By now, most advisors are aware that the Securities and Exchange Commission (SEC) voted unanimously to approve a new Form ADV Part 2 during its July 21, 2010, meeting. This form is the primary disclosure document that SEC-registered investment advisors are required to provide to clients. States tend to mirror the SEC's disclosure requirements, so it is likely that many state-registered advisors will also be required to complete Form ADV Part 2 soon.

The old ADV Part 2 took a "check the box" approach to disclosure. Advisors were required to answer multiple choice questions by checking the appropriate box on the form. Supplementary information was disclosed on Schedule F and other forms.

In contrast, the new Form ADV Part 2 is supposed to be a plain English narrative that includes information about the firm's business, business practices, fees, compensation policies, disciplinary events, brokerage practices and more. In addition, there will be a required supplement containing a resume-style description of each advisor offering advice to clients as well as an annual summary of material changes to the form that firms will be required to provide to clients. New advisors will be required to start using the revised Form ADV Part 2 after January 1, 2011. Existing advisors with fiscal years ending December 31, 2010 will have to file with the SEC no later than March 31, 2011.

The SEC estimates that it will take firms between 15 and 60 hours to complete the form at a cost of more than $3,000. It is estimated that firms engaging outside consultants to complete the form will pay between $3,000 and $5,000. Firms engaging a compliance attorney to complete the form will pay in excess of $10,000, the SEC estimates.

While the new Form ADV Part 2 requirements create a significant new burden for RIA firms of all sizes, they've created a business opportunity for compliance consultants and software developers that inhabit the compliance realm. A number of firms have developed or are in the process of developing software to help RIAs complete the new Form ADV Part 2. One firm with a long history of supplying advisors with compliance help is National Regulatory Services (NRS), so when they contacted me and invited me to try their new Web-based Brochure Architect offering, I was happy to oblige.

Brochure Architect
Brochure Architect can be purchased as a stand-alone program for $1,200 annually or $600 if you purchase it as part of the more comprehensive NRS Guardian online compliance service. When you try to launch Brochure Architect for the first time, a Web page appears informing you that the .NET Framework 2.0 is required to run the application. Most readers will already meet this requirement, but if in doubt, there is a compatibility test.

Assuming the .NET 2.0 Framework is lacking, you can download it for free from Microsoft. Once it is installed, the site prompts you to install the NRS TextControl Wizard (additional software is required on your computer for Brochure Architect to run properly). In order to install and run the NRS applet, you must adjust your Web browser security settings to allow the NRS TextControl Wizard.

When I logged on for the first time, a pop-up alerted me that I might need .NET 2.0 and it included a link for the compatibility test, but it did not include any notification that only Microsoft Internet Explorer was required. A geek might surmise this, but the average user will not. I was under the impression that the setup software has the ability to automatically adjust Internet Explorer's security settings to allow for the NRS applet, but it didn't happen when I tried to do the installation. It is possible that my security suite blocked it, or it is possible that it didn't work. In any case, I had to go in and add www.nrs-inc.com to my list of "Trusted Sites" in Internet Explorer. Once I did that, everything seemed to work fine.

After logging on to the site, the way you access Brochure Architect may be dependent on whether you purchase it as a stand-alone product or as part of the many NRS Compliance Guardian configurations available. In my case, I went to the Tools menu, selected Brochure Architect, and launched the module. I then clicked on the "add" button to create my first brochure. I assigned the brochure a name, a date and a type. The reason for this is so that you can later update your brochure but retain all previous copies.

For larger firms with multiple branches or multiple divisions, it might be necessary to create different brochures for each. If your organization requires brochures that are similar but distinct for various offices/divisions, you can clone an existing brochure, give it a different name, and edit it as necessary rather than go through the entire process of creating a new one.

After you've named and dated your brochure file, the software launches the Profile Wizard. First, the wizard asks you for general information about your firm. This includes name, address, Web site, CRD number, etc. Next, it begins the interview process in earnest, dividing the questions into sections such as Advisory Business, Fees and Compensation, Types of Clients, Disciplinary Information, etc. As each section is being completed, the wizard, in the background, begins drafting the text of your Form ADV Part 2 based upon the answers provided in the wizard. Like the old form ADV Part 2, almost all of the questions can be answered by checking one or more boxes.

For example, in the Advisory Business section, when it asks about the services your firm offers, you might check the financial planning box. If you do, a new question appears asking if you offer restricted or unrestricted financial planning services. If you check the box indicating that you offer portfolio management, you'll be asked whether you offer individual portfolio management. If the answer is yes, you are asked if you offer discretionary, non-discretionary or both.

As you complete each section, you are taken to the text editor. The editor includes a written description of your firm based upon the information that you have recorded in the wizard. The text is a draft, not a finished product. In some cases, where the program has identified specific information you are required to type in (for example, the name of a mutual fund company, a fee schedule or a Web site address), the information is highlighted in red caps for easy identification.

There are other areas that are not highlighted in red that contain blanks, XXX's, or instructions that clearly require some editing. It was not clear to me why those areas did not appear in red. In addition, there could be some text that isn't appropriate or that needs further explanation, so you really do need to read every word carefully and make adjustments as necessary.

All of this may sound like a lot of work, but once you get going, the process moves along rapidly, and given the alternatives, many will find the Brochure Architect an appealing balance of functionality and price.

Evaluation
Compliance-related tasks are not one of the most gratifying endeavors advisors deal with, and the new ADV Part 2 is no exception. At one extreme, advisors can pay thousands of dollars to a compliance attorney to complete the form for you, and in many cases the money will be well spent. You can also try to complete it yourself without any assistance, but that does not seem like a good use of your time, and it will probably leave you vulnerable to regulatory scrutiny.

There are other options. You can purchase a boilerplate Form ADV Part 2 as a Word Document and edit it yourself. In order to create a usable document that truly reflects your business, however, such a document will require extensive editing and a substantial time commitment. The idea of using a wizard to create something that closely reflects your business, and then presenting it in a text editor for final refining, as Brochure Architect does, is more appealing than working from a template.
As you work your way through the wizard, the application does a very good job of automatically generating the appropriate text and submitting it to the user for final refining. That's what you are paying for, and Brochure Architect delivers.

Although I like the overall Brochure Architect concept, and although the application delivered the appropriate text, there is room for improvement. Once you save a brochure, the wizard will not edit it, even if you change your answers to the questions. This acts as a compliance safeguard, but it can also be problematic if you make mistakes while creating a brochure and you want to easily correct them. I'd prefer to see a warning box with an override that automatically saves the previous version and allows you to create a new, revised version (provided you have the proper credentials).

I also think that context-sensitive help should be part of the system. For example, if the wizard asks whether you provide restricted or unrestricted financial planning, my definition of those terms might differ from those of the SEC. Users should be able to right-click or otherwise pull up a definition of the terms in order to ensure they answer the question properly.

When I checked with NRS, they confirmed that Brochure Architect is only designed to work with Windows computers running Internet Explorer. I was told that other browsers may work, but they have not been tested. In my opinion, using anything other than Windows and IE is not an option for the typical user. NRS has not tested any other configurations, nor do they offer any instructions (or support) for working with other browsers.

I find the inability to select your browser and O/S troubling, but not fatally so. The last time I checked, IE's market share had dropped to under 60%, which indicates to me that many people prefer to use a browser other than Internet Explorer. Software for advisors launching in this day and age should be browser-neutral; Brochure Architect is not.

Web-based software targeting advisors these days should also support other operating systems such as the Mac O/S, Androids, etc. Brochure Architect does not. Did it not occur to the developers that advisors might want to access their brochure on a MacBook Pro, an iPad or an Android Tablet? I suspect many advisors will want to access and update their brochures through these devices. Currently, Brochure Architect does not allow for this.

Another annoyance: Each subsequent time I logged on to the site, a pop-up appeared prompting me to do the compatibility test again. I suspect this happened because my security settings do not allow third parties to store cookies on my machine. A fatal flaw? No, just an annoying one.

Bottom Line
I like the NRS approach to dealing with ADV Part 2. The new Brochure Architect wizard makes creating a customized form relatively painless, and it is backed by a firm with years of compliance experience. In addition, NRS has trained consultants who can help you out if necessary for an additional fee.

On the other hand, I'm mildly disappointed because I think better programming could have yielded a significantly better product, one that included context-sensitive help and support for multiple browsers and operating systems.

The good news for NRS is that the need to create, update and maintain the new Form ADV Part 2 will be with us for years to come and that Brochure Architect is a 1.0 version that they can improve over time. Given the firm's good reputation in the field, I trust that they will continue to refine Brochure Architect. For now, Brochure Architect is a decent choice for those who need help creating and maintaining their ADV Part 2; however, with a little bit of refinement, it can become a much better one.