The function of an investment adviser is, at its core, to provide clients with thoughtful, expert advice on financial and investment functionalities. Within this role, you are required to continually act in your client’s best interest, which includes disclosing any and all conflicts of interest and material information relevant to your client/adviser relationship. The Securities and Exchange Commission (SEC) formalized this requirement with the amendment of Form ADV Part 2 on Oct. 12, 2010.
As stated by the SEC, this amendment, “require[s] investment advisers registered with us to provide new and prospective clients with a brochure and brochure supplements written in plain English. These amendments are designed to provide new and prospective advisory clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of the investment adviser and its advisory personnel.”
In this blog, we’ll dig into the different disclosures which investment advisers are required to include in their Form ADV Part 2B brochure supplement.
Form ADV Part 2B – Investment adviser disclosures
The purpose of the brochure supplement is to provide an adviser’s client with information on any and all material information which could impact the client. The SEC states it must be provided at the beginning of the client/adviser relationship and on a yearly basis, within 120 days of your fiscal year end.
Disclosures to be incorporated in your brochure include, but are not limited to:
- Explain how fees are charged (e.g., rates, how are assets valued and by whom and if changeable), if fees are negotiable and if fees vary by types of clients/accounts.
- Explain the material risks involved for each significant investment strategy or method of analysis.
- Material facts about specified list of events and any legal or disciplinary events that are material to a client’s evaluation of the integrity of the adviser or its management.
- Material relationships or arrangements with related financial industry participants that create material conflicts of interest.
- Purchase or sale of securities for clients where the adviser or related person has a material financial interest.
- Purchase for personal accounts of principals/staff of same or similar securities recommended to clients, especially those with limited availability.
- Disclose whether, and how often, adviser reviews accounts or financial plans.
- Disclose who conducts the review.
- Description of any cash or other payment by firm or related person for client referrals.
- Advisers with custody must explain that clients will receive account statements directly from the qualified custodian.
- Practices and any limitations clients may place on this authority.
- Proxy voting practices and how associated conflicts are addressed.
- Advisers with discretionary authority or custody of client funds or securities must disclose any financial condition that is reasonably likely to impair their ability to meet contractual commitments to clients, and the manner in which such commitments would be impaired.
Within the brochure, financial advisers should:
- Disclose all material conflicts of interest between you and your clients which could affect the advisory relationship, anywhere adviser’s interests compete with the interests of its clients.
- Provide the client with “sufficiently specific facts” so they can:
- Understand the material conflicts of interest you have.
- Understand the business practices in which you engage.
- Give informed consent to such conflicts or practices or reject them.
- Disclose any other material information that could affect the advisory relationship, even if not specifically set forth in the ADV.
- Some additional material information may have to be otherwise provided to a client, in addition to and separate from, the brochure
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