Annual Update Time!

This is the time of year to pay close attention to your disclosures and make sure your ADV accurately describes your business, especially your services, compensation, and conflicts of interest. It’s especially important to take a careful look if you’ve never had a regulatory examination. One of the most common things we see is advisors who got a boilerplate ADV when they first registered and they’ve never really changed it.

Obviously there’s a regulatory requirement to keep your disclosures accurate. But beyond that, a well-written ADV is an important part of your own risk management strategy. Describing your services and conflicts clearly and accurately helps manage client expectations and likely reduces your liability if you get into a dispute with a client or a regulator.

1. Read the ADV! It’s reasonable to ask all employees to be familiar with it, and specific employees (e.g., executives, operations manager, lead advisors, those responsible for billing, etc.) to take a more careful look. Ask whether it makes sense and whether it seems to accurately describe how you work.
2. If it’s full of legalese, consider a re-write. The ADV is supposed to be written in “plain English,” but far too often it’s a bunch of gobbledygook. Advisors are fiduciaries and your disclosures should be aligned with your responsibility to put the client first. While good disclosures protect you, that’s because you’ve provided full, fair, and understandable information, not because you’ve obscured the icky bits.
3. Pay special attention to money, including how you calculate your fees, the maximum amounts you’ll charge, and any revenue-sharing, referral, or other secondary sources of income. How you get paid is the basic source of conflicts of interest; if you’ve identified everything and explained where the conflicts are and how you’ve mitigated them, you’ve gone a long way to avoiding future problems. If you find yourself saying stuff like, “Oh, that doesn’t matter. I would never be influenced by that amount of money,” beware! What you avoid talking about is often exactly what you need to talk about.
4. Don’t get too specific about operational details in the ADV. Most advisors don’t need to provide step-by-step descriptions of their investment selection process or everything involved in an annual client review. You want to provide meaningful information about how you work and how clients need to cooperate with you, but not hamstring yourself with minutiae.
5. Look at your descriptions of process and ask whether they’re accurate. Sometimes advisors try to differentiate themselves by creating elaborate investment or review processes that may exist in name only. If you’re not really doing it, don’t include it in the ADV. Often, simplicity is best.

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