Regulation

How Allocators Use Form ADV Part 2 as a Qualitative Risk Lens

What’s in Form ADV Part 2, why it matters to allocators, and how technology helps surface risk, strategy drift, and governance misalignment.

C M Nafi
May 1, 2025
Regulation

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Form ADV Part 2 has become a key resource for allocators looking beyond the numbers. Unlike the quantitative disclosures in Part 1, it offers a narrative view into how a manager operates, communicates, and manages risk. 

A Brief History: From Legalese to Plain-English Transparency

In 2010, the SEC overhauled Form ADV Part 2 in response to criticism that advisers’ disclosures were too opaque, too legalistic, and too difficult for investors to interpret.

The result was a redesigned form:

  • Written in plain English
  • Structured as a narrative brochure
  • Split into two key documents:
    • Part 2A: The "firm brochure," covering 18 core sections about the adviser’s operations, fees, risks, and conflicts
    • Part 2B: Supplementary brochures on key personnel (e.g., portfolio managers, principals) 

Form ADV Part 2A is where firms tell their story - and where allocators can learn how they operate, not just what they claim. 

What's Inside Form ADV Part 2?

Part 2A: The 18-Section Framework

Item

Disclosure Topic

1. Cover Page 

Contact info and version date 

2. Material Changes 

Summary of recent changes since last filing 

3. Table of Contents 

Navigation aid for the document 

4. Advisory Business 

AUM, client types, and service model 

5. Fees and Compensation 

Billing structures, incentive alignment 

6. Performance-Based Fees & Side-By-Side Management 

Potential conflicts from fee incentives 

7. Types of Clients 

Minimum account sizes, investor segments 

8. Investment Strategies & Risk of Loss 

Strategy narratives and embedded risks 

9. Disciplinary Information 

Legal or regulatory actions 

10. Other Financial Industry Activities & Affiliations 

Broker-dealer status, affiliates 

11. Code of Ethics 

Insider trading policies, personal trading 

12. Brokerage Practices 

Soft dollars, best execution, trading relationships 

13. Review of Accounts 

Frequency and scope of client reporting 

14. Client Referrals & Compensation 

Paid referrals, affiliate marketing 

15. Custody 

How client assets are safeguarded 

16. Investment Discretion 

When and how discretion is exercised 

17. Voting Client Securities 

Proxy voting practices and conflicts 

18. Financial Condition 

Disclosure of financial distress or prepayment risks 

Part 2B: The Supplementary Brochures

The Part 2B supplement provides personnel-level detail, often overlooked but crucial.

These documents tell you: 

  • Who manages the portfolio
  • How long they’ve been in the role
  • Whether they’ve faced prior disciplinary action
  • What licenses and education they bring to the table

For allocators focused on key person risk, 2B is where those flags often emerge first. 

Why Form ADV Part 2 Matters to Allocators 

Part 2 isn’t just about disclosure, it’s about tone, transparency, and alignment. A firm’s brochure tells you: 

  • How clearly they communicate with stakeholders 
  • Whether they acknowledge conflicts or bury them 
  • How much they invest in governance and compliance infrastructure 
  • Whether their strategy description reflects actual portfolio behavior 

Example: Fees & Side-By-Side Management (Items 5 & 6) 

A manager may list “1.5% + 20%” performance fees and offer both hedge funds and SMAs. Do they clearly explain how performance fees impact asset allocation or trade allocation? Do they manage conflicts, or simply disclose them? 

Example: Strategy Drift Signals (Item 8) 

One year, a manager discloses long/short equity focused on U.S. small-cap names. The next year, they add global macro and structured credit exposures. This signals a material shift in strategy - and risk exposure. 

These changes are subtle unless tracked year-over-year. That’s where tools like Dasseti step in. 

Automating Form ADV Part 2 Analysis with Dasseti

Manually reading dozens of brochures to catch nuanced changes in strategy, fees, or conflict disclosures is time-consuming, prone to error, and difficult to scale. 

Dasseti COLLECT and the Form ADV Data Suite convert these dense documents into structured, alert-driven workflows with a range of powerful features: 

Smart Docs for Form ADV Part 2: 

  • Extract fee disclosures, risk narratives, and key governance terms from PDF brochures 
  • Compare across years to flag what's added, removed, or reworded

Risk Flagging and Change Detection: 

Alerts when a manager: 
  • Adds complex fee layers (e.g., fund-of-one, side letters) 
  • Modifies strategy from equity long/short to multi-asset 
  • Introduces new conflicts (e.g., new affiliate relationships) 

AI-Powered Review: 

  • Smart Docs and Chat with Doc lets you ask: “What changed in the conflicts of interest section since last year?” and get a precise, document-sourced answer. 

Centralized Brochure Tracking: 

  • All 2A and 2B files tied to manager profiles 
  • View trends across your portfolio - like how many managers updated Item 5 or disclosed new regulatory affiliations 

Form ADV Part 2 Is the Story Behind the Strategy

If Part 1 is the data, Part 2 is the dialogue. And that dialogue can reveal inconsistencies, cultural misalignment, and operational blind spots that even AUM trends won’t catch. 

Allocators who want deeper transparency and better fit need to treat Part 2 as a dynamic, evolving source of qualitative insight. 

Dasseti makes that easy. 

Want to see how Dasseti can simplify your Form ADV review process?

Explore our Form ADV module and see how automated insights can drive faster, smarter due diligence.

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