Investment Advisors: What They Do, Prices and Whether You Need One

If you’re struggling to manage your investment portfolio or need help getting started, a registered investment advisor could be the answer.

Hiring someone to manage your investment accounts tends to make sense as your finances get more complicated, not as your balance gets bigger. In some cases, it may come down to two questions: How confident are you in managing your accounts, and how much time do you want to dedicate to it?

If you’ve decided it’s time to explore outside help, the first step may be hiring an investment advisor. These financial advisors help you decide which investments to buy and sell, and many also offer financial planning services, such as retirement and wealth planning.

First: What is investment management?

Investment management is the maintenance of an investment portfolio or collection of financial assets. It can include purchasing and selling assets, creating short- or long-term investment strategies, overseeing a portfolio's asset allocation and developing a tax strategy. Investors can manage their investments independently or with an investment manager's help.

Investment management, however, isn't just about handling specific assets in a portfolio — it includes ensuring the portfolio continues to align with the client's goals, risk tolerance and financial priorities.

Wealth management often offers more areas of expertise, such as estate and tax planning, accounting services and retirement planning in addition to investment management for high net worth clients. If you simply need a hand choosing investments for your IRA, investment management could be helpful. Wealth management would probably be overkill.

» Need some help? Check out our roundup of the best wealth advisors

Next: What’s it like working with an investment advisor?

To get started, an investment advisor may require you to set up an investment account with them or at a brokerage firm they use as a custodian. This setup ensures that your advisor has the authority to make trades on your behalf, but the money is still yours and you receive account statements.

Most advisors only work with a few custodians, which is why your brokerage choices might be limited. If you have existing accounts at other firms (such as an IRA or taxable brokerage account) that you want that advisor to manage, you may be asked to transfer those over to their custodian.

IRAs, as tax-advantaged accounts, usually do not trigger capital gains tax during the transfer or if you buy and sell within the account (withdrawals are a different story). For your taxable brokerage account, ask if you can transfer the assets in kind to avoid capital gains, and ask how your advisor plans to manage capital gains or losses as part of their investment strategy for you.

Investment decisions are based on a variety of factors, including:

• Your savings goals, such as retirement, education or a large purchase.

• The time frame for those savings goals. 

• Your risk tolerance, or your ability to endure swings in investment returns and market fluctuations. 

• Other factors, such as market conditions, historical performance, tax efficiency and investment fees.

Once your investment advisor has an idea of your priorities and goals, they should:

• Come up with an investment strategy to meet a client's goals.

• Decide how to divide the client's portfolio among different types of investments, such as stocks and bonds. 

• Buy and sell those investments for the client as needed.

• Monitor the portfolio's overall performance.

What to know about investment advisors

“Financial advisor” is a general term that is not regulated. Anyone can legally use it. However, “investment advisor” is a legally regulated term to describe any person or firm registered with the Securities and Exchange Commission (SEC) or a state regulator to provide investment advice for compensation. Registered investment advisors, or RIAs, have a fiduciary duty to their clients. This means they are legally obligated to act in their client's best interest and eliminate or disclose any potential conflicts of interest^[0]

This mandatory registration, and the regulation that follows, is what makes investment advisors unique. The SEC shares the duty of regulating these advisors with state securities regulators. Keep in mind that registering as an investment adviser doesn't imply a certain level of skill or training, and it isn't an endorsement by the SEC or any state regulator. It simply means the adviser met the applicable regulatory requirements.

The SEC oversees investment advisors who have at least $110 million in assets under management (AUM). Investment advisors with AUM below that threshold are typically regulated by the state^[0]

The SEC and the state securities regulators set requirements for investment advisors to hold them accountable. For example, all investment advisors registered with the SEC must have a written policy on insider trading, privacy and a code of ethics.

Is an investment advisor worth the cost?

Investment advisors typically charge clients a percentage of the assets they manage (the assets under management, or AUM). For example, let's say an investment advisor is managing three accounts for you: a traditional IRA, a Roth IRA and a taxable brokerage account. The advisor may charge an AUM fee on the sum of those accounts. If the traditional IRA has $100,000, the Roth IRA has $50,000 and the taxable brokerage account has $300,000, that AUM fee will be applied to $450,000. If the AUM fee is 1%, you'll pay $4,500 a year.

That $4,500 is generally paid over the course of the year; for example, you might pay in four quarterly installments of $1,125. Generally, advisors take the fee directly out of your investment account. Your agreement with the investment advisor will get specific about all of these details.

Now, do you really need an investment advisor — and is it worth that cost? That depends on how comfortable you are selecting, monitoring and managing investments yourself.

Not everyone needs a financial advisor. Generally speaking, the more complicated your financial situation is, the more valuable professional help can be. If you feel your money isn't working hard enough, an advisor can help figure out next steps. Many investment advisors don't just manage investments — they may also provide overall financial guidance, including recommendations on insurance coverage, estate planning needs and retirement planning.

For simpler finances or a lower-cost option, a robo-advisor might be a better choice. Robo-advisors will build and manage an investment portfolio for you, but generally do not offer comprehensive financial planning services beyond that.

» How to choose between a robo-advisor and a financial advisor

How do I vet an investment advisor?

For starters, confirm that the advisor is registered with the SEC or state. To advise clients, individuals also generally have to pass the Series 65 exam or hold other professional designations that allow them to waive the Series 65 requirement, such as the certified financial planner® (CFP) or chartered financial analyst (CFA) designations. These designations may also help the advisor offer more holistic financial guidance, such as advice on how to budget, save on taxes, plan for retirement or pay down debt, in addition to advice on what investments to buy and sell.

When vetting a potential investment advisor, take these additional steps:

• Be clear about what you’re looking for: Make sure you’re talking to a person who has the registration status, education, certifications and licenses that meet your needs. 

• Interview them to find the right fit: Always ask about their qualifications, if they have a fiduciary duty to their clients and how they get paid. We have a full list of questions to ask a financial advisor.

• Verify their credentials: You can look up an investment advisor’s background through the SEC’s Investment Adviser Public Disclosure (IAPD) database at adviserinfo.sec.gov and the Financial Industry Regulatory Authority’s BrokerCheck at brokercheck.finra.org.