Over the past 15 years, advisors have seen the average number of data points they must submit in annual Form ADV regulatory filings nearly double to more than 1,000.
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Now the Investment Adviser Association, which compiled the data on Form ADV submissions, is hoping that shifting regulatory priorities at the Securities and Exchange Commission will provide an opening to roll back some of those requirements.
Federally registered advisors filled out an average 1,026 data points in just two sections of their Form ADVs last year, according to the nonprofit IAA’s latest annual “industry snapshot,” released last week. In 2011, the average was just 566 data points.
The IAA tracked data reported on Form ADV Part 1A, which details firms’ basic attributes like advisor and client counts and assets under management. The IAA also tracked information submitted on the form’s Schedule D, which asks advisors to list affiliates, alternative business names and investments in vehicles like private funds and separately managed accounts.
“While the burden of Form ADV compliance is significant, the benefits of some of the data for regulators and for investors may not be proportionate,” according to the IAA’s snapshot report. “The Investment Adviser Association advocates to help ensure that ever-increasing costs are justified by the actual benefits.”
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Bloat results from questions being added, never subtracted
The number of questions asked in just those two parts of Form ADV jumped from 228 in 2000 to 577 last year, the IAA found. The survey did not take into account questions or data provided in response to other parts of Form ADV, such as Schedules A, B and C, which collect information on ownership.
Karen Barr, the president and CEO of the IAA, said the “bloat” in collected data is being caused by regulators’ tendency to regularly add new questions to Form ADV without considering if older ones remain pertinent.
“They never subtract,” Barr said. “They just say, ‘OK, here’s a new rule, or here’s a new issue, we need to find out more information.’ But they never go back and say, ‘Well, we’ve added a lot more information. Are there some things that maybe are less important?'”
As an example, Barr noted that the SEC started asking questions about firms’ advertising practices in 2022, around the time it began enforcing a new marketing rule placing strict limits on what advisors can say in messages to the public. At the same time, Barr said, the SEC continues to ask advisors about “wrap fees,” which firms charge not only for managing assets but also to cover brokerage commissions and other trading-related expenses.
Barr said the widespread adoption of commission-free trading is making wrap fees a thing of the past. But you couldn’t tell that by looking at Form ADV.
“Why don’t they say, ‘OK, we’re adding questions about the marketing rule, or we’re adding them about private funds, so why don’t we take out the questions about wrap fees?'” she said.
The SEC’s push to reduce private fund reporting requirements
Advisors are required to submit a Form ADV annually within 90 days of the end of their fiscal year. They also have to turn in a revision any time changes to their practice have rendered previous information substantially inaccurate.
Barr noted that the SEC does have a current proposal to lessen its reporting requirements for advisors who have to fill out its Form PF, which is used to disclose details about private equity funds. She’s hoping the same simplifying spirit can be applied to Form ADV.
“We’re looking at [it] in the context of here’s the SEC looking at revising Form PF,” she said. “And there’s been a huge amount of bloat, if you will, in the amount of data that private funds have had to provide on Form PF. But the same is true of Form ADV.”
The SEC did not immediately return a request for comment on possible changes to Form ADV.
Jeff Judge, a managing partner at Chesapeake Financial Planners in Forest Hill, Maryland, said the trouble with heavy reporting requirements is that they detract from time with clients. He said one of his clients recently asked why their quarterly meeting had seemed rushed.
“The honest answer was that I’d spent two mornings that week on regulatory filings that had nothing to do with his portfolio,” Judge said.
Data collection for its own sake?
Judge said it’s sometimes hard to discern why the SEC wants certain types of information. If the goal is to protect investors, it’s not always apparent how all the questions on Form ADV are helping to further it.
Often, it seems the SEC is engaging in “data collection for its own sake,” he said.
“The form has grown in layers over the years, and some of those layers almost certainly reflect solved problems or duplicated reporting that now exists elsewhere,” Judge said.
Citing a common complaint about industry regulations, Judge said the Form ADV requirements fall more heavily on firms that may not be large enough to have internal compliance departments.
“A large RIA has compliance staff to absorb this,” he said. “A two-person advisory practice in Harford County [Maryland] does not.”
A short history of the ever-expanding Form ADV
The IAA’s latest industry snapshot provides a timeline of the ever-increasing reporting requirements on Form ADV. The greatest number of questions in a single batch were added in 2010 as result of the Dodd-Frank Act, legislation passed to curtail the excesses that led to the global financial collapse two years earlier.
Questions about private funds were added in 2012 and questions about wrap fees and accounts in 2017. In June 2020, the SEC began requiring advisors to furnish a Form CRS — a customer relationship summary — to clarify how they make money and disclose conflicts of interest.
Of the roughly 1,000 pieces of information firms on average now submit on their Form ADVs, just over one-quarter involve Schedule D questions about affiliates, alternative business names and similar matters. Just over another quarter concern basic inquiries in Part 1A about client and advisor numbers and AUM.
Nearly 30% are about private funds, and 16% are about portfolio holdings, borrowings and derivatives in separately managed accounts.
Barr said the IAA draws heavily on Form ADVs for the information reported in its annual industry snapshots. She and her colleagues became interested in changes to Form ADV after noticing that certain data points only began to be reported in recent years, suggesting they weren’t being collected before.
“So we just started looking at it from that viewpoint and saw, wow, we have a lot of these strange time periods,” she said. “Let’s look at how much the ADV has grown, how much more data there is.”
