Disclosure - The Brochure Rule
Investment advisors must disclose the nature of the relationship between the client and the IA. IAs cannot participate in, nor be compensated by, any percentage gains of a client's portfolio. These terms must be included within the investment advisor's contract.

The most important rule regarding disclosure is the brochure rule, which requires an IA to provide a written disclosure document to each investment advisory client or potential client. The IA can simply provide a copy of the Form ADV Part II, or create a brochure with substantially the same content. The document must include all of the following information:

  • Background information of the IA and any IARs

  • Services available and the fees for those services

  • Disclosure of any compensation received from third parties (such as commissions or referral fees)

  • Whether the IA exercises discretion over client funds

  • Types of clients for whom advisory services are provided, including any minimum dollar amount for assets to be managed

  • Disclosure of any affiliation with a broker-dealer

  • Any material legal or disciplinary action that occurred within the last 10 years

  • Any financial condition of the IA (such as bankruptcy) that might impair its ability to meet client commitments must also be disclosed if the IA:
    • has discretion over client accounts.
    • has custody of client monies or securities.
    • requires prepayment of more than $500 in fees, more than six months in advance.

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. Each year, the IA must deliver (or offer to deliver) its disclosure document to existing clients. Failure to meet disclosure requirements is considered fraudulent behavior.


Look Out!
It is crucial for you to know when the brochure must be given; the timing of this disclosure is frequently tested on the exam. Remember, it is not true that a brochure must be provided prior to entering into the contract; however, the contract must then explicitly offer the right to terminate without penalty within five business days. If this offer is not part of the contract, the brochure may not be provided at the time of signing the contract. Watch for answers such as "...if the IA states he/she has a right to terminate within five business days..." - this is incorrect, since a verbal statement is not sufficient.


Under the USA, an additional disclosure is required if the IA acts as principal for its own account or as broker for both an advisory client and another person on any securities transaction. In these instances, the IA must disclose (prior to completion of the transaction) in what capacity it is acting, and it must receive the client's written consent.

Wrap fee (or wrap account) programs require a special disclosure form instead of the Form ADV Part II. For these purposes, the SEC definition of wrap accounts does not include:

  • Managed account programs - Traditional portfolio management services offered by money managers

  • Mutual fund asset allocation programs - Bundled programs that charge a percentage of assets fee to manage a portfolio of no-load (or load-waived) mutual funds

The wrap fee disclosure must include the following information (where applicable):

  • The amount of the wrap fee, the services that are included, and whether the fees are negotiable
  • Any additional fees that might be required
  • What methods are used to select portfolio managers
  • What compensation is paid to the person who recommended the program


    Look Out!
    It is crucial for you to know when the brochure must be given; the timing of this disclosure is frequently tested on the exam. Remember, it is not true that a brochure must be provided prior to entering into the contract; however, the contract must then explicitly offer the right to terminate without penalty within five business days. If this offer is not part of the contract, the brochure may not be provided at the time of signing the contract. Watch for answers such as "...if the IA states he/she has a right to terminate within five business days..." - this is incorrect, since a verbal statement is not sufficient.

  1. The brochure rule applies to:
    1. only discretionary advisory contracts.
    2. only written advisory contracts.
    3. only oral advisory contracts.
    4. both oral and written advisory contracts.

The correct answer is "d". The brochure rule applies to all investment advisory contracts.

  1. Under the brochure rule, the IA clients (or potential clients) must receive a copy of the brochure:
    1. at least 48 hours prior to entering into an advisory contract.
    2. within 24 hours of entering into an advisory contract.
    3. at the time of entering into an advisory contract, as long as the client can terminate the contract without penalty within three days.
    4. within five days of entering into an advisory contract.

The correct answer is "a". "c" is wrong because this provision only applies if the client can terminate within five days.



Investment Advisor Contracts

Related Articles
  1. Investing

    Advisory Fees On The Series 66 Exam

    Learn what you need to know about investment advisory fees and contracts to pass the Series 66 exam.
  2. Managing Wealth

    Asset Manager Ethics: Disclosures

    Effective communication and disclosures go a long way towards easing minds and creating a lasting and trusting symbiotic relationship. Here are the four steps to making good disclosures.
  3. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  4. Financial Advisor

    Buying an Advisory Practice: How to Get it Right

    Before purchasing a financial advisory practice, ensure due diligence is done and you understand the business and culture of the organization in question.
  5. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  6. Financial Advisor

    Growth Strategies For Financial Advisors

    These 5 strategies offer financial advisors a blueprint on how to grow their practices.
  7. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  8. Financial Advisor

    The Fiduciary Rule: What Advisors Need to Know

    The rules surrounding the DOL's fiduciary proposal are confusing for advisors and clients. Here’s what we know so far.
  9. Financial Advisor

    How the New Fiduciary Rule Will Impact Investors

    The DOL's new fiduciary rule is now in effect. Here are a few areas where individual investors, including clients and prospects, might notice some change.
  10. Financial Advisor

    4 Ways To Build Your Client Book

    Growing your client book takes more effort than simply running a radio or newspaper ad.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center