Advisor Disclosure: What Financial Professionals Must Tell You
Financial advisors are required to disclose their fees, conflicts of interest, disciplinary history, and investment strategies through Form ADV and Form CRS. Bernie Madoff's fraud was enabled by the fact that he served as his own custodian and his ADV contained false information — a red flag that many investors missed.
Disclosure is the foundation of investor protection under US securities laws. The principle is simple: before you hire a financial advisor, they must provide you with enough information to make an informed decision. The Investment Advisers Act of 1940 requires investment advisers to file Form ADV with the SEC and distribute ADV Part 2 (the "brochure") to clients. The SEC's "Delivery Rule" (Rule 204-3) requires advisers to deliver the brochure to clients before or at the time of entering into an advisory contract and annually thereafter. The brochure must be written in plain English and include 19 specific items covering fees, conflicts, disciplinary history, investment strategies, and more.
Form ADV Part 2A (the "firm brochure") covers the advisory firm. Key sections to read: Item 4 (Advisory Business — how the firm is owned and what services it provides), Item 5 (Fees and Compensation — the complete fee schedule, including AUM fees, hourly rates, flat fees, performance fees), Item 8 (Methods of Analysis, Investment Strategies and Risk of Loss — how the firm makes investment decisions), Item 9 (Disciplinary Information — any legal or regulatory actions against the firm), Item 10 (Other Financial Industry Activities and Affiliations — conflicts of interest from related businesses), Item 11 (Code of Ethics — insider trading policies, personal trading), Item 12 (Brokerage Practices — how trades are executed and whether soft dollars are used), and Item 14 (Client Referrals — compensation for referrals).
Real-world example: When Bernie Madoff was investigated by the SEC in 2006, his Form ADV claimed he managed $7.5 billion using a "split-strike conversion" strategy. The ADV should have raised red flags: there was no independent auditor (item 21 was blank), the firm had no pricing verification from an independent source (no qualified custodian), and Madoff served as his own broker-dealer (creating an undisclosed conflict in items 10 and 12). The SEC did not thoroughly verify Madoff's ADV disclosures. Today, SEC examiners verify ADV disclosures more carefully. As an investor, you should read at least Items 5, 8, 9, 10, and 11 of any advisor's ADV before hiring them. If the advisor cannot explain any item clearly, that is a red flag.
Form CRS: The Customer Relationship Summary
Since 2020, the SEC requires both investment advisers and broker-dealers to provide a "Customer Relationship Summary" (Form CRS) to retail investors. This 2-to-4-page document summarizes in plain English: the services the firm offers, the fees and costs, conflicts of interest (including commissions, revenue sharing, proprietary products), the legal standard of conduct (fiduciary vs. suitability), and disciplinary history. Form CRS must be delivered when engaging a new client and must be posted on the firm's website. While Form ADV is long (50 to 100 pages), Form CRS is designed to be readable. Read it carefully. If any part is unclear, ask the advisor to explain. The CRS must include a phone number to call with questions — use it.
FAQs
How do I access my advisor's disclosure documents?
Form ADV Part 2 is available on the SEC's Investment Adviser Public Disclosure (IAPD) website (adviserinfo.sec.gov). Search by firm name or CRD number. You can also ask the advisor directly — they must provide the brochure upon request. Form CRS is available on the same site and from the advisor's website. Form ADV Part 1 (which includes disciplinary history, ownership, and assets under management) is also on IAPD. For brokers, FINRA BrokerCheck (brokercheck.finra.org) shows employment history, licenses, exams passed, customer disputes, and regulatory actions. Make it a habit to check IAPD and BrokerCheck before engaging any financial professional.
What should I look for in the disciplinary section?
In Form ADV Item 9 (Disciplinary Information), look for: criminal convictions for fraud, forgery, or embezzlement; SEC or state securities regulator actions (cease-and-desist orders, fines, suspensions, revocations); self-regulatory organization (SRO) actions (FINRA disciplinary actions); and civil court judgments involving fraud or securities violations. Not all disclosures are disqualifying — a minor regulatory filing error from 20 years ago may not be concerning. Disclosures involving customer harm, fraud, or theft are serious red flags. If you find a disclosure, ask the advisor to explain it. If they minimize it, blame others, or fail to take responsibility, consider that a warning sign about their character.
What if my advisor does not provide disclosure documents?
Under SEC rules, the advisor must deliver Form ADV Part 2 and Form CRS before or at the time of engagement. If they do not, they are violating SEC rules. Do not engage with an advisor who cannot or will not provide these documents. Request them in writing. If the advisor still does not provide them, file a complaint with the SEC's Enforcement Complaint Center (sec.gov/complaint). This is also a red flag: a legitimate advisor will have ADV and CRS documents readily available. If they are reluctant to share them, they may have something to hide. Always verify the documents you receive by checking the SEC's IAPD website — ensure the versions you receive match the versions on file with the SEC.