Investment Advisor - Explained
What is an Investment Advisor?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is an Investment Advisor?What Does an Investment Advisor Do?Investment Advisor RegulationsLicensing of Investment AdvisorsRegistration for Investment AdvisorsLimitations on Investment Advisors
What is an Investment Advisor?
An investment advisor offers investment or financial advice to clients, this is a professional who gives financial recommendations and investment analysis for clients. After analyzing a security or an investment as well as the risks it entails, an investor advisor provides professional advice to clients in exchange for a fee. Investment advisors are also called financial advisors. The Investment Advisers Act in 1940 enrolled the functions of these advisors into the system. An investor advisor with sufficient assets may register with the Securities and Exchange Commission (SEC), he is then referred to as a Registered Investment Advisor (RIA).
Back to:INVESTMENTS & TRADING
What Does an Investment Advisor Do?
An individual with required certification or skills in the investment or financial industry can act as an investment advisor. It could also be a group of persons (a corporation) with a structure and qualified personnel who offer recommendations and analysis to clients in exchange for a fee. In some cases, these advisors may stand as proxy for the investors (clients) they offer services to, they can also manage assets on clients behalf. The fee charged by investment advisors could be a flat fee or a percentage of the assets they manage. Investment advisors are not biased in selection of clients, since their fee depend on the asset base of the client, they choose clients who meet the portfolio requirements.
Investment Advisor Regulations
There are general practices that investment advisors are expected to maintain. Investment advisors and firms are required to register with SEC or state in which they operate. Those that do not register with SEC or state work with venture capital funds or hedge funds. Investment advisors should not give false or fraudulent advice to their clients ot transact a client's securities without the client's consent. In the U.S, SEC regulates the activities of investment advisors, this is to ensure they uphold professional practises and standards. An advisor or firm with as asset of $100 million or more are expected to register with SEC. Investor advisors or firms with lesser assets can register at the state level. Before an individual or a corporate firm can provide investment advice, analysis and recommendations to clients, the following requirements must be met;
- The individual or corporation must register with SEC or with the state.
- The person must have the sponsorship of a broker-dealer.
- The individual or corporation must be licensed as a representative under FINRA regulations.
Investment advisors or financial advisors can choose to either offer their services in exchange for a fee or offer the services as a fiduciary.
Licensing of Investment Advisors
There are certain steps that an individual must follow in order to be licensed as qualified or registered investment advisor (RIA). The steps are outlined below. The individual;
- Must sit for the Uniform Investment advisor Law examination popularly called Series 65.
- Must perform well or pass the examination.
- must correctly answer 94 questions out of the 130 scored questions, to pass the exam.
The Series 65 examination covers federal securities laws and other topics related to investment advice services. Persons who sit for this exam and pass do not need the sponsorship of a broker-dealer before they can become investment advisors. Practitioners are also encouraged to take CFP, CFA, CIC, ChFc and PFS examination. Individuals who want to venture into investment advice services or asset management full bloem need to register with the SEC or at the state level. However, there are some professionals who render investment advice services as part of their profession. These persons are not required to register with SEC or state authority, these people include accountants, broker-dealers, attorneys, engineers, and banks. Individuals or firms with less that $100 million worth of assets are to register with state authorities while those with $100 million in assets or more are to register with SEC. A firm or individual without a place of business in a state or has less than 5 clients is not required to register with the state.
Registration for Investment Advisors
To become a Registered Investment Advisor (RIA), you need to open an account with IARD (Investment Adviser Registration Depository). FINRA manages IARD and once a person creates an account, FINRA issues a CRD number and account IB information to the individual or firm. The RIA proceeds by filing Forms ADV and U4 with SEC or state, this is an official document to become a RIA. Once the documents are approved, the RIA can use the form as disclosure documents to potential clients, showing them that he is registered. Contained in this form are the services offered b y the RIA, service fees and other terms. However, before this form can be given to clients, it must be uploaded into IARD.
Limitations on Investment Advisors
Registration with the Securities Exchange Commission (SEC) or state authority enable individuals or firms perform at a large scale. Since they are certified and licensed, they are at liberate to operate at a wide scope. However, registered representatives who are sponsored by broker-dealers remit a percentage of all income made through asset management or investment advice as payment for compliance oversight. RIAs have standard fees or flat rate they charge their clients or a percentage of the assets they manage. Brokers on the other work on commission. There has been a debate over the regulatory oversight of investment advisors. FINRA maintains that SEC either lacks the ability to effectively regulate the activities of investment advisors or needs to be resourced to adequately so this. Hence, the regulatory oversight functions that SEC performs should be ceded to FINRA which is a self-regulatory organization. This position was backed by a study done by SEC in 2011 that showed that less than 10% of RIAs under it are being adequately regulated. However, despite this existing data, RIAs show preference for SEC because they maintain that FINRA favors broker-dealers, especially when disputes occur in transactions. The Investment Advisors Oversight Act, a bill moved by FINRA in 2012 to give oversight functions to SRO was unsuccessful due to strong oppositions. Investment advisors who are registered and licensed by the SEC of the state authority in which they operate have more operational liberty than others who choose to work with broker-dealers on commission. Despite that Registered Investment Advisors (RIAs) enjoy freedom, they are subject to regulations from SEC and the state who perform regulatory oversight functions. This means that registered advisors need to comply with the ethics and standards of the profession.