How to read an advisory firm's brochure (Form ADV Part 2A), item by item

Every SEC- and state-registered advisory firm must give clients a brochure, Form ADV Part 2A, written in plain English. Where Part 1 of Form ADV, the source of the facts on AdvisorCensus, is a set of checkboxes and numbers, the brochure explains them in the firm's own words. It follows the same 18 items at every firm, so once you know the layout you can find anything in a few minutes.

The 18 items

1. Cover page. The firm's name, address, and the brochure's date.
2. Material changes. What changed since the last annual update; read this first on a brochure you have seen before.
3. Table of contents.
4. Advisory business. What the firm does, who owns it, and how much it manages.
5. Fees and compensation. The fee schedule, how and when fees are charged, other costs, refunds, and any sales compensation. See how advisory fees are billed.
6. Performance-based fees and side-by-side management. Fees based on gains, and how the firm handles accounts that pay them alongside accounts that don't.
7. Types of clients. Whom the firm works with, and any minimum account size.
8. Methods of analysis, investment strategies, and risk of loss. How the firm invests and the risks of its approach.
9. Disciplinary information. Legal or disciplinary events material to clients.
10. Other financial industry activities and affiliations. Related broker-dealers, insurance agencies, and other businesses, and the conflicts they create.
11. Code of ethics, participation or interest in client transactions, and personal trading. How the firm handles trading by its own people in the securities it recommends.
12. Brokerage practices. How the firm chooses where trades are executed, and benefits it receives from brokers, such as research.
13. Review of accounts. How often accounts are reviewed, by whom, and what reports you receive.
14. Client referrals and other compensation. Payments the firm receives from others, or makes to others, for clients.
15. Custody. Whether the firm has custody of client assets and what statements you will receive.
16. Investment discretion. Whether the firm trades without asking you first, and any limits.
17. Voting client securities. Whether the firm votes proxies for you, and how.
18. Financial information. A balance sheet if the firm requires prepayment of more than $1,200 in fees per client, six months or more in advance, and any financial condition that could impair its ability to meet commitments to clients.

Where costs and conflicts are

For costs, read Items 5 and 7. For conflicts, read Items 10, 11, 12, and 14: a related broker-dealer or insurance agency, trading by the firm's people, benefits the firm gets from where it sends trades, and payments for referrals. A firm's Form CRS summarizes the same ground; the brochure has the detail.

The people: Part 2B

The brochure supplement, Form ADV Part 2B, covers the individuals who advise you: education and business experience, disciplinary information, other business activities, additional compensation, and who supervises them. Ask for the supplement for each person you will work with. For individuals' registration records, look them up on IAPD and BrokerCheck.

Getting the brochure, and keeping up

A firm must give you its brochure before or when you sign an advisory agreement, and each year it must give clients either the updated brochure or a summary of material changes with an offer to provide it. SEC-registered firms' brochures are on their records at IAPD; state-registered firms file theirs with their states, so ask the firm for it.