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Completing Form ADV is required to register with the SEC as an investment advisor. Form ADV Part 3, also referred to as Form CRS, includes details about your firm’s services, the fees you charge, standards of conduct and past disciplinary history. Registered investment advisors must share this customer relationship summary with all new and existing retail investor clients.
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Understanding Form ADV Part 3
Form ADV Part 3 is a written disclosure that broker-dealers and RIAs must furnish to their clients, as required by the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, respectively. Under SEC rules, if you don’t have any retail investors you would need to provide a relationship summary to, you’re not required to prepare or file one.
Here are a few key takeaways to know about Form ADV Part 3:
- The relationship summary must include all required information, as specified by the SEC.
- You may not include any disclosures in your customer relationship summary, other than the ones you’re required or allowed to include.
- Advisors must provide copies of their relationship summary to clients upon request free of charge.
- Your summary can’t exceed two pages in length, or four pages if you’re a dual registrant.
- You must use plain English throughout your relationship summary and avoid jargon.
- All information provided by you must be true and factual, and you can’t omit facts that are material to any disclosures you make.
- The SEC allows advisors to incorporate graphic elements into their customer relationship summary, including graphs, charts, tables and text.
If you’re posting your relationship summary online, you may include links to external sites, videos, chat functionality, calculators and other interactive media, as long as they help enhance the client’s understanding of the information in the summary. Links to external resources must be noticeable so clients can easily find them to access supplemental information.
Completing Form ADV Part 3
Form ADV Part 3 has five items or sections you’ll need to complete. It’s important to read through each item carefully to make sure you’re answering all required questions and providing accurate information.
Item 1 – Introduction
Your relationship summary should begin with an introduction that includes your name and registration status – i.e., are you a broker-dealer, investment advisor or both. The date should be included in the header or footer of the first page where it’s clearly visible.
You also need to include two statements:
- Indicate that brokerage and investment advisory services and fees differ, and that investors need to understand the differences.
- Tell investors that free and simple tools are available to research firms and advisors at Investor.gov/CRS.
Item 2 – Relationships and Services
Here, you’ll explain your approach to client relationships and the services you offer. You’ll start this section with the heading: “What investment services and advice can you provide me?”
Next, you’ll dive into a description of your services, addressing:
- Monitoring of retail investors’ investments
- Discretionary investment authority you hold and when this authority is triggered
- The range of services you offer and any material limitations that apply
If you’re an investment advisor, the information you share about your services should be the same or equivalent to the details you provided in Form ADV Part 2.
You’ll also need to include specific “conversation starter” questions that investors can ask their advisors about the relationships and services.
Broker-dealers should include this question:
- “Given my financial situation, should I choose a brokerage service? Why or why not?”
Investment advisors should add the following:
- “Given my financial situation, should I choose an investment advisory service? Why or why not?”
Dual registrants should ask this question:
- “Given my financial situation, should I choose an investment advisory service? Should I choose a brokerage service? Should I choose both types of services? Why or why not?”
Other conversation starters include “How will you choose investments to recommend to me?” and “What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?”
Item 3 – Fees, Costs, Conflicts, and Standards of Conduct
In this section, you’ll explain how your fees work as well as any conflicts of interest that may exist. You’ll use this heading to introduce the section: “What fees will I pay?”
Investment advisors should describe:
- Ongoing asset-based fees you charge, as well as fixed fees, wrap fee program fees and other direct fee arrangements you use. The fees listed here should reflect the fee structure you reported in Form ADV Part 1.
- Other fees and costs related to your services in addition to the principal fees and costs investors will pay, either directly or indirectly. For example, custodian fees should be mentioned here.
You’ll need to include this statement: “You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.”
A conversation starter is also required here, and it should be worded as follows: “Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?”
After explaining your fees, start with a new header: “What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?”
Under the header, you’ll add a statement regarding your standard of conduct. The recommended statement for investment advisors reads as follows:
“When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means.”
Next, you’ll list any conflicts of interest that apply to you, along with a detailed explanation. You’ll also add this conversation starter: “How might your conflicts of interest affect me, and how will you address them?”
Start the next section with a new heading: “How do your financial professionals make money?” and round off this part of your summary with a breakdown of how your financial professionals are compensated. Include cash and noncash compensation and any conflicts of interest arising from those payments.
Item 4 – Disciplinary History
This section requires a specific heading: “Do you or your financial professionals have legal or disciplinary history?”
State “Yes” if you or any member of your team discloses or is required to disclose:
If you’re not required to disclose any of this information, you can state “No.”
Whether you choose yes or no, you’ll also need to:
- Direct investors to visit Investor.gov/CRS to search for more information on you and your team members.
- Add this conversation starter: “As a financial professional, do you have any disciplinary history? For what type of conduct?”
Item 5 – Additional Information
In the last section of your relationship summary, you’ll tell investors where they can find additional information about your advisory services and request a copy of the summary. You’ll need to include a telephone number and this conversation starter: “Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me?”
Frequently Asked Questions (FAQs)
When Do You File Form ADV Part 3?
If you’re an investment advisor who’s required to deliver a customer relationship summary to retail investors, you’ll need to File Form ADV Part 3 through the Investment Advisor Registration Depository (IARD). Broker-dealers will file Form CRS through the Central Registration Depository (CRD), which is operated by FINRA.
When Are You Required to Give Clients a Customer Relationship Summary?
Investment advisors must deliver relationship summaries to each retail investor they work with, either before or at the time you enter into an advisory contract with them. This rule applies even if the agreement you have with a retail investor is verbal, rather than written.
Broker-dealers must deliver a relationship summary to retail investors before or at the earliest of:
- Recommending an account type, securities transaction or investment strategy involving securities
- Placing an order on behalf of the investor
- Opening a brokerage account for the investor
Dual registrants must share relationship summaries before or at the earliest of the first two items on the above list.
All registrants are required to deliver the most recent version of their relationship summary to retail investors when opening new accounts on their behalf, recommending that they roll over assets from an existing account to a new one or recommending a new brokerage or investment advisory service. Delivery is also mandated within 30 days of an investor requesting a copy of your relationship summary.
Does Form ADV 3 Need to Be Updated Annually?
Advisors must update their relationship summary and file it within 30 days of any material changes to its content. The filing must clearly illustrate what’s changed, and you must communicate these changes to your clients within 60 days after the update is required to be made.
Bottom Line
Unless you’re an exempt reporting advisor, you’ll need to file Form ADV Part 3 if you plan to register as an investment advisor or broker-dealer with the SEC. Understanding what’s required beforehand can help you ensure a smooth and accurate filing.
Tips for Growing Your Advisory Business
- Starting a new RIA requires a solid game plan for marketing and attracting new clients. If you’d like to spend less time promoting your business and more time serving the clients you already have, you might consider partnering with an advisor marketing platform. SmartAsset AMP (Advisor Marketing Platform) is a holistic marketing service financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
- Form ADV, whether you’re tackling Part 1, Part 2 or Part 3, can be a time-consuming document to complete. If you’re feeling overwhelmed by the volume of detail you need to provide or want to avoid delays stemming from mistakes, you might consider working with a Form ADV consultant. Form ADV consultants work with advisors and broker-dealers to help them complete the registration process with minimal hiccups.
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