New Form ADV-2 adding costs, confusion

It isn't easy - or inexpensive - to spell out practices and make disclosures clear for clients, some say

Oct 17, 2010 @ 12:01 am

By Lisa Shidler

A new rule aimed at making the financial advisory business more understandable to clients is giving advisers a headache.

Starting next spring, many financial advisers will be required to provide clients with “plain-English” descriptions of their investment philosophies, fee schedules and conflicts of interest on the Securities and Exchange Commission's Form ADV Part 2. The rule change, which was unanimously approved by the SEC in July, is intended to make it simple for clients to compare advisers' services and business models.

But advisers said that putting the new brochures together is anything but simple.

As the months count down to the deadline for complying with the new rule, many are struggling to deal with the added costs and difficulty of transforming complicated legalese into readable text. Part of the problem, they said, is that the SEC has given little in the way of direct guidance on how the brochures should be written or organized.

“There's just so much left to interpretation,” said adviser Jim Pollock, whose firm, Pollock Investment Advisors LLC, manages nearly $80 million in assets.

“We're just trying to understand this. It's really complicated,” Mr. Pollock said.

Newly registered advisers will be required to submit the new Form ADV Part 2 after Jan. 1. Current advisers are required to submit the new form ADV Part 2 with their first fiscal year-end update after Dec. 31. 

Because many investment advisers' fiscal years end Dec. 31, that means most — but not all — will be required to file the new form by March 31.

Complying with the added disclosure requirements won't be cheap. The average cost to hire a consultant to craft a new filing ranges from $3,000 to $10,000, said Brian Hamburger, founder and managing partner of MarketCounsel LLC.

In addition to the one-time fee to produce the new brochure, advisers will face added costs and added time to update the form throughout the year as changes occur in their practices.

For adviser Patrick Tucker of Meridian Management Inc., a registered investment advisory firm with $100 million in assets under management, the initial price tag of complying with the rule change was $6,000. That is double his usual annual compliance bill.

“It's a killer,” Mr. Tucker said. “You never like to pay for the legislative stuff.”

Although advisers can choose from several free templates designed to simplify completing the form, even these require considerable time to complete the necessary customization, practice-management experts said. Addressing complicated topics with simple and lively narrative is particularly difficult.

“Advisers just want to cut and paste previous disclosures, and it won't work,” said Patrick Burns Jr., president of Advanced Regulatory Compliance Inc. and managing attorney with an eponymous law firm. “They're being asked to write short sentences with an active voice, but the questions are more complex.”

Mr. Burns has crafted a dozen of these documents and expects to have completed more than 100 by the end of this month.

Difficult areas for advisers to address include the risks that might accompany a particular method of investment analysis, strategy or security in which an adviser specializes, a description of an adviser's policies and procedures if he or she votes on client securities, and the disclosure of any soft-dollar services received from a broker-dealer or a third party, and the potential conflicts.

These are complicated matters, said Mr. Burns, who counsels advisers that it is usually better to err on the side of too much disclosure. For example, if an adviser receives discounts from a technology vendor as a result of a relationship with a broker-dealer, the adviser should disclose the relationship and the discount.

Because of the complex nature of the necessary disclosures, advisers shouldn't race to complete the form, Mr. Hamburger said.

“There are some early adopters, but the smart money is on holding off,” he said. “Firms rush for a solution, and we don't want our advisers to be on the front end.”


Since the form isn't due for several months, Mr. Hamburger encourages advisers to make sure that they are prepared to describe their firm and its philosophies carefully and concisely.

Advisers are already wrestling with how they are going to position their firm in this document, said David Canter, executive vice president of practice management at Fidelity Investments.

“It's causing them to take a thoughtful look at how they're describing their practice to their clients and prospects,” he said.

Adviser Margaret Sucré-Vail of Sucré-Vail Wealth Advisors Inc. will hire a consultant to fill out the form. But she wants to send the right message to clients and prospects.

“You've got some pressure to make sure you get your branding right,” said Ms. Sucré-Vail, whose firm manages about $50 million in assets. “You also have to communicate so that clients can understand your strategies.”

And once advisers have done their self-evaluation, they also need to have a plan to keep the document up-to-date, said John Anderson, head of practice management for SEI Advisor Network.

In a webcast survey of 100 advisers conducted by his firm last month, 80% said they predict that they will spend five additional hours each month working on the form, including time spent updating the document once it is filed.

“That's going to be a challenge,” Mr. Anderson said. “It means they'll have less time with clients when clients need it most.”

So far, no one has lost any time with clients, said Michael Foltz, an adviser with Balasa Dinverno Foltz LLC, which manages $1.5 billion. The firm has hired a consultant to work on the document, which will cost nearly $10,000. It is expected to be completed in about a month.

“The document is very important in the eyes of the SEC,” Mr. Foltz said. “We wanted a consultant to help us through the nuances of all of the requirements.”

E-mail Lisa Shidler at


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