Frequently Asked Questions
What is Form ADV Part 2?
Form ADV Part 2 is a “disclosure brochure”. It is designed to tell you everything you should know about a registered investment advisor (RIA) and its key employees to make an informed decision about working with them. In other words, it is to an RIA what a prospectus is to a mutual fund.
An RIA must give prospective clients with its Form ADV Part 2 at least two days before entering into an agreement with them. Or, it must give them at least five days to cancel an agreement without penalty. If a financial advisor fails to give you its Form ADV Part 2, it is not a RIA. Or, if it is an RIA, it is not complying with securities regulations.
In addition, an RIA must offer existing clients its Form ADV Part 2 at least annually. In doing so, it must provide them with a written statement of material changes, if any.
Is a registered investment advisor (RIA) the same as a broker-dealer (BD)?
No, an RIA and BD are quite different, especially in their duties to you. That said; neither is better or worse than the other. They are simply different. Your choice should be based on an honest assessment of your needs, not those of your friends, neighbors or coworkers.
An RIA is registered to provide advice and management services. In doing so, it is held to a fiduciary standard.
Are all financial advisors fiduciaries?
Today, everyone calls himself a financial advisor, but not all financial advisors are fiduciaries. In general, stockbrokers and insurance agents are licensed as sales representatives, not investment advisors. As such, they are held to a lower standard of care, namely, the “suitability standard”. This means they must make reasonable inquiry into your goals, circumstance and risk tolerance to assure the financial product sold to you is suitable at the time of sale. You can find out more about the fiduciary standard by clicking here.
Are professional designations important?
As the Certified Financial Planner™ and Chartered Financial Analyst® designations have gained prominence, there has been a proliferation of other designations. Some indicate the individual has met significant education, examination, experience and ethics requirements, but not all. In response, the Financial Industry Regulatory Authority (FINRA) has compiled a large database of professional designations, allowing you to research and compare them. Click here to visit the FINRA Professional Designations database.
How are financial advisors paid?
Financial advisors are paid in one of three ways.
“Fee-only” advisors are registered as investment advisors only. They are paid fees by their clients for advisory and management services rendered, like financial planning or investment management services. They do not sell financial products of any kind. And, they do not charge commissions nor are they paid commissions or fees by any third party.
“Fee and commission” advisors are registered as both investment advisors and securities salespeople. So, they may be paid fees by their clients for advisory and management services rendered. Or, they may be paid commissions for selling financial products. Or, they may be paid both. Many fee and commission advisors call themselves, “fee-based”. This can be confusing because it sounds similar to “fee-only”, but it’s not.
“Commission only” advisors are registered as securities salespeople only. They are paid commissions by their clients or the financial product providers they represent.