Form ADV Part 2A overview for Series 63, 65, and 66 exams

Tyler York

Form ADV Part 2A is an investment adviser disclosure form that is tested on the NASAA Series 63, 65, and 66 exams. In this video, we go over what the form contains, what it’s for, and walk through a practice question that you might see on the exam.

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Full Form ADV Part 2A overview for Series 63, 65, and 66 exams video transcript:

Form Adv Part 2 A is the big disclosure document that investment advisors utilize to tell their potential clients and current clients what they can expect by doing business with the advisor. This document is often referred to as the brochure, and you can think of it just like a typical brochure. Hey, you want to do business with me? Here's a pamphlet that'll give you an idea of what it's like to do business with my company.
We will cover all the important components of this disclosure document in this video, but what I would encourage you to think about is if you're about to hire a firm to manage your money, what are all the things that you might want to know about doing business with that company? All of those things are likely in the brochure, but let's go ahead and dot our i's and cross our T's and make sure we know the important components that are likely to be tested on the exam.
In the achievable program, we breakdown form ADV Part 2 A into six primary components, the first of which is general business characteristics and this section is pretty much what you would expect. It includes a description of the business, how long the advisor has been in the securities industry and the type of advisory services the business provides.
And this could include everything from, hey, do we actively manage your money for you on a discretionary basis? Do we do it on a non discretionary basis, meaning that we just meet with you and make recommendations and then do whatever you want to do? Do they have a RAP fee program where they charge one fee for investment advice, trade execution, etc. There are a lot of advisory services these businesses can provide and that type of information is included in this part of form. ADV Part 2 A. The next section is a big section.
And clients will really care about this. It is fees and compensation. And this one's pretty straightforward too. What does the advisor charge for their services? What type of fees do they charge? Meaning, do they have an hourly fee structure? Do they have a fixed fee structure? Do they charge an assets under management fee? Do they charge performance fees? Additionally, this section will cover whether fees that are prepaid, are they refundable, are they negotiable, and whether or not the advisor is paid by a third party.
In any way, shape or form that could be something like, hey, I'm your advisor and I give you investment advice on what you should do in your portfolio. But by the way, Vanguard pays me to recommend their funds to my clients. That would be an example of thirdparty compensation. Obviously this is a really important section for clients, not only so they understand what they're going to pay for the services they're being provided, but also to know if there's any kind of conflict of interest, especially if there's a third party paying.
Them to do something behind the scenes, and we'll talk a little bit more about conflicts of interest later on in this video. The next section discloses what type of clients the advisor typically works with, and this is important.
Because advisors typically specialize with certain types of clients. For example, an investment advisor giving advice primarily to large institutions like insurance companies or hedge funds, something along those lines. That type of advisor might not be the best for, say, an individual that maybe doesn't have a ton of money to invest into the market and is just getting started. Also included in this section is whether or not there are any prerequisites to work with the advisor, for example in order to hire.
This advisor you have to have a half $1,000,000 to invest. Otherwise you just have to go somewhere else for investment advice. Some advisors have those requirements, some don't, but it's important for clients to be aware of them if they do exist. The next section is investment philosophy, and this can be also a really important section.
Especially for clients who have an understanding of how the market works. For example, if I'm the type of investor that likes risky, maybe more aggressive type investments, I probably don't want to put my money with an advisor that specializes in giving U.S. government securities advice. Those are really safe securities and probably would not match with whatever I'm looking for in terms of investment advice. Clients can find the types of securities. Advisors recommend how they analyze those securities to determine if they're good or.
Bad investments, and sometimes it will even include a description of the risks that investors face with the specific securities that these advisors typically recommend. Disciplinary information is also disclosed on the brochure. This also is a really important section. I guess they're all important, but you'd probably want to know if your advisor had a criminal past, if the regulators had maybe gone after them, maybe suspended the license because of some unethical activity, maybe even if they had their license revoked a long time ago.
There are a number of different things that will go in the disciplinary section. This tends to be the bad stuff, but it's important that advisors disclose this and are transparent so clients know who it is they're hiring to manage their money, and the last big section is going to be conflicts of interest. We already talked about this a little bit before about say, hey, if I'm recommending a security to you like a Vanguard fund. And Oh yeah, by the way, Vanguard is paying me behind the scenes to recommend the fund to you, That is a.
Conflict of interest. In case you're wondering, a conflict of interest in general is any circumstance that may jeopardize the prioritization of the clients interests. Advisors almost always have to maintain a fiduciary relationship to their clients, meaning they have to prioritize their clients interest above and beyond even their own. In the real world, there are endless numbers of potential conflicts of interest. For example, if I'm recommending a stock to you, that.
My brother is the CEO of the company whose stock that's from. That's a conflict of interest. If my company is running a sales contest where we're encouraging our representatives to sell, self sell and get more products into the hands of our clients, that's a conflict of interest. And all those circumstances there is an incentive to make a recommendation, not because it's best for the client, but maybe because of something else, like it makes the advisor more money or I'm recommending a security that my family.
The member is tied to somehow, someway. There's nothing illegal about a conflict of interest as long as it's properly disclosed to clients in. One of the primary ways you can disclose it is put it in the brochure. Now that we've covered the primary parts of former DV Part 2 A, let's go ahead and take a look at a practice question to see if we can understand how we might see questions on this topic.
OK. Let's go ahead and put the question up on the board. Here it is. All of the following disclosures are required to be made to investors in form Adv Port two way except if you want to go ahead and pause the video, see if you can answer the question yourself and then we will break it down together here in just a moment. All right, You think you have the answer. Let's go ahead and see. We'll start with the top left answer that's in front of you.
Salaries of investment advisor representatives with client facing roles, that's an interesting one. We talked about how the brochure covers fees and compensation received by the advisor. But remember, when we're saying the term advisor, we're talking about the business itself. And yes, it's important for a client to know, hey, what fees am I paying, what type of behind the scenes compensation is the advisor receiving, if any. All that is important and all of that is also on a firm basis.
Meaning we're looking at the investment advisor, the company. We didn't mention anything about investment advisor representatives, which are the employees of the business. Another part of Form ADV, in particular Form ADV Part 2B, the brochure supplement that is where information related to investment advisor representatives will go, but.
Even in that part of form a DV, we're not going to get a disclosure of information related to how much an investment advisor is making on a salary basis. While transparency is really important in the industry, this is arguably going too far telling exactly how much an investment advisor representative is making. Again, the client will know what type of fees the advisor collects. Are they hourly fees? Are they fixed fees? Are they asset under management fees? Are they performance fees?
They will know that, but clients will not know exactly how much the firm is sharing with investment advisors, representatives or paying them for their employment. So with that being said, that is probably our right answer question is basically asking what is not informing the Part 2 A. Let's go ahead and assume that's the case, but it's important for us to move on and look at the other 3 answers just to make sure that we feel good about that one being the correct answer. Let's go to the bottom left.
Conflicts of interest related to the firm's activities. Yes, this is a really important part of form 80V port two way. Any type of ongoing conflicts of interest have to be disclosed in the brochure. There's no way around that. It's important to be transparent here. This is definitely going to be in the brochures. So this is not the correct answer. Let's go to the top right investment philosophy of the firm.
Yes, We talked about this. It's important for clients to know what type of advisor they're hiring. What's their philosophy when it comes to investing? Are they a little bit more aggressive? Are they a little bit more conservative? What type of financial products do they typically recommend? Do they specialize in anything? How do they view the market? How do they view investing? There's a lot to unpack here and this is definitely disclosed in the brochure. So this is not going to be the right answer. We'll mark that one is wrong. And the last one.
The typical type of client handled, Yes, this is also disclosed. Does the advisor typically handle large institutional clients? Do they handle wealthier clients? Do they handle smaller individual clients? And maybe you don't have a ton to invest.
This is disclosed in the brochure so that clients know what type of advisor they're dealing with. And yes, advisors typically specialize in these areas. Advisors working with large institutions are probably unlikely to work with small investors with not a ton of money to invest into the market and vice versa. So this is our last incorrect answer and that confirms it.
The first answer we looked at is the right answer. Salaries of investment advisors, representatives, whether their client facing or not are just not going to be disclosed in the brochure also known as Form ADV Part 2A.
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