Good financial advisers can develop a suitable investing strategy and plan for their clients, given the client’s time horizon, risk tolerance, and personal preferences. Some investors, however, may feel that finding a good adviser can be as challenging as investing itself. Fortunately, the Securities and Exchange Commission offers an underutilized resource to make the process easier.
The Investment Adviser Public Disclosure (IAPD) website is a user-friendly searchable database of registered financial advisers and a repository for their Form ADVs, documents that disclose useful information about an adviser’s business. Once you’ve accessed the site, you can begin to address the important questions associated with finding an adviser.
What Does The Adviser’s Business Look Like?
The registered investment adviser’s Form ADV discloses important information about the firm, including the firm’s number of employees and clients, their types of clients (for example, high-net-worth individuals, charitable organizations, or pension funds), and the amount of money the firm manages. Perhaps you’d prefer the attention and dedication of a smaller adviser or the resources and scale of a larger adviser. The Form ADV can provide this insight you need.
Is The Adviser Nearby?
On the IAPD site, you can search for your home city to return a list of nearby financial advisers. Having a local adviser can be beneficial. Not only are you likely to have easier access, but the adviser may have better ideas about local investment opportunities that can support your community.
Does The Adviser Have A History Of Misconduct?
The Form ADV includes “Disclosure Reporting Pages” that describe regulatory, civil, or criminal actions brought against the firm, any resulting penalties or sanctions, and the firm’s written response to them. Understanding the history of an adviser’s conduct is important. Academic research published in the Journal of Financial Economics and Corruption and Fraud in Financial Markets: Malpractice, Misconduct and Manipulation shows that past frauds, violations, and misconduct as revealed on these documents can be predictive of future instances of misconduct.
Does The Adviser’s Investing Philosophy Match My Own?
Part 2 of the Form ADV, known as the “brochure,” describes everything from the fee structure of the firm to the firm’s investment strategy. You should read these forms carefully to determine the extent to which the adviser’s investment philosophy aligns with your own.
What Other Factors Should I Consider?
Keep in mind that smaller advisers managing less than $100 million are not necessarily required to complete an ADV filing. The SEC still maintains a list of these “Exempt Reporting Adviser” firms on the IAPD site. Additionally, the SEC does not verify all information as filed on the Form ADV. However, the consequences of an adviser misleading on these forms is severe: “intentional misstatements and omissions constitute federal criminal violations,” per the SEC.
Investors can additionally verify whether an individual adviser possesses the Chartered Financial Analyst or the Certified Financial Planner designations. These credentials require the adviser to pass rigorous exams, have suitable work experience, and pledge to adhere to a code of ethics and standard of conduct. You can verify if an adviser has either designation on these programs’ official websites — the CFP Board of Standards and the CFA Institute. For certain estate planning roles, you may prefer a financial adviser who is also a legal expert. You can verify with state bar association websites the status of an individual’s legal license.
Investing can certainly be daunting, and many investors would benefit from the services and advice that financial advisers have to offer. Freely available and easily accessible Form ADVs on the IAPD site are a great resource for investors that wish to learn more. Yet, accessing an ADV is only the beginning. Consumers should revisit these filings regularly to keep up to date with the status and condition of a financial adviser.
Speaking directly with an adviser, preferably in person, is also crucial. Solicit references and ask questions. Ensure the adviser takes a pragmatic approach to investing and that their explanations about their firm are consistent with what they disclose in their Form ADV. Establishing trust between an investor and an adviser takes time, and the IAPD site is a useful tool to help with that process.