What Is a Form ADV Part 2 Brochure? How to Read an Adviser's Brochure

What is the brochure, and why does the firm have to give it to you?

The brochure is the long disclosure document an investment adviser writes about itself. Its official name is Form ADV Part 2A. The firm must give you a copy before or when you sign an advisory agreement. Each year after that, if there have been material changes, it must send you a summary of those changes and offer you the full updated brochure. It is written in prose, not checkboxes, and it is the one place a firm has to explain, in its own words, how it charges you, how else it gets paid, and what that does to its advice.

The SEC does not let the firm write whatever it likes. The instructions to Form ADV list the items a brochure must cover and, for the important ones, the specific points each item must address. Fees are Item 5. Conflicts of interest are spread across Items 10, 11, 12 and 14. Research and services the firm gets from brokers in return for your trades, often called soft dollars, are Item 12. A brochure that leaves one of those points out is not shorter; it is incomplete.

Most people never read it because it can run twenty or thirty pages. That is why Fidelon reads it for you, item by item, and shows what it found with the firm's own sentences and page numbers.

What does the fee section have to tell you?

Item 5 is where the money is. The SEC asks the brochure to state the fee schedule, say whether fees are negotiable, explain whether fees are taken from your account or billed to you, say how often you are charged and whether you pay in advance, list the other costs you will pay such as fund expenses and custodian charges, and explain how you get a refund if you leave after paying in advance.

Each of those is a sentence you can hold the firm to. A brochure that states a maximum fee but never a schedule, or says fees 'may' be negotiable without saying how, has met the rule's letter and left you without the number you came for.

• The fee schedule, with a rate you can apply to your own account size.
• Whether the fee is negotiable, so you know to ask.
• Deducted from your account or billed, and how often, so you can find each charge on a statement.
• The other costs on top of the advisory fee.
• What you get back if you leave partway through a period you have already paid for.

What does it have to say about conflicts of interest?

A conflict of interest is any way the firm or its people get paid, or benefit, that depends on what they recommend to you. Commissions on products, payments from fund companies, free research from a broker, referral fees, and a sister company that sells insurance are the common ones. The SEC's instructions ask the brochure to do more than admit each conflict exists. For each one it should say what the arrangement is, what it pays the firm, what it tempts the firm to do, what it can cost you, and how the firm keeps it in check.

That is the difference between a brochure that says 'we may receive compensation that creates a conflict' and one that says 'our advisers earn insurance commissions, which gives them a reason to recommend insurance, and we do not reduce your advisory fee when they do.' Both are disclosures. Only the second one tells you anything.

One pattern to watch for: a brochure that says the firm 'may' earn a commission on one page and 'does not' earn commissions on another. The firm has hedged. Fidelon scores the sentence that admits the conflict and shows you both sentences so you can ask which one is true.

What does Fidelon check in a brochure?

Fidelon reads each firm's filed brochure against the SEC's own list and shows the result as questions an investor would ask. Can you tell what you would pay and when? Does it explain each conflict and what it could cost you? Do they earn commissions on products, and do they say so? Do they get free research from brokers, and does it affect you? Under each question, every point the SEC asks for is marked Covered, with the firm's sentence and the page it is on, or Not found in the brochure.

A point not found is not a finding against the firm. Many points only apply when the firm has that arrangement, and the page says so when a point does not apply. When a point is not found, the page tells you what to ask the advisor, so the gap becomes a question in your first meeting rather than something you find out later.

Where can you read a firm's brochure yourself?

Every brochure is filed with the SEC and is free to read on the public adviser database, along with the shorter Form CRS. The firm must also give you one directly. If you are comparing two firms, open both brochures to Item 5 and read the fee pages side by side; then open each to Item 12 and look for what the firm gets from the broker it uses for your account. Those two items answer most of what a first meeting is about.