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Take a Deep Dive With Us Into the Form ADV 2B (Don’t Hold Your Breath!)

June 15, 2011

Last time on blogmosaic, we left you with a thrilling cliffhanger. You probably stayed up all night wondering to yourself: What did they find in these highly anticipated Part 2Bs? Well, let me paint you a picture…

Photo by Ilse Reijs and Jan-Noud Hutten. Some rights reserved.

As you sit at your desk, about to view the Form ADV part 2B of your current or potential investment adviser-to-be, you might be thinking, “Yes. Finally I can know all the dirt on the people giving me investment advice.” A reasonable request—clients deserve to know relevant information about the disciplinary history and possible conflicts of interest required by the SEC to be disclosed in the 2B Brochure Supplement. However, as you begin to read this long-awaited gold mine of secrets, you may start to become confused. You may think to yourself, “Wait a second…is this the SEC Form ADV Part 2B? Or did I accidentally stumble upon Match.com?

The answer to that question, based on our perusal of about three dozen 2B’s already submitted, is unfortunately not always immediately clear. Although some 2B’s can contain valuable, helpful information, a small handful of these filings may leave the reader to feel like, for lack of a better term, a creepy stalker.

The large majority of the Part 2B’s, which are meant to be like a mini-resume disclosing disciplinary history, conflicts of interest, and educational and professional background, are, to be honest, pretty boring and uninformative. All the relevant information one might want to know is largely labeled as “non-applicable.” Given the SEC’s rather narrow rules for what is actually required, combined with the adviser’s freedom to use “reasonable judgment” about what to disclose, perhaps it is no wonder that all that juicy stuff we wanted to know is simply not there.

As a few advisers have done, however, the form 2B is a great place for firms or individuals to explain and defend against any questionable accusations that may have been made in the past. Many firms have also taken the opportunity to list the impressive qualifications and requirements that their advisers must satisfy in order to be hired, or even to get their certifications in the first place.

But sometimes advisers go beyond providing professional background information and start to get uncomfortably personal, taking the new SEC requirement to use “narrative English,” a little too seriously—listing advisers’ hobbies, interests, and even the names of their spouses and children. For example, did you know that Robert likes scuba diving, antique car restoration, and jogging? Or that Mike enjoys time with his family, boating, skiing, running, and golf? Or how about that Bob likes backcountry hiking and camping, when time permits? I sure didn’t. But I’m not sure I wanted to either.

Maybe it’s the unexpected extra information, or maybe it’s something about the way it’s written, but in some cases the 2B begins to feel less like a professional assessment and more like an online dating profile that somebody set up for their unwilling, resistant friend who happens to be an investment adviser. Except that they forgot to mention that their friend enjoys long walks on the beach, watching the sunset, and that they are an Aquarius. Good thing the adviser’s supervisor’s contact information is a required item… now we can all ask the burning question: “Is this person free Saturday night?”

As irrelevant as some of the information offered in these gems of 2B filings appears to be, these extra tidbits are mostly harmless and mildly amusing.  Still, we might want to advise these advisers to leave out the part informing clients that they were working in a tanning salon or delivering wood-fired pizza only but three years prior. But given how dull these filings appear to be, maybe we should give them credit for attempting to spice them up a little.

And who knows? Maybe you really like pizza or are a very active jogger and backcountry hiker and you want an investment adviser who shares your interests. Then you may find that the form 2B is extremely helpful.  Or maybe you discover that you’re the lucky dog who gets investment advice from a former NFL defense tackle for the Green Bay Packers! The 2B can be full of surprises.

But usually it’s not. And unfortunately, the real “Conflict of Interest” that clients will most likely encounter is the conflict between what is deemed “applicable” by the advisers and what the client is actually interested in learning.

Now maybe one shouldn’t read too much into these early findings. This small sample size is really only the tip of the 2B iceberg. And maybe the fact that these particular 2B’s were all voluntarily submitted well in advance of the July 31stdeadline makes that sample skewed anyway. Those caveats aside, there is definitely a laundry list to be found in the Form ADV Part 2B. But does the SEC really want us to feel like we are going through a stranger’s actual laundry?

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