Looking for a financial planner? I’ve got the ultimate pro tip to help you evaluate a financial planning firm.
Before you entrust your money to an investment advisor, you should learn everything you can about the firm or individual and how they do business. Fortunately, many resources can help you evaluate a financial advisor, including the SEC-required document Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Advisers—the ADV for short.
Here’s how to leverage this incredibly useful information.
The Securities and Exchange Commission requires any individual or organization (such as Mosaic Financial Partners) working as a registered investment advisor and managing more than $100 million to file and update an ADV annually. The form details the advisor’s investment style, lists the assets they manage, and names key officers in the company.
Reviewing the ADV of a financial advisor you’re considering doing business with can help you understand how the firm operates, give you an idea of what it might cost to work with them, identify any potential conflicts of interest, and discern if the firm’s advisory style is a good fit for your investment objectives.
Reading the ADV
The ADV is divided into two main parts. The first part of the ADV tells you:
- The filing advisor’s education
- Basic business information such as location, hours, phone number, and website address
- Type of company (corporation, sole proprietorship, LLC, etc.)
- The number and type of employees
- The number and types of clients they have (high net worth individuals, charities, state or municipal governments, etc.)
- How the advisor gets paid
- Total assets the firm manages
- Other business activities of the firm
- History of any disciplinary actions against the firm
The second part of the ADV is a brochure that is organized with a detailed table of contents and includes information about the firm such as:
- Any material changes from last year’s information
- How long the firm has been in business and who owns it
- Types of services offered
- Fees charged to clients
- How advisors are compensated
- Information on how advisors analyze market information, formulate investment strategies, and manage risk of losses
- Any disciplinary actions taken against the firm
- Other financial industry activities and affiliations
- The firm’s code of ethics
- Brokerage practices
As you review the ADV, keep in mind what you’re looking for in a planner. While it won’t outline how the firm will specifically help with stock options, the ADV will list overall focus areas. Interested in the firm’s asset allocation? Search the ADV for the term, and you can see how it is addressed in investment management, regular reporting, and more. Look for the terms that resonate with you. (For example, if you’re on a PC, you can use the "CTRL F" keyboard command in our ADV to search for a term.)
A Wealth of Information
ADVs contain far more information than we could list here. Unfortunately, the nature of the information they contain means the average ADV can be a very dry and weighty read. However, they contain a wealth of information that can be useful to investors as they’re evaluating financial advisors—which is one of the goals the SEC hopes the documents achieve.
Because ADVs can be a difficult read, the federal government provides a great deal of online information about the documents and how they work. Here are some links that can be helpful in understanding an ADV:
- For background information on the ADV, visit https://www.sec.gov/about/forms/formadv.pdf
- To get the ADV and other information about a specific advisor without crawling their individual website, go to the Investment Adviser Public Disclosure website: https://advisorinfo.sec.gov/IAPD/Default.aspx
- You can find fast answers about the ADV here: https://www.sec.gov/fast-answers/answersformadvhtm.html
- For a Q&A on what to know before hiring an investment advisor, go here: https://www.sec.gov/reportspubs/investor-publications/investorpubsinvadvisorshtm.html
- To read a glossary of terms, try this link: https://www.sec.gov/rules/final/2011/ia-3221-appc.pdf
So use the ADV to evaluate a financial planning firm. Start with us: click here to review the ADV of Mosaic Financial Partners.
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