Inevitably, every firm will be faced with ADV Updates. Inherent in the growth of your business is change, and with those changes come the regulatory obligation to make updates to your ADV Part 2.
Here are a few quick tips to help you confidently navigate what you need to know about RIA compliance and serving as your own CCO.
What Is Form ADV Part 2?
According to the SEC website, “Form ADV Part 2 requires investment advisers to prepare narrative brochures written in plain English that contain information such as the types of advisory services offered, the adviser’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel of the adviser. The brochure is the primary disclosure document that investment advisers provide to their clients.”
First, let’s break down three critical sections of this definition.
1. Narrative: When we think of a “narrative,” we think of a story or some written account of connected events. This is exactly the approach to take when updating your ADV Part 2.
Regardless of which item you update within the document, make sure that the changes you make connect to the rest of the document to make a coherent picture of how your firm operates.
Write your ADV Part 2 as if you are writing a story about your firm.
2. Plain English: It seems counterintuitive, but many advisers tend to explain things verbally differently than they explain things in writing. Using “Plain English” can help bridge the gap between verbal and written explanations.
The ADV Part 2 should center around the use of proper grammar, without slang or colloquialisms. Focus on turning your conversational tone into plain English for the purposes of drafting or updating this document.
3. Disclosure Document: A major part of the regulatory scrutiny surrounding ADV Part 2 documents is the level of disclosure. With this document, the more detailed the firm is regarding the information input in each Item, the more effective the document from a regulatory perspective.
When disclosing information about items such as fees or services offered, ask yourself, “If I were a prospective client of my firm, what questions would I have for the adviser before I sign the advisory agreement?”
Then, simply answer those questions along the way as you update the document.
Incorporating Language into Existing Documents
Incorporating new language into an existing ADV is a common requirement with RIA compliance. For instance, if you change or add a custodian or recommended broker dealer, you may be required to update your ADV Part 2 to reflect that change.
In this case, the most important thing to remember is to maintain the integrity of the document. Adding something to your ADV Part 2 doesn’t mean you have to delete something else that is already in the document.
If you are still using the previous custodian, and you are adding an additional custodian, then there is no reason to remove language from the previous custodian. The same is true if you are adding a third party asset manager.
Just add the new language and review the entire document to make sure that it reads coherently (remember the “narrative” part from the section above).
Updating Language Pertaining to Fees
In some cases, you may need to update language in relation to a change in fees. It’s easy to update the numerical amount, but it’s a bit more challenging to update other fee-related items, such as termination and refund clauses, or methods of payment.
When doing so, simply be as descriptive as possible.Try to cover all possible scenarios in your verbiage.
Please note that you will need to update your Advisory or Financial Planning Contracts along with any changes to Fees and Compensation on your ADV.
Stay Calm and Keep Compliant
The last thing to address when you update the language in your ADV Part 2 — and perhaps the most important thing — is the psychological aspect of this process.
For many of us, just looking at long and detailed regulatory documents is stressful. As a result, we immediately begin to doubt our abilities to draft or make updates to the document.
Don’t allow yourself to be defeated by an unsubstantiated lack of confidence. Before beginning the process, take a deep breath and say, “I CAN DO THIS.”
It may sound silly, but half of the battle in updating this type of document, is diving in head first and working through it confidently. Good Luck!
About the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.