What Is an Investment Advisor?

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

Alana BensonJuly 31, 2020
What Is an Investment Advisor?-story

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“Investment advisor” is a term for a company or individual who is registered with either the U.S. Securities and Exchange Commission or a state securities regulator. While most commonly spelled “advisor,” the laws that govern these financial professionals use the spelling “adviser.”

Investment advisor definition

An investment advisor is a financial professional or firm that helps you choose and manage investments (such as stocks), explains larger market trends and outlines the pros and cons of alternative investments. Investment advisors sometimes offer financial planning services too.

In terms of cost, investment advisors typically charge clients a percentage of the assets they manage. According to a 2019 survey of registered investment advisors from software provider RIA in a Box, the average total advisory fee is 1.17%. The median fee is slightly lower, 0.98%, meaning that over half of RIA firms are charging less than 1%.

Who must register as an investment advisor?

According to the U.S. Investment Advisers Act of 1940, an investment advisor is a person or firm that engages in the business of providing advice to others or issuing securities reports or analysis for compensation. Any financial professional who fits that description must register as an investment advisor, or qualify for an exception.

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. Investment advisors who reach $110 million in assets under management are overseen by the SEC; investors with AUM below that threshold are typically governed by the state. An investment advisor can voluntarily register with the SEC once they reach $100 million, but they are generally required to do so when their AUM passes the $110 million threshold.

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.

What is the difference between an investment advisor and a financial advisor?

The terms investment advisor and financial advisor are often used interchangeably, but they are not the same. “Financial advisor” is a catch-all phrase referring to many different kinds of financial professionals. “Investment adviser” or investment advisor is a legally regulated term for individuals or companies that are registered with the SEC or a state regulator.

Since the term financial advisor casts a wide net, it's tricky to know whether someone can legally give investment advice. It’s important to confirm that the advisor is registered — registered investment advisors have a fiduciary duty to their clients, meaning they are obligated to act in the clients’ best interest rather than their own.

Registered investment advisors have a fiduciary duty to their clients, meaning they are obligated to act in the clients’ best interest rather than their own.

Investment advisors do not have to take a qualifying exam, but many of them have other certifications like certified financial planner (CFP) or chartered financial analyst (CFA). These designations may allow them to offer more holistic financial guidance — for example, advice on how to budget, plan for retirement or pay down debt — in addition to investment advice.

When vetting a potential investment advisor, make sure their certifications or licenses meet your needs. Always ask about their qualifications, if they have a fiduciary duty to their clients and what their fee structure is. You can also look up an investment advisor’s background through the Financial Industry Regulatory Authority’s BrokerCheck, which offers information on both SEC- and state-registered investment advisors.

» Want to know more? Learn about the different types of financial advisors.

Do you need an investment advisor?

Whether you need an investment advisor depends on how comfortable you are selecting, monitoring and managing your investments yourself.

Generally speaking, the more complicated your financial situation, the more likely you are to benefit from professional help managing your finances. If you feel your money could be doing more for you and you’re not sure where to start, it may be a good idea to hire an investment advisor or financial advisor.

If your finances are more straightforward or you want an inexpensive alternative to an in-person advisor, consider using a robo-advisor. Robo-advisors use computer algorithms to build and manage your portfolio, usually for an annual fee of 0.25% to 0.50% of your account balance.

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