Real world example of Form ADV Part 2A

Tyler York

The investment adviser disclosure Form ADV Part 2A is one of the key things IA compliance needs to manage and is tested on the NASAA Series 63, 65, and 66 exams. In this video, we walk through a real world example to help you understand the form and how it can show up on the exams.

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Full Real world example of Form ADV Part 2A video transcript:

You've learned a lot about the brochure, also known as Farm ADV Part 2A, and a lot of this probably feels like conceptual, like just, hey, I guess this is stuff I have to know. But I think it's important for you to see a real world example so you know exactly what a brochure typically looks like. I've actually found an example we can go through from a small investment advisor out here in my home state of Colorado. We'll take a look at Intelligent Investing's brochure right now.
All right, here's your first look at a brochure. By the way, the style of this brochure is the choice of the person who's running this company. We'll talk about that person here in a second. And every brochure has a little bit of a different, say, flair to it. Some use different fonts. Some use kind of a different look to them. This is what Intelligent Investing's brochure looks like. It's not some boring government form. The purpose of form adv port two way, and actually the reason why we call it a brochure.
Is we're trying to make this thing client friendly. We want our clients to read this. We want them to be aware of what it is they're getting into when they hire the advisor. We want this to be at least somewhat engaging. Now still, it's not going to be the most exciting thing to look at in the world, but if you've ever seen any other form, for example Form U4.
Formula four is just a boring government form. Anyone looking at that form would probably fall asleep after the first couple paragraphs at least. This is a little engaging. And again, that's the point. First thing, I'll just disclose this. I have no connection to intelligent investing other than hey, they're an investment advisor here in Colorado. I literally went on the investment advisor public disclosure. You can just Google IAPD and you can find brochures for pretty much any advisor out there on that public disclosure forum I just looked.
For advisors here in Colorado, this is one of the first ones that came up on my random search and it looked like a good example of a brochure. Intelligent investing is a one person investment advisor firm based out of Loveland Co and let's go ahead and dive into the specifics and see what this business is all about. Let's take a look first at the table of contents.
There's a lot of stuff here. The first page is just a cover page. The second page was material changes and there was actually nothing there, which just means that from the time this brochure was created to now there haven't been any big monumental changes to the business. So it sounds like the guy who runs this kind of does the same thing every single year, and that tends to be the case with most smaller advisors.
Advisory business, like what does this investment advisor do, fees and compensation. We talked a lot about that in the previous video on achievable performance based fees, types of clients, methods of analysis, disciplinary information. And as you go down the line, you'll see this is pretty much everything we've covered in this achievable chapter. The next page covers the advisory business which basically goes into what intelligent investing offers their clients. You can see the bullet points there, they help you determine investments.
Strategy, your asset allocation, assessment of risk tolerance, personal investment policy, which helps determine basically what they're going to do with your assets or what type of recommendations are going to make to you based upon your situation. Asset selection, regular portfolio monitoring. Those are the primary services that intelligent investing offers their clients. And if you're really interested, you can pause it and try to read it. Or you can look this thing up on IAPD. If we Scroll down a little bit, the advisor also offers pension.
Consulting services. So it sounds like organizations that offer pensions to their employees if they need help investing their money to make sure they can pay the retirees sometimes until the day they die. Hey, this is a service that intelligent investing offers. They also do general financial planning and right below that you can see that their services are limited to specific types of investments. Another way of saying, hey, we're not going to recommend just anything to you, here are the things that we generally recommend and we're not typically going to go outside of these bounds here. Look at this.
Mutual funds, fixed income securities which include debt securities and things like preferred stock, equities that would be stock as well ETF's, treasury, inflation protected linked bonds, etc. non-us securities. Here's an interesting thing, they actually disclose how much they have in terms of assets under management. As you can see here they have nothing for discretionary. A discretionary account is 1 where a client signs a power of attorney gives it to the advisor which gives them the ability to trade in that account.
Account and make decisions on behalf of the client without getting their explicit approval before each trade. That's great for the type of client who's just like hey, take care of my account. I don't want to deal with this. You do everything. I don't even need you to call me, just do it. This investment advisor doesn't do any of that. All of their assets under management are non discretionary which means they give advice and say hey, here are the things I think you should do in your account. Here's a plan. Are you OK with me implementing this plan? So a non discretionary type of account would.
Mean that they have to get approval before taking part in any kind of transaction with a specific client item number 5, fees and compensation. You better believe this is probably one of the primary sections that clients are going to open up and take a look at. This is what this advisor charges and they charge an assets under management fee. Their highest fee if they're managing anything from zero to half 1,000,000 bucks is 1.25% anything from you know half a million and a dollar up to 2,000,000 it's.
Percent and anything from 2,000,000 upwards is .8%. Typical advisors will usually charge on the low end something below 1% on the high end, maybe 2 or 3% if they're really good at what they do. But hey, these are pretty reasonable fees at least in the grand scheme of advisors. If we Scroll down a little bit, looks like they charge basically the same fees for pinching consulting advice. On the following page it talks about other fee structures. So for example, for financial planning, looks like they have a fixed fee structure, could be anything from three and a bucks to 10,000.
Hourly fees are another structure some clients would prefer that seems like he charges anywhere between 100 and 250 for hourly fees. These fees might seem kind of high if you've never hired a professional like a lawyer or an advisor to do stuff for you, but these again are pretty reasonable fees for the grand scheme of things in this part of the industry. Item 6 covers performance based fees, which are basically fees where the advisor is collecting part of the gains that they make for you, For example, if they recommend a stock to you that.
That you then make $10,000 on. If they kept 2000 of your $10,000 profit, that would be a performance based fee. Later in the achievable material, you'll learn more about this type of fee structure in the type of client that you can charge it to. You can't charge it to just anyone. Clients typically have to have a little bit of money at their disposal before they're eligible for this type of fee structure, but doesn't matter here. Intelligent investing does not charge this type of fee to their clients.
Item 7 type of clients Hey, looks like they do a little bit of everything across the board. We have individuals, high net worth individuals which are just wealthy people, pension and profit sharing plans, which are institutions, charitable organizations. Seems like they do a little bit of everything here and also they have no account minimum.
So hey, maybe I can show up with $1000, they can help me invest that money or I can be a charitable organization or pension plan and have 100 million to invest in. This advisor will still help me. Item 8 covers methods of analysis. Basically, what does this investment advisor do to find the right investments for you. And there are a number of different things they do. Looks like there's a little bit of technical analysis, a little bit of fundamental analysis, some modern portfolio theory, quantitative analysis. There are a lot of different things here, but this is just a way of.
Telling you, hey, this is how we find the right investments for you. This is our philosophy, etc. Item number 9 is disciplinary information and look at that. No criminal, civil, administrative or self regulatory organization proceedings to report. This firm has a clean record and if there was any type of background, it'd be important for the firm to put it here and say, hey, this is when we got in trouble in the past. Of course intelligent investing does not have to disclose anything because again they got a clean record. The next section is other financial industry activities and.
And affiliations, which it seems like the guy who runs this firm doesn't really have any, and the firm doesn't have any either. Some things you would see here would be maybe if the firm's also registered as a broker dealer. That would definitely be put here. They also mentioned that hey, if we ever had anything to do with like commodities or futures, we would tell you here. Now, it does mention the name of the guy who runs this firm. His name is Brian Joyce. He's also a CPA. He's an accountant and from time to time may offer clients advice relating to tax preparation now.
Something that's interesting here is that they say, hey, this is a conflict of interest. If you were to hire Brian Joyce to do your taxes, he has an incentive to recommend you to his other part of his business, the investment advice business, and vice versa. If you were to hire him for investment advice, he also has an incentive to recommend his tax preparation services.
And of course that may or may not be working in the clients best interest. There might be a better accountant out there. There might be a better investment advisor out there. Whatever it is, it's a conflict of interest and he properly discloses it here. The next section is code of ethics. The point of this section is to tell your clients, hey, here are all the ways that we make sure that we're acting in an ethical manner with our clients. And this is another section where there are some conflicts of interest that are disclosed. In particular, they mentioned that hey, Brian Joyce might recommend the security.
To you as a client that he already has ownership of or that he's going to buy and have ownership of as well. And of course, if I own a stock and I get more people to buy that stock, that's more demand for the stock and that'll push the price upward. That's a conflict of interest because the advisor has an incentive to recommend securities that they own themselves. The more demand for those securities, if they get their clients to buy that stock, the higher the price will go. Of course, that's important to disclose to your clients so they know what's going.
On Hey, if I recommend ABC stock to you, I might also own ABC stock, so there's an interest in there for me possibly to do that. But hey, we're telling you we're doing this now and we're acting ethically. Just because I like it for myself doesn't mean that it can't be suitable for you to feel free to look up this brochure on IEPD to see the other parts. I'm not going over every single section here, but we went over the primary fundamental parts of form ADV Part 2 way. Hopefully seeing this real world example helps paint a picture for what.
Brochure actually is. It helps you understand and remember this stuff for the actual test.
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