ADV disclosure: Overview, definition, and example
What is ADV disclosure?
ADV disclosure refers to the requirement for financial advisers or investment firms to file Form ADV with the U.S. Securities and Exchange Commission (SEC) or state securities regulators. Form ADV is a set of documents that provides important information about an adviser’s business, including services offered, fees charged, disciplinary history, and potential conflicts of interest. The disclosure is designed to help clients make informed decisions about hiring an adviser by providing transparency about the adviser’s practices, financial condition, and regulatory compliance.
The form is broken into two parts:
- Part 1: Provides information about the firm’s business, ownership, clients, employees, and potential conflicts of interest.
- Part 2: Contains a narrative brochure that explains the firm's services, fees, and other important details in plain language for clients.
Why is ADV disclosure important?
ADV disclosure is important because it promotes transparency and accountability within the financial services industry. By requiring investment advisers and firms to provide clear and detailed information, it allows clients and potential clients to understand the risks and benefits of working with a particular firm. ADV disclosure helps clients make more informed decisions, ensures regulatory compliance, and helps prevent deceptive or fraudulent practices by financial advisers. It is a key part of consumer protection in the financial services industry.
Understanding ADV disclosure through an example
Imagine a small business owner who is considering hiring a financial adviser to help manage their company’s retirement plan. Before moving forward, the business owner requests the adviser’s Form ADV disclosure. The form includes details about the adviser’s services, fees, and any potential conflicts of interest. For example, the adviser may charge a flat fee for consulting services but also receive commissions for recommending certain financial products. This information helps the business owner understand the costs associated with the adviser’s services and whether there may be any conflicts of interest in the adviser’s recommendations.
In another example, an investor is looking for a financial planner to help with personal investments. The investor reviews the firm’s Form ADV and discovers that the adviser has a history of disciplinary actions related to previous violations of securities laws. The investor may choose to look for another adviser or ask more questions before proceeding, thanks to the transparency provided by the ADV disclosure.
An example of an ADV disclosure clause
Here’s how a clause about ADV disclosure might appear in an agreement:
“The Adviser agrees to provide the Client with a copy of Form ADV Part 2 at the time of the initial advisory agreement and annually thereafter. The Adviser shall update the Client if any material changes are made to the information contained in Form ADV.”
Conclusion
ADV disclosure is a key regulatory requirement for financial advisers that helps ensure transparency and protect clients from potential risks associated with hiring an adviser. By providing important information about the firm’s services, fees, and history, the ADV disclosure allows clients to make more informed decisions about their financial advisers. For businesses and individual investors, reviewing ADV disclosures is an essential part of the due diligence process when selecting a financial professional.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.