Tuesday, March 10, 2009

ADV Part 2, Disclosure Brochure

A Series 65 customer just emailed a great question:

What is the practical application of this rule?
New Clients: The brochure must be provided at least 48 hours before entering into an advisory contract, OR at the time of entering into a contract, if the client has the right to terminate the contract without penalty within five business days.

The practical application is this: give the prospect at least two business days to review the brochure (ADV Part 2) before he comes in and signs the advisory agreement/contract. Why? As you see at www.passthe65.com/extra, AdV II gives the prospect important info on your firm--who you are, what you do, how you charge compensation, who your other clients are, your disciplinary history, whether you have discretion, etc. So, the prospect needs time to review it before signing the contract.

The latest that the brochure can be provided is at the time the client signs, IF he can cancel within 5 days without losing any prepayment to the adviser. Some advisers accept a "prepayment" or upfront fee before doing any actual advising. If they take, say, $1,000 just to sit down and start looking at the client's situation, then they could give ADV 2 to the client when they sign, IF the client could cancel in 5 days and get all her money back.
Most advisers avoid the prepayment because if you take >$500 six or more months in advance, you have "custody" and you have to provide the client and the Administrator with your balance sheet, and if the liabilities EVER exceed the assets for even ONE DAY, you have big problems on your hands.

So, like most things, it's simpler than it sounds--give the client 2 business days to consider your brochure before they sign the advisory agreement. If you want to give them the brochure when they sign, you have to know that they might cancel in 5 days, and any prepayment you took has to be paid right back out.

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