “Part 2 Brochure”).

What’s Form ADV Part 2?

Form ADV is a form that investment advisers have to file with the SEC. Part 2 of the form contains most of the important information that you’d want to know about an investment adviser. For example, you can see:

  • How the adviser charges for their services (hourly, fee-for-service, percentage of assets under management, etc.),
  • How much the adviser charges for their services (e.g., if it’s hourly, what is the hourly rate?),
  • What services the adviser offers (e.g., if you’re paying 1% per year, are you getting comprehensive financial planning? Or is it just portfolio management, and you would have to pay extra for other financial planning services?), and
  • The adviser’s investment philosophy (i.e., how they pick investments and how they allocate between those investments).

What’s nice about this form is that it’s a way to get the relevant information quickly, without having to filter through a bunch of sales talk (as you would often have to do if you visited the adviser’s website), and without having to give the adviser your contact information.

For instance, if you’re wondering whether PlanVision provides investment management, their Form ADV Part 2 has this very clear statement: “PLANVISION’s services are limited to providing investment advice only and not asset management services to Clients.”

And if you’re wondering whether Vanguard Personal Advisor Services provides comprehensive financial planning, you can find this statement in their Form ADV Part 2: “The Services are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of your financial situation.” Elsewhere it states more bluntly, “We don’t provide tax advice.” (Vanguard PAS is basically portfolio management, plus a basic level of advice relating mostly to the portfolio.)

How to Find an RIA’s Form ADV Part 2

Downloading an RIA’s Form ADV Part 2 is easy:

  1. Go to the SEC’s Investment Adviser Search website.
  2. Look up the adviser by firm name.
  3. Click “more details” then “Part 2 Brochures.”
  4. If necessary, click the link for the most recent brochure filed.

Looking up a registered investment adviser’s Form ADV Part 2 should certainly not be the only research you do on an adviser. But it’s an excellent first step to quickly check for things that would eliminate the adviser from consideration (e.g., they don’t offer the service you’re seeking, they have an important conflict of interests, their fees are too high, they have a minimum asset level that you don’t meet, or they have an investment philosophy that’s markedly different from your own).

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