New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 20,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Checking out an Investment Adviser: Form ADV Part II

Editorial note: We discussed this topic a couple years back, but a few reader emails have made me realize it’s time to cover it again.

When researching a registered investment adviser (RIA), in my opinion the single best first step you can take is to read the RIA’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 his/her services (hourly, fee-for-service, percentage of assets under management, etc.),
  • How much the adviser charges for his/her 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.

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 “get details” then “Part 2 Brochures.”
  4. If necessary, click the link for the most recent brochure filed.

How About an Example?

Let’s say you recently read Allan Roth’s book How a Second Grader Beats Wall Street, you liked it, and you’ve decided to include Allan’s firm Wealth Logic as one of several firms you’re considering. But first you want to find out a bit more about his practice, how much he charges, and so on. So you look up Wealth Logic on the SEC site and download the ADV Part 2 brochure.

With regard to how Allan’s firm charges clients, you find the following plain-English statement:

“All fees are hourly or fixed dollar to minimize any conflicts of interest. No additional profits can be made as a result of the advice rendered. The hourly rate is currently $350. This rate is both negotiable and can be capped for a period of time. All fees are due within 30 days of the billing date and a retainer amount may be requested.”

It’s clear and to the point. And if, for example, Wealth Logic instead charged a fee based on the amount of assets under management, there would be a table showing exactly how that fee is calculated.

With regard to what types of investments Allan’s firm recommends to clients, you’ll find the following statement:

“Minimizing expenses and emotion, and maximizing diversification, are core methods Wealth Logic applies in designing portfolios. Broad index funds of mutual fund and ETF categories are those most often used in the practice, as well as Bank and Credit Union CDs going directly to those institutions insured by the FDIC or NCUA.”

Again, it gets right to the point with very little fluff.

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., an important conflict of interests, fees that you think are too high, a minimum asset level that you don’t meet, or an investment philosophy that’s markedly different from your own).

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing

Comments

  1. I agree that this would work well for a reputable firm that promotes low cost investing and fixed fees. But it looks like these forms are filled out by the firms themselves and probably not checked too thoroughly. I bet some of the shadier/higher cost firms have some eloquent language in there to disguise their fee structure and make themselves sound appealing.

  2. Harry,

    I’m not sure to what extent the content of the form is regulated, but I get the impression there are certain things that must be in there and must be in there in a certain way.

    For example, the reason this article topic came up was that I recently got multiple emails from readers asking me about particular RIAs. Having never heard of either of the RIAs in question, I looked them up. In each case, the information in the form was enough to say, “I’d keep looking.”

    In both cases the asset management fees were high (AUM fees ranging from 1.25%-2.25%). And those fees were detailed very clearly. And in one case any additional services came at an additional cost, and that was clearly explained as well.

Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2019 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator (beta): Open Social Security