Money Matters

Money Matters: How advisers become approved by discount brokerages

CorrespondentJuly 5, 2014 

  • What’s an ADV?

    An ADV is a form that the Securities and Exchange Commission requires investment advisers to file. It is divided into two parts. The first requires information about the adviser’s business, ownership, clients, employees, business practices, affiliations, and any disciplinary actions. The second part explains the services offered, any fees, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel.

    The forms are available to the public at, but most advisers should offer a current form ADV to any potential client.

    The form must be updated annually.

Q. I recently received a rather large inheritance from my uncle in the form of a brokerage account at a discount brokerage. The discount brokerage is listed on your ADV form as one that you use to hold your client accounts. I went to the local branch office to complete some paperwork and when I told them I was planning to hire a local money manager they suggested I select one from their list of approved Registered Investment Advisers. Much to my surprise, you are not on their list. I asked them if they'd heard of you and they said yes, but you did not meet their criteria. I thought about calling and asking you directly but then decided your other readers may want to know why you can't meet the criteria for an approved adviser. I plan to meet with two of the approved advisers but will wait for your published response before I make a final selection.

A Ah yes, the complimentary referral list from the discount brokerages. I only use two, so I have a 50/50 chance of guessing which branch office so kindly told you I didn't meet its criteria. They actually refer to the advisers as pre-screened, not pre-approved. The screening process isn't much of a hurdle. With most of them, the following is what is required for a Registered Investment Adviser or advisory firm to be on the pre-screened list:

•  It must be properly licensed/registered with the Securities and Exchange Commission or the secretary of state in the state or states in which you do business.

•  It may be required to have a certain amount of assets under management either already held at the brokerage or elsewhere.

•  It must agree to pay a certain percentage of annual fees paid by the referred client for as long as that person remains a client.

The usual fee to the brokerage is 25 basis points or 25 percent of fees paid. My firm's annual fee for a $1 million account is $8,375. If that account was referred to me as a pre-screened adviser, $2,094 would go to the brokerage each year. If I retained the client for 10 years, assuming no growth of the portfolio, I would have paid the brokerage $20,940 for just that one referral. One way to make that up would be to charge a premium or higher fee to those referred than charged to clients who come to me directly. Another way to make it up would be to raise all fees. My firm doesn't participate in the program; therefore, it is not on the list of pre-screened advisory firms.

When you are seeking an adviser, it is totally acceptable to ask what the requirements are to be on a referral list as well as what the requirements are to earn any touted credentials.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at or P.O. Box 97128, Raleigh, NC 27624.

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